1. ORGANIZATION AND DESCRIPTION OF BUSINESS

ProFrac Holding Corp. (“ProFrac Corp.”) and its consolidated subsidiaries, including ProFrac Holdings, LLC (“ProFrac LLC”), 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 Company operates in three business segments: stimulation services, manufacturing, and proppant production.

Company Formation

ProFrac Corp. was incorporated as a Delaware corporation on August 17, 2021, to become a holding corporation for ProFrac LLC and its subsidiaries upon completion of a corporate reorganization in conjunction with a planned initial public offering (“IPO”). On May 17, 2022, ProFrac Corp. completed its IPO and corporate reorganization and became the managing member of ProFrac LLC.

The consolidated financial statements presented herein are those of ProFrac Corp. subsequent to the corporate reorganization on May 17, 2022, and ProFrac LLC before that date. In these notes to the consolidated financial statements, ProFrac Corp. and ProFrac LLC together are also referred to as “we,” “us,” “our,” or the “Company” and ProFrac LLC is also referred to as “ProFrac Predecessor.” For all periods presented, the consolidated financial statements presented herein include the controlled subsidiaries of ProFrac LLC, which include Best Pump & Flow LP (“Best Flow”) and Alpine Silica, LLC (“Alpine”).

Prior to December 21, 2021, Dan Wilks and Farris Wilks (or entities they control) (collectively, the “Wilks Parties”) 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 Parties. 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 years ended December 31, 2021 and 2020 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, comprehensive income, equity and cash flows have been adjusted to include all activities of the commonly controlled groups for all periods in which common control existed.

Initial Public Offering

On May 17, 2022, ProFrac 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 $301.7 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 defined in “Note 4 – Business Combinations and Asset Acquisition”) 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 2022 Term Loan Credit Facility (as defined herein), (ii) to fully pay the $22.0 million of the outstanding borrowings of the Backstop 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.

Correction of an Immaterial Error on Previously Issued Financial Statements

During the fourth quarter of 2022, the Company identified and corrected errors related to the recognition and classification of certain repairs and maintenance expenses and the capitalized costs associated with certain inventory and property, plant and equipment in the first three quarters of 2022. We evaluated whether our previously issued unaudited consolidated financial statements for the first three quarters of 2022 were materially misstated due to these errors. Based upon our evaluation of both quantitative and qualitative factors, we concluded that the effects of these errors were not material individually or in the aggregate to any previously reported quarterly period. Accordingly, we have corrected our previously issued unaudited consolidated financial statements for the first three quarters of 2022 as shown in Note 17 - “Selected Quarterly Data (Unaudited).”

Redeemable Noncontrolling Interests

ProFrac Corp’s only material asset is an equity interest consisting of units representing limited liability company interests in ProFrac LLC (“Units”). As the sole managing member of ProFrac LLC, ProFrac Corp. operates and controls all of the business and affairs of ProFrac LLC and conducts its business through ProFrac LLC and its subsidiaries. As a result, ProFrac Corp. consolidates the financial results of ProFrac LLC and its subsidiaries and reports a noncontrolling interest related to the portion of Units not owned by ProFrac Corp., which reduces net income attributable to holders of ProFrac Corp.’s Class A Common Stock. The holders of Units not owned by ProFrac Corp. also hold shares of ProFrac Corp.’s Class B common stock, par value $0.01 per share (the “Class B Common Stock”) such that a single share of Class B Common Stock is issued for each Unit not owned by ProFrac Corp.

The holders of Units not owned by ProFrac Corp. may redeem all or a portion of their Units, together with a corresponding number of shares of Class B Common Stock, for either shares of Class A Common Stock or an approximately equivalent amount of cash, at the election of ProFrac Corp. In connection with the exercise of such redemption, a corresponding number of shares of Class B Common Stock will be canceled. The redemption election is not considered to be within the control of the Company because the holders of Class B Common Stock and their affiliates control the Company through direct representation on ProFrac Corp.’s board of directors. As a result, we present the noncontrolling interests in ProFrac LLC as redeemable noncontrolling interests outside of permanent equity.

As of December 31, 2022, ProFrac Corp. owned 34.1% of ProFrac LLC with the remaining 65.9% owned directly by other PFH Unit holders. As of December 31, 2022, ProFrac Corp. had outstanding 54.0 million shares of Class A Common Stock (representing approximately 34.1% of the total voting power) and 104.2 million shares of Class B Common Stock (representing approximately 65.9% of the total voting power).

Concentrations of Risk

Our business activities are concentrated in the well completion services segment of the oilfield services industry in the United States. The market for these services is cyclical, and we depend on the willingness of our customers to make operating and capital expenditures to explore for, develop, and produce oil and natural gas in the United States. The willingness of our customers to undertake these activities depends largely upon prevailing industry conditions that are predominantly influenced by current and expected prices for oil and natural gas. Historically, a low commodity-price environment has caused our customers to significantly reduce their hydraulic fracturing activities and the prices they are willing to pay for those services. During these periods, these customer actions materially adversely affected our business, financial condition and results of operations.

Our customers consist primarily of E&P companies in the continental United States. For the year ended December 31, 2022, no individual customer represented more than 10% of our consolidated revenues. For the year ended December 31, 2021, our top three customers individually represented, respectively, 15%, 10% and 7% of our consolidated revenues. For the year ended December 31, 2020, our top three customers individually represented, respectively, 16%, 11%, and 10% of our consolidated revenues. These top customers are from our stimulation services segment. The loss of any of our largest customers could have a material adverse effect on our results of operations.