pfhc-10q_20220331.htm

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-41388

ProFrac Holding Corp.

(Exact Name of Registrant as Specified in its Charter)

Delaware	87-2424964
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
333 Shops Boulevard, Suite 301 Willow Park, Texas	76087
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (254) 776-3722

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Class A common stock, par value $0.01 per share

PFHC

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

At June 17, 2022, the registrant had 41,237,003 shares of Class A common stock, $0.01 par value per share, and 101,133,201 shares of Class B common stock, $0.01 par value per share, outstanding.

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		Page
	Cautionary Statement Regarding Forward-Looking Statements	1
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	ProFrac Holdings, LLC Consolidated Balance Sheets	3
	ProFrac Holdings, LLC Consolidated Statements of Operations	4
	ProFrac Holdings, LLC Consolidated Statements of Changes in Equity	5
	ProFrac Holdings, LLC Consolidated Statements of Cash Flows	6
	ProFrac Holdings, LLC Notes to Unaudited Consolidated Financial Statements	7
	ProFrac Holding Corp. Balance Sheets and Accompanying Notes	29
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	47
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults Upon Senior Securities	50
Item 4.	Mine Safety Disclosures	50
Item 5.	Other Information	50
Item 6.	Exhibits	51
Signatures		54

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Cautionary statement regarding forward-looking statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) about us and our industry that involve substantial risks and uncertainties. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include the words “may,” “could,” “plan,” “project,” “budget,” “predict,” “pursue,” “target,” “seek,” “objective,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” or similar expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. Our forward-looking statements include statements about our business strategy, our industry, our future profitability, our expected capital expenditures and the impact of such expenditures on our performance, the costs of being a publicly traded corporation and our capital programs.

A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:

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

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

•

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

•	a further decline or future decline in domestic spending by the onshore oil and natural gas industry;

•	actions by members of the Organization of Petroleum Exporting Counties, Russia and other oil-producing countries (“OPEC+”) with respect to oil production levels and announcements of potential changes in such levels;

•	the political environment in oil and natural gas producing regions, including uncertainty or instability resulting from civil disorder, terrorism or war, such as the recent conflict between Russia and Ukraine, which may negatively impact our operating results;

•	changes in general economic and geopolitical conditions;

•	competitive conditions in our industry;

•	changes in the long-term supply of and demand for oil and natural gas;

•	actions taken by our customers, competitors and third-party operators;

•	a decline in demand for proppant;

•	our ability to obtain permits, approvals and authorizations from governmental and third parties, and the effects of or changes to U.S. government regulation;

•	changes in the availability and cost of capital;

•	our ability to successfully implement our business plan;

•	large or multiple customer defaults, including defaults resulting from actual or potential insolvencies;

•	the effects of consolidation on our customers or competitors;

•	the price and availability of debt and equity financing (including changes in interest rates);

•	our ability to complete growth projects on time and on budget;

•	our ability to integrate and realize the benefits expected from the acquisition of FTS International, Inc. (“FTSI”) including any related synergies;

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•	our ability to finance, consummate, and realize the benefits expected from our recently announced agreements to acquire SP Silica of Monahans, LLC and SP Silica Sales, LLC (collectively, the “SP Companies”), and U.S. Well Services, Inc. (“USWS”), including any related synergies;

•	introduction of new drilling or completion techniques, or services using new technologies subject to patent or other intellectual property protections;

•	operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control;

•	acts of terrorism, war or political or civil unrest in the United States or elsewhere;

•	loss or corruption of our information or a cyberattack on our computer systems;

•	the price and availability of alternative fuels and energy sources;

•	federal, state and local regulation of hydraulic fracturing and other oilfield service activities, as well as exploration and production (“E&P”) activities, including public pressure on governmental bodies and regulatory agencies to regulate our industry;

•	the availability of water resources, suitable proppant and chemicals in sufficient quantities for use in hydraulic fracturing fluids;

•	the effects of existing and future laws and governmental regulations (or the interpretation thereof) on us and our customers;

•	the effects of future litigation; and

•	other factors discussed in this report.

You should not place undue reliance on our forward-looking statements. Although forward-looking statements reflect our good faith beliefs at the time they are made, forward-looking statements involve known and unknown risks, uncertainties and other factors, including the factors described in Part II, Item 1A of this Quarterly Report on Form 10-Q and under the heading “Risk Factors” in our prospectus, dated May 12, 2022, filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b) under the Securities Act on May 16, 2022 in connection with our initial public offering (the “Prospectus”), any of which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements.

We have also made certain statements in this Quarterly Report on Form 10-Q regarding our proposed acquisition of the SP Companies and USWS, described elsewhere in this report, and have set forth in this report under Part II, Item 1A, certain risk factors relating to these acquisitions and the transactions, including the financing contemplated thereby, that could adversely affect our business and prospects. The risks included above and in this report and in our other filings with the SEC are not exhaustive. Except as required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any such statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any such forward-looking statement is based. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

ProFrac Holdings, LLC

Consolidated balance sheets

(Unaudited)

(In thousands)	March 31, 2022			December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	28,654		$	5,376
Accounts receivable, net		298,870			161,632
Accounts receivable—related party		3,396			4,515
Prepaid expenses, and other current assets		18,726			6,213
Inventories		139,143			73,942
Total current assets		488,789			251,678
Property, plant, and equipment		1,126,602			827,865
Accumulated depreciation and depletion		(506,831	)		(464,178	)
Property, plant, and equipment, net		619,771			363,687
Operating lease right-of-use assets		79,049			—
Investments		78,296			4,244
Intangible assets, net		28,681			27,816
Other assets		19,302			17,145
Total assets	$	1,313,888		$	664,570
Liabilities and equity
Current liabilities:
Accounts payable	$	216,054		$	121,070
Accounts payable—related party		19,553			21,275
Current portion of operating lease liabilities		8,371			—
Accrued expenses		90,079			38,149
Other current liabilities		36,123			34,400
Current portion of long-term debt		47,620			31,793
Total current liabilities		417,800			246,687
Long-term debt		488,204			235,128
Long-term debt—related party		89,800			34,645
Operating lease liabilities		70,815			—
Other liabilities		902			—
Total liabilities		1,067,521			516,460
Commitments and contingencies (Note 13)
Equity		244,992			147,015
Noncontrolling interests		1,421			1,039
Accumulated other comprehensive (loss) income		(46	)		56
Total equity		246,367			148,110
Total liabilities and equity	$	1,313,888		$	664,570

The accompanying notes are an integral part of these consolidated financial statements.

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ProFrac Holdings, LLC

Consolidated statements of operations

(Unaudited)

	Three Months Ended March 31,
(In thousands)	2022			2021
Revenues	$	344,980		$	149,586
Operating costs and expenses:
Cost of revenues, exclusive of depreciation, depletion and amortization		232,599			118,306
Depreciation, depletion and amortization		44,216			35,461
(Gain) loss on disposal of assets, net		(154	)		2,207
Selling, general, and administrative		34,127			13,778
Total operating costs and expenses		310,788			169,752
Operating income (loss)		34,192			(20,166	)
Other (expense) income:
Interest expense, net		(9,272	)		(6,035	)
Loss on extinguishment of debt		(8,273	)		—
Other income		8,231			187
Income (loss) before income tax provision		24,878			(26,014	)
Income tax (provision) benefit		(752	)		25
Net income (loss)	$	24,126		$	(25,989	)
Net income attributable to noncontrolling interests		(416	)		(9	)
Net income (loss) attributable to ProFrac Holdings, LLC	$	23,710		$	(25,998	)
Other comprehensive (loss) income		(136	)		6
Comprehensive income (loss)	$	23,574		$	(25,992	)
Less: Other comprehensive (loss) income attributable to noncontrolling interests		(34	)		2
Comprehensive income (loss) attributable to ProFrac Holdings, LLC	$	23,608		$	(25,994	)

The accompanying notes are an integral part of these consolidated financial statements.

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ProFrac Holdings, LLC

Consolidated statements of changes in equity

(Unaudited)

(In thousands)	Equity			Accumulated Other Comprehensive Income (Loss)			Noncontrolling interests			Total
Balance, January 1, 2022	$	147,015		$	56		$	1,039		$	148,110
Net income		23,710			—			416			24,126
Member contributions		5,000			—			—			5,000
Deemed distribution		(3,664	)		—			—			(3,664	)
THRC related equity		72,931			—			—			72,931
Currency translation adjustments		—			(102	)		(34	)		(136	)
Balance, March 31, 2022	$	244,992		$	(46	)	$	1,421		$	246,367



(In thousands)	Equity			Accumulated Other Comprehensive Income			Noncontrolling interests			Total
Balance, January 1, 2021	$	175,027		$	—		$	1,785		$	176,812
Net (loss) income		(25,998	)		—			9			(25,989	)
Currency translation adjustments		—			6			—			6
Noncontrolling interest of acquired business		—			—			1,228			1,228
Balance, March 31, 2021	$	149,029		$	6		$	3,022		$	152,057

The accompanying notes are an integral part of these consolidated financial statements.

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ProFrac Holdings, LLC

Consolidated statements of cash flow

(Unaudited)

	Three Months Ended March 31,
(In thousands)	2022			2021
Cash flows from operating activities:
Net income (loss)	$	24,126		$	(25,989	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation, depletion and amortization		44,216			35,461
(Gain) loss on disposal of assets, net		(154	)		2,207
Non-cash loss on extinguishment of debt		4,284			—
Amortization of debt issuance costs		1,371			536
Bad debt expense, net of recoveries		5			30
Non-cash investment income		(8,100	)		—
Changes in operating assets and liabilities:
Accounts receivable		(46,856	)		(8,976	)
Inventories		(22,857	)		(6,504	)
Prepaid expenses and other assets		(9,903	)		(829	)
Accounts payable		29,824			11,243
Accrued expenses		22,622			9,240
Deferred revenues and other current liabilities		5,146			(109	)
Net cash provided by operating activities		43,724			16,310
Cash flows from investing activities:
Investment in property, plant & equipment		(41,492	)		(17,357	)
Cash proceeds from sale of assets		45,622			16,730
Acquisitions, net of cash acquired		(278,990	)		(2,303	)
Investment in preferred shares of BPC		(45,952	)		—
Investments		(13,893	)		—
Net cash used in investing activities		(334,705	)		(2,930	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		658,266			6,817
Repayments of long-term debt		(324,034	)		(13,437	)
Payment of debt issuance costs		(22,913	)		—
Member contribution		5,000			—
Other		—			6
Net cash provided by (used in) financing activities		316,319			(6,614	)
Net increase in cash, cash equivalents, and restricted cash		25,338			6,766
Cash, cash equivalents, and restricted cash beginning of period		5,376			2,952
Cash, cash equivalents, and restricted cash end of period	$	30,714		$	9,718
Supplemental cash flow information:
Cash payments for interest	$	6,637		$	6,320
Cash payments for taxes	$	—		$	—
Non-cash investing and financing activities:
Capital expenditures included in accounts payable	$	25,418		$	7,837
Operating lease liabilities incurred from obtaining right-of-use-assets	$	44,959		$	—

The accompanying notes are an integral part of these consolidated financial statements.

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ProFrac Holdings, LLC

Notes to the consolidated financial statements

(Amounts in thousands, except as noted)

(unaudited)

1. Organization and description of business

The unaudited consolidated financial statements presented herein are those of ProFrac Holdings, LLC (“ProFrac LLC”) and its subsidiaries, which include Best Pump & Flow LP (“Best Flow”) and Alpine Silica, LLC (“Alpine”). ProFrac LLC, on a consolidated basis, is the predecessor to ProFrac Holding Corp. and is referred to herein as “ProFrac Predecessor,” “we,” “us,” “our,” or the “Company.” Prior to December 21, 2021, Dan Wilks and Farris Wilks (or entities they control) (collectively, the “Wilks”) held a controlling interest in each of ProFrac LLC, Best Flow and Alpine. Historical periods for ProFrac Predecessor had been presented on a consolidated and combined basis given the common control ownership by the Wilks. On December 21, 2021, all of the then-outstanding membership interests in Best Flow and Alpine were contributed to ProFrac LLC in exchange for membership interests in ProFrac LLC. Accordingly, the results for the three months ended March 31, 2021 have been retrospectively adjusted to present the operations of ProFrac LLC, Best Flow and Alpine on a combined basis. The acquisitions of Best Flow and Alpine have been accounted for in a manner consistent with the pooling of interest method of accounting, as the transaction was a combination of entities under common control. Under this method of accounting, the statements of operations, equity and cash flows have been adjusted to include all activities of the commonly controlled groups for all periods in which common control existed.

ProFrac Predecessor is a vertically integrated and innovation-driven energy services company providing hydraulic fracturing, completion services and other complementary products and services to leading upstream oil and gas companies engaged in the exploration and production (“E&P”) of North American unconventional oil and natural gas resources. The ProFrac Predecessor operates in three business segments: stimulation services, manufacturing and proppant production.

ProFrac Holding Corp. was incorporated as a Delaware corporation August 17, 2021, to become a holding corporation for ProFrac Holdings, LLC and its subsidiaries upon completion of a corporate reorganization in conjunction with a planned initial public offering (“IPO”). On May 12, 2022, ProFrac Holding Corp. completed its IPO of 16,000,000 shares of its Class A common stock, par value $0.01 per share (the "Class A Common Stock") at a public offering price of $18.00 per share. On June 6, 2022, an over-allotment option was exercised resulting in an additional 2,228,153 shares of Class A Common Stock being priced at $18.00 per share. The IPO and exercise of the over-allotment option generated combined net proceeds of $303.9 million, after deducting underwriter discounts and commissions and estimated offering costs. The Company used $72.9 million of the net proceeds to redeem the membership ownership interests from the then-existing owners of THRC FTSI Related Equity (as described in Note 11 – Acquisitions and Investments) and contributed the remaining proceeds to ProFrac Holdings, LLC. The Company used the remaining proceeds (i) to pay down $143.8 million of the outstanding borrowings under the New Term Loan Credit Facility (as defined herein) (ii) to fully pay the $22.0 million of the outstanding borrowings of The Back Stop Note (as defined herein) (iii) pay down $22.0 million of the outstanding borrowings of the Closing Date Note (as defined herein) (iv) to pay down $20.8 million of the outstanding borrowings of the Equify Bridge Note (as defined herein) and (v) with the remaining proceeds to be used for general corporate uses and additional repayment of debt.

2. Summary of significant accounting policies

Basis of presentation

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2021 included within the Company’s final prospectus filed with the SEC on May 16, 2022, pursuant to Rule 424(b) under the Securities Act. The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In our opinion, all adjustments considered necessary for a fair statement have been included in the accompanying unaudited financial statements. Operating results for the three-months ended March 31, 2022, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2022. The December 31, 2021, balance sheet information has been derived from the 2021 audited financial statements.

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Use of estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities and (2) the reported amounts of revenue and expenses during the reporting period. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. It is at least reasonably possible these estimates could be revised in the near term, and these revisions could be material.

Leases

The Company determines if an arrangement is a lease at inception of the arrangement. To the extent that we determine an arrangement represents a lease, we classify that lease as an operating lease or a finance lease. We capitalize operating and finance leases on our consolidated balance sheets through a right-of-use (“ROU”) asset and a corresponding lease liability. ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. See Note 9 – Leases for additional information.

Operating and finance lease ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

Revenue recognition

The Company’s products and services are sold based upon contracts with customers. The Company recognizes revenue as it satisfies performance obligations by transferring control over a service or product to a customer. Payment terms are specified in each customer agreement and are typically a specific number of days following satisfaction of the performance obligation. The following are descriptions of the principal activities of each reportable segment from which the Company generates its revenue.

Stimulation services. We generate revenue through the provision of hydraulic fracturing services, which involves the injection of water, sand and chemicals under high pressure into formations to optimize hydrocarbon flow paths during the completion phase of wellbores. Our contracts with customers are short term in nature, typically less than four weeks, and have a single performance obligation, which is the contracted total stages, satisfied over time. Once a stage has been completed, a field ticket is created which includes charges for services performed and any inputs consumed during the service. The signing of the field ticket by a customer representative represents their acceptance of the service and agreement to the amounts to which the Company has the right to invoice and recognize as revenue. We believe that recognizing revenue based on actual stages completed, upon receipt of a signed field ticket, appropriately depicts how our hydraulic fracturing services are transferred to our customers over time.

Manufacturing. We generate revenue through sales of equipment used to perform oilfield services. The performance obligation is satisfied and revenues are recognized at the point-in-time that control of goods are transferred to the customer, generally upon shipment from our manufacturing facility. Payment terms are specified in each customer agreement and are typically a specific number of days following satisfaction of the performance obligation.

Proppant production. We generate revenue through the sale of frac sand to oilfield service providers and E&P companies. The performance obligation is satisfied and revenue is recognized at the point-in-time that control of the product is transferred to the customer, generally upon shipment from our facility. We charge our customers on a per-ton basis at current market prices. Payment terms are specified in each customer agreement and are typically a specific number of days following satisfaction of the performance obligation.

Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and are therefore excluded from revenues in the consolidated statements of operations.

Business Combinations

Business combinations are accounted for under the acquisition method of accounting. Under this method, the assets acquired and liabilities assumed are recognized at their respective fair values as of the date of acquisition. The excess, if any, of the acquisition price over the fair values of the assets acquired and liabilities assumed is recorded as goodwill. For significant acquisitions, we utilize third-party appraisal firms to assist us in determining the fair values for certain assets acquired and liabilities assumed. The measurement of these fair values requires us to make significant estimates and assumptions which are inherently uncertain.

Adjustments to the fair values of assets acquired and liabilities assumed are made until we obtain all relevant information regarding the facts and circumstances that existed as of the acquisition date (the “measurement period”), not to exceed one year from the date of

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the acquisition. We recognize measurement-period adjustments in the period in which we determine the amounts, including the effect on earnings of any amounts we would have recorded in previous periods if the accounting had been completed at the acquisition date.

See Note 11 — Acquisitions and Investments for information on acquisitions completed during the historical period.

Variable Interest Entities

We evaluate our ownership, contractual and other interest in entities to determine if they are variable interest entities (“VIE”). We evaluate whether we have a variable interest in those entities and the nature and extent of those interests. Based on our evaluation, if we determine we are the primary beneficiary of a VIE, we consolidate the entity in our financial statements.

Fair value measurements

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at a measurement date. We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases of categorization within the hierarchy upon the lowest level input that is available and significant to the fair value measurement:

•	Level 1: The use of quoted prices in active markets for identical assets or liabilities.

•	Level 2: Other than quoted prices included in Level 1, inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. At March 31, 2022, we had no Level 2 measurements.

•	Level 3: The use of significant unobservable inputs that typically require the use of management’s estimates of assumptions that market participants would use in pricing. See Note 12 — Fair Value of Financial Interests for more information on our investments using Level 3 measurements.

Our current assets and liabilities contain financial instruments, the most significant of which are trade accounts receivable and payable. We believe the carrying value of our current assets and liabilities approximate fair value. Our fair value assessment incorporates a variety of considerations, including: (i) the short-term duration of the instruments and (ii) our historical incurrence of and expectations of future bad debt expense. The book value of our floating rate debt approximates fair value because of its floating rate structure.

Income taxes

At March 31, 2022, the ProFrac Predecessor entities were organized as limited liability companies or a limited partnership and were treated as either a disregarded entity or a partnership for U.S. federal income tax purposes, whereby the ordinary business income or loss and certain deductions were passed-through and reported on the members’ income tax returns. As such, the ProFrac Predecessor was not required to account for U.S. federal income taxes in the consolidated financial statements. Certain state income-based taxes are imposed on the ProFrac Predecessor entities which are reflected as income tax expense or benefit in historical periods.

In connection with the IPO in May 2022 (see Note 15 – Subsequent Events), ProFrac Predecessor became partially owned by ProFrac Holding Corp., a U.S. Internal Revenue Code Subchapter C corporation (“C-Corporation”). ProFrac Holding Corp. is a taxable entity and will be required to account for income taxes under the asset and liability method beginning in the second quarter of 2022.

Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled pursuant to the provisions of Accounting Standards Codification (“ASC”) 740, Income Taxes. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more-likely-than-not to be realized.

Recently adopted accounting standards

On January 1, 2022, we adopted the Financial Accounting Standards Board (“FASB”) accounting standards update for “Leases,” which amended existing guidance to require lessees to recognize liabilities and ROU assets on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements.

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We adopted this guidance using a modified retrospective approach on January 1, 2022 using the transition method that allows a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

We have completed our process to implement this standard, and we have designed processes and internal controls necessary for adoption of this standard. We have made policy elections to (i) not capitalize short-term leases for all asset classes, (ii) not separate non-lease components from lease components for all of our existing asset classes, (iii) apply the package of practical expedients that allows us to not reassess: whether any expired or existing contracts contain leases, lease classification for any expired or existing leases and initial direct costs for existing leases and (iv) apply the practical expedient to apply hindsight in estimating lease term and impairment.

The impact of applying this standard is not expected to significantly impact our results of operations or cash flows. As of January 1, 2022, we recognized ROU assets and liabilities of approximately $35.8 million from operating leases on our consolidated balance sheet. See Note 9 - Leases for additional disclosures related to our adoption this accounting standards update.

New accounting standards to be adopted

We have not yet implemented FASB ASU No. 2016-13, Financial Instruments – Credit Losses. The ASU introduces a new accounting model, the Current Expected Credit Losses model (“CECL”), which requires recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for loans and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models previously used under GAAP, which generally require that a loss be incurred before it is recognized. The new standard also applies to financial assets arising from revenue transactions such as contract assets and accounts receivable.

Implementation is currently required for fiscal years beginning after December 15, 2022. The Company does not believe implementation will have a material impact on its financial statements.

We have not yet implemented FASB ASU No. 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes, which removes specific exceptions to the general principles in Topic 740 under GAAP. The new guidance also improves the application of income tax-related guidance and simplifies GAAP for franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill, separate financial statements of legal entities that are not subject to tax, and enacted changes in tax laws in interim periods. The new guidance will be effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022; however, early adoption is permitted. The Company is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.

3. Restricted cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated statement of cash flows as of March 31, 2022, and December 31, 2021:

(In thousands)	March 31, 2022		December 31, 2021
Cash and cash equivalents	$	28,654	$	5,376
Restricted cash included in prepaid expenses and other current assets		2,060		—
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows	$	30,714	$	5,376

As of March 31, 2022, restricted cash included cash used as collateral for our credit card program.

4. Inventories

The following table summarizes the components of our inventories as of March 31, 2022, and December 31, 2021:

(In thousands)	March 31, 2022		December 31, 2021
Raw materials and supplies	$	37,081	$	13,911
Work in process		6,492		3,288
Finished products and parts		95,570		56,743
Total	$	139,143	$	73,942

Table of Contents

5. Property, plant, and equipment

The following table summarizes the components of our property, plant, and equipment, net as of March 31, 2022, and December 31, 2021:

(In thousands)	March 31, 2022			December 31, 2021
Machinery and equipment	$	1,018,221		$	760,829
Mining property and mine development		35,491			34,809
Office equipment, software and other		13,876			5,550
Buildings and leasehold improvements		16,091			15,947
Total		1,083,679			817,135
Less: accumulated depreciation and depletion		(506,831	)		(464,178	)
Construction in progress		42,923			10,730
Property, plant, and equipment, net	$	619,771		$	363,687

Depreciation expense for the three months ended March 31, 2022 and 2021, was $44.2 million and $35.5 million, respectively. Major classifications of property, plant, and equipment and their respective useful lives are as follows:

Machinery and equipment		2 years—10 years
Office equipment, software, and other		3 years—7 years
Buildings and leasehold improvements		2 years—40 years

6. Intangible assets

The following table summarizes the components of our intangible assets as of March 31, 2022, and December 31, 2021:

	March 31, 2022							December 31, 2021
(In thousands)	Gross Book Value		Less: Accumulated Amortization			Net Book Value		Gross Book Value		Less: Accumulated Amortization			Net Book Value
Electric frac licenses	$	22,500	$	—		$	22,500	$	22,500	$	—		$	22,500
Acquired technology		7,144		(963	)		6,181		5,905		(589	)		5,316
Intangible assets, net	$	29,644	$	(963	)	$	28,681	$	28,405