ProFrac Holding Corp

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, proppant production, and manufacturing.

Mr. Dan Wilks and Mr. Farris Wilks are brothers and are the founders and principal stockholders of the Company. Their sons, Mr. Matthew D. Wilks and Mr. Johnathan Ladd Wilks are the Company’s Executive Chairman and Chief Executive Officer, respectively. In the normal course of business, we enter into transactions with related parties where Mr. Dan Wilks and Mr. Farris Wilks and entities owned by or affiliated with them (collectively, the "Wilks Parties") hold a controlling financial interest (see “Note 16 – Related Party Transactions”).

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, 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 year ended December 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 consolidated statements of operations, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of 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

In the second quarter of 2022, ProFrac Corp. completed its IPO of 18.2 million 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, which 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 contributed the remaining proceeds to ProFrac Holdings, LLC. The Company used the remaining proceeds to pay down $208.6 million of outstanding borrowings with the remaining proceeds to be used for general corporate uses and additional repayment of debt.

Redeemable Noncontrolling Interests

ProFrac Corp.’s only material asset is an equity interest consisting of units representing limited liability company interests in ProFrac LLC (the “Units”). As the sole managing member of ProFrac LLC, 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. Historically, the holders of Units not owned by ProFrac Corp. also held shares of ProFrac Corp.’s Class B common stock, such that a single share of Class B common stock was issued for each Unit not owned by ProFrac Corp.

Pursuant to the Third Amended and Restated Limited Liability Company Agreement of ProFrac LLC and the Second Amended and Restated Certificate of Incorporation of ProFrac Corp., certain members of ProFrac LLC had the right to cause ProFrac LLC to redeem all or a portion of each such member's Units, together with the surrender of the same number of each such member's shares of Class B common stock, for an equivalent number of shares of Class A common stock or, at the election of our board of directors, cash. In connection with the exercise of such redemption, a corresponding number of shares of Class B common stock would be canceled. The redemption election was not considered to be within our control because the holders of Class B common stock and their affiliates controlled us through direct representation on our board of directors. As a result, we have historically presented the noncontrolling interests in ProFrac LLC as redeemable noncontrolling interests outside of permanent equity.

In April 2023, all the eligible holders of the Units (the "Redeeming Members") submitted redemption notices with respect to all of their Units, representing an aggregate of 104.2 million ProFrac LLC units (the "Redeemed Units"), together with the surrender and delivery of the same number of shares of our Class B common stock. The Redeeming Members include entities owned or affiliated with ProFrac Corp.'s controlling stockholders, Mr. Dan Wilks and Mr. Farris Wilks, as well as Mr. Matthew D. Wilks, our Executive Chairman, an entity affiliated with Mr. Johnathan L. Wilks, our Chief Executive Officer, and Mr. Coy Randle, a member of our board of directors.

In April 2023, we delivered a written notice to ProFrac LLC and the Redeeming Members setting forth our election to exercise our right to purchase directly and acquire the Redeemed Units, together with the surrender and delivery of the same number of shares of our Class B common stock from the Redeeming Members.

We subsequently acquired the Redeemed Units from the Redeeming Members by issuing an aggregate of 101.1 million shares of Class A common stock on or about April 10, 2023 and the remaining 3.1 million shares on or about April 13, 2023. The surrendered shares of Class B common stock were canceled, and no shares of our Class B common stock remain issued and outstanding. The phrase "conversion of Class B common stock to Class A common stock" used throughout this document refers to the April 2023 transactions described above.

Activity related to the redeemable noncontrolling interest is as follows:

(1)

Based on 101.1 million shares of Class B Common Stock outstanding and the $18.00 per share IPO price.

(2)

Based on 104.2 million shares of Class B Common Stock outstanding and the 10-day VWAP of Class A Common Stock of $23.63 at December 31, 2022.

(3)

Based on 104.2 million shares of Class B common stock outstanding and the 10-day VWAP of Class A common stock of $12.60 at April 7, 2023.

Correction of an Immaterial Error on Previously Issued Financial Statements

During the fourth quarter of 2023, the Company identified and corrected an error in our accounting for deferred tax assets and liabilities. The source of the error related to the incorrect accounting for differences in our book value and tax basis of liabilities assumed in the acquisition of USWS in the fourth quarter of 2022. At December 31, 2022, this error understated our deferred tax assets by $65.8 million and also understated our valuation allowance of deferred tax assets by the same amount. The net effect of the error did not affect our consolidated balance sheet as of December 31, 2022, and it did not affect our consolidated statement of operations nor our consolidated statement of cash flows for the year ended December 31, 2022. Our schedule of deferred tax assets and liabilities included in “Note 11 - Income Taxes” included the understated amounts discussed above.

As a result of the conversion of our Class B common stock to Class A common stock in the second quarter of 2023, we recorded a net deferred tax liability of $74.7 million with a corresponding reduction to additional paid-in capital. At September 30, 2023, we revised our estimate of this net deferred tax liability to $74.3 million with a corresponding adjustment to additional paid-in capital. At these reporting dates, the error had not been detected and overstated these net deferred tax liabilities by $65.3 million at both June 30, 2023 and September 30, 2023. After correction of the calculation error, our estimated deferred tax liability should have been $9.4 million and $9.0 million at June 30, 2023, and September 30, 2023, respectively. See “Note 11 – Income Taxes” for discussion of the accounting for income taxes related to the conversion of our Class B common stock to Class A common stock.

We evaluated whether our previously issued consolidated financial statements for December 31, 2022, and our unaudited consolidated financial statements for June 30, 2023, and September 30, 2023, 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 these previously reported periods. Accordingly, we have corrected our schedule of deferred tax assets and deferred tax liabilities for December 31, 2022, in “Note 11 - Income Taxes.” We will also report the corrected amounts for June 30, 2023, and September 30, 2023, when presented in future financial statements.

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 years ended December 31, 2023 and 2022, no individual customer represented more than 10% of our consolidated revenues. For the year ended December 31, 2021, our topthree customers individually represented, respectively,15%,10%, and 7% 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.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission for annual financial information. The consolidated financial statements include the accounts of our company and all of our majority-owned subsidiaries that we control or variable interest entities for which we have determined that we are the primary beneficiary. All significant intercompany accounts and transactions are eliminated in consolidation.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, related revenues and expenses, and the disclosure of gain and loss contingencies at the date of the financial statements and during the periods presented. 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. Actual results could differ materially from those estimates.

Estimates are used for, but are not limited to, determining the following: allowance for credit losses; inventory net realizable values; recoverability of long-lived assets; revenue recognition on long-term contracts; valuation of goodwill; useful lives used in depreciation, depletion and amortization; income taxes and related valuation allowances; accruals for loss contingencies; stock-based compensation expense; and the fair value of assets acquired and liabilities assumed in acquisitions.

Cash and Cash Equivalents

Cash equivalents include only investments with an original maturity of three months or less. We occasionally hold cash deposits in financial institutions that exceed federally insured limits. We monitor the credit ratings and our concentration of risk with these financial institutions on a continuing basis to safeguard our cash deposits.

Restricted Cash

Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements, or are reserved for a specific purpose, and not readily available for immediate or general use are recorded to restricted cash and included in prepaid expenses and other current assets in our consolidated balance sheets. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated statements of cash flows for the periods indicated:

As of December 31, 2023, we hadno restricted cash. As of December 31, 2022, restricted cash consisted of cash used as collateral for our credit card program and to support our workers’ compensation obligations.

Allowance for Credit Losses

We establish an allowance for credit losses to reduce the carrying value of our accounts receivable based on a number of factors, including the length of time that accounts receivable are past due, our previous loss history, and the customer’s creditworthiness. Losses are charged against the allowance when the customer accounts are determined to be uncollectible.

The following table summarizes the rollforward of our allowance for credit losses:

Inventories

Inventories, which consist of proppants and chemicals that are used in the hydraulic fracturing process and maintenance parts for oilfield services equipment, are carried at the lower of cost or net realizable value. Our inventory is recorded using the first-in, first-out method or average cost basis. As necessary, we record an adjustment to decrease the value of slow moving and obsolete inventory to its net realizable value. To determine the adjustment amount, we regularly review inventory quantities on hand and compare them to estimates of future product demand, market conditions, production requirements and technological developments.

Property, Plant and Equipment

Property, plant, and equipment is stated at cost less accumulated depreciation, which is generally provided by using the straight-line method over the estimated useful lives of the individual assets. We manufacture our hydraulic fracturing units and the cost of this equipment, which includes direct and indirect manufacturing costs, is capitalized, and carried as construction in progress until it is completed and placed into service. Expenditures for renewals and betterments that extend the lives of our service equipment, which includes the replacement of significant components of service equipment, are capitalized and depreciated. Other repairs and maintenance costs are expensed as incurred.

When assets are disposed or retired, the cost and accumulated depreciation are netted against any sale proceeds, and the resulting gains or losses are included in the results of operations.

Other than those assets acquired in business combinations that were recorded at their fair values upon acquisition, our property, plant and equipment are recorded at cost less accumulated depreciation, which is generally provided by using the straight-line method over the estimated useful lives of the individual assets.

Depletion expense related to mining property and mine development are recorded as minerals are extracted, based on units of production and engineering estimates of mineable reserves. The impact of revisions to reserve estimates is recognized on a prospective basis.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired in a business combination. Goodwill is not amortized, but is reviewed for each reporting unit for impairment annually during the fourth quarter or more frequently when events or changes in circumstances indicate that the carrying value may not be recoverable. Judgments regarding indicators of potential impairment are based on market conditions and operational performance of our business. We may assess our goodwill for impairment initially using a qualitative approach to determine whether conditions exist that indicate it is more likely than not that a reporting unit’s carrying value is greater than its fair value, and if such conditions are identified, then a quantitative analysis will be performed to determine if there is any impairment.

The changes in the carrying amount of goodwill by reportable segment were as follows:

The measurement period adjustments for the stimulation services segment included an adjustment to finalize the estimate for contingent liabilities at the acquisition date for our U.S. Well Services acquisition and adjustments to working capital balances for our USWS, REV and Producers acquisitions.

The measurement period adjustment for the Proppant production segment related to adjustments to working capital balances for our Performance Proppant, Monahans, and Monarch acquisitions.

As of December 31, 2023, there wereno indefinite-lived intangible assets recorded in our consolidated balance sheets.

Impairment of Long-Lived Assets

We evaluate property, plant, and equipment, operating lease right-of-use assets, and definite-lived intangible assets for impairment when events or changes in circumstances indicate that the carrying value of a long-lived asset may not be recoverable. Recoverability is assessed based on the undiscounted future cash flows generated by the asset or asset group. If the carrying amount of an asset or asset group is not recoverable, we recognize an impairment loss equal to the amount by which the carrying amount exceeds fair value. We estimate fair value based on the income, market, or cost valuation techniques.

Leases

At the inception of an arrangement or contract, we determine whether it is a lease or contains a lease. Lease classification is determined, and the lease is recognized and measured, at the lease commencement date. A right-of-use asset and the corresponding lease liability are recorded based on the present value of the remaining lease payments over the lease term. We do not include renewal or termination options in our assessment of the lease term unless the exercise of those options is deemed to be reasonably certain. We do not recognize a right-of-use asset and lease liability for leases with a term of 12 months or less. Operating lease expenses are recognized on a straight-line basis over the lease term. Assets and lease liabilities related to finance leases are classified as property, plant and equipment and debt on our consolidated balance sheets.

Revenue Recognition

Our products and services are sold based upon contracts with our customers. We recognize revenue as we satisfy our 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. We assess our customers’ ability and intention to pay based on factors such as their financial condition and our historical payment experience with them. The following are descriptions of the principal activities of each reportable segment from which we generate our 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 generally short term in nature and have a single performance obligation, which is satisfied over time. We generate a field ticket, which our customer signs, that includes charges for services performed and any inputs consumed during the service. The signing of the field ticket by the customer represents their acceptance of the service and agreement to the amounts to which we have the right to invoice and recognize as revenue. We have elected the practical expedient permitting the exclusion of disclosing the value of unsatisfied performance obligations for Stimulation Services contracts as these contracts have original contract terms of one year or less or we have the right to invoice for services performed.

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. Certain of our contracts contain multiple performance obligations to provide a minimum quantity of products to our customers in future periods. For these contracts, the transaction price is allocated to each performance obligation at estimated selling prices and we recognize revenue as we satisfy these performance obligations. At December 31, 2023, the aggregate amount of transaction price allocated to unsatisfied performance obligations was $247.2 million, and the Company expects to perform these obligations and recognize revenue of $145.7 million in 2024, $43.5 million in 2025, $43.5 million in 2026, and $14.5 million in 2027.

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.

Our contract assets are classified as accounts receivable in our consolidated balance sheets. Accounts receivable consist of invoiced amounts or amounts for which we have a right to invoice based on services completed or products delivered.

Our current and non-current contract liabilities are classified as other current liabilities and other liabilities, respectively, in our consolidated balance sheets. Our contract liabilities consist of deferred revenues from advance consideration received from customers related to future performance of service or delivery of products and off-market contract liabilities from unfavorable contracts recognized in connection with our business acquisitions in the Proppant Production segment.

We believe that disaggregating our revenue by reportable segment (see “Note 15 – Business Segments”) provides the information necessary to understand the nature, amount, timing and uncertainty of our revenues and cash flows.

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 if the definition of a business is met. For significant acquisitions, we utilize third-party appraisal firms to assist us in determining the fair values for certain assets acquired and liabilities assumed using discounted cash flows and other applicable valuation techniques. We record any acquisition related costs as expenses when incurred.

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 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.

We measure asset acquisitions based on their cost to us, including transaction costs. Acquisition costs or consideration transferred in an asset acquisition are assumed to be equal to the fair value of the net assets acquired. If the consideration transferred is cash, measurement is based on the amount of cash paid to the seller, as well as transaction costs incurred. Consideration given in the form of non-monetary assets, liabilities incurred or equity interests issued is measured based on either their cost to us or the fair value of the net assets acquired, whichever is more clearly evident. The cost of an asset acquisition is allocated to the net assets acquired based on their estimated relative fair values. Goodwill is not recognized in an asset acquisition.

The estimation of the fair values of assets and liabilities acquired in business combinations or asset acquisitions requires significant judgment. Our fair value estimates require us to use significant observable and unobservable inputs. The estimates of fair value are also subject to significant variability, are sensitive to changes in market conditions, and are reasonably likely to change in the future. A significant change in the observable and unobservable inputs and determination of fair value of the assets and liabilities acquired could significantly impact our consolidated financial statements.

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:

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

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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.

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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.

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 credit losses. The book value of our floating rate debt approximates fair value because of its floating rate structure.

Stock-based Compensation

Stock-based compensation is measured on the grant date and fair value is recognized as expense over the requisite service period, which is generally the vesting period of the award. We recognize forfeitures as they occur rather than estimating expected forfeitures. For equity-classified awards with graded vesting based solely on the satisfaction of a service condition, we recognize compensation cost as a single award on a straight-line basis.

The fair value of time-based and performance-based restricted stock units is determined based on the number of units granted and the closing price of our Class A Common Stock on the date of grant. Stock-based awards with market conditions are valued using a Monte Carlo simulation analysis.

Income Taxes

Before May 17, 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, we were not required to account for U.S. federal income taxes in the consolidated financial statements. Certain state income-based taxes are imposed on us which are reflected as income tax expense or benefit in historical periods.

In connection with the IPO in May 2022, the Company reorganized and ProFrac LLC became partially owned by ProFrac Corp., a U.S. Internal Revenue Code Subchapter C corporation (“C-Corporation”). ProFrac Corp. is a taxable entity and is required to account for income taxes under the asset and liability method for periods subsequent to May 17, 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 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.

We record uncertain tax positions, if any, in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We had no uncertain tax positions during the periods presented.

Recently Adopted Accounting Standards

On January 1, 2022, we adopted the FASB Accounting Standards Codification (“ASC”) Topic 842, Leases, which amended existing guidance to require lessees to recognize right-of-use assets and related lease liabilities on the consolidated balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. We adopted this guidance using the current period adjustment 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.

Our application of this standard did not significantly impact our results of operations or cash flows. As of January 1, 2022, we recognized right-of-use assets and liabilities of approximately $35.8 million from operating leases on our consolidated balance sheet. See “Note 7– Leases” for additional disclosures related to our adoption of this ASC.

During 2022, we adopted FASB ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This 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.

On January 1, 2022, we adopted FASB ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removed 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. We adopted this guidance using a prospective method of transition, which did not result in a material impact on our consolidated financial statements.

Recently Issued Standards Not Yet Adopted

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which enhances the disclosures required for operating segments in the Company's annual and interim consolidated financial statements. This ASU is effective retrospectively for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of this standard on our disclosures.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which is intended to enhance the transparency and decision usefulness of income tax disclosures. This ASU provides for enhanced income tax information primarily through changes to the rate reconciliation and income taxes paid information. This ASU is effective for the Company prospectively to all annual periods beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of this standard on our disclosures.

3. SUPPLEMENTAL BALANCE SHEET INFORMATION

Inventories

Inventories are comprised of the following:

Property, Plant, and Equipment, Net

Property, plant and equipment, net is comprised of the following:

The increase in net property, plant, and equipment was partially due to assets of $506.4 million acquired through our 2023 acquisitions (see Note 4).

Depreciation and amortization expense related to property, plant, and equipment was $398.0 million, $261.2 million and $139.9 million in 2023, 2022 and 2021, respectively. Depletion expense was $5.2 million, $0.5 million, and $0.2 million in 2023, 2022 and 2021, respectively.

Intangible Assets, Net

Intangible assets, net is comprised of the following:

We amortize other identifiable intangible assets with a definite life on a straight-line basis over the estimated useful lives of the assets. Our definite-lived intangible assets consist of acquired technology and customer relationships.

Amortization expense related to intangible assets was $35.2 million, $5.6 million, and $0.6 million in 2023, 2022 and 2021, respectively.

The estimated future amortization expense related to intangible assets is $35.4 million in 2024, $35.1 million in 2025, $33.5 million in 2026, $12.4 million in 2027, $12.0 million in 2028, and $45.1 million thereafter.

Accrued Expenses

Accrued expenses are comprised of the following:

Other Current Liabilities

Other current liabilities are comprised of the following:

4. BUSINESS COMBINATIONS

Current Year Acquisitions

On January 3, 2023, we acquired 100% of the issued and outstanding membership interest of Producers Service Holdings LLC (“Producers”), an employee-owned pressure pumping services provider serving Appalachia and the Mid-Continent, for a total purchase consideration of $36.5 million, consisting of (i) Class A common stock valued at $12.9 million based on the acquisition date closing price of $21.40; (ii) cash consideration of $9.7 million; and (iii) our pre-existing investment of $13.9 million. Throughout the six months ended June 30, 2023, we integrated Producers' operations. As a result, we track all stimulation services assets as one group and it would be impracticable to separately report Producers' revenues or pretax earnings subsequent to the acquisition.

On February 24, 2023, we acquired 100% of the issued and outstanding membership interests in(i) Performance Proppants, LLC, (ii) Red River Land Holdings, LLC, (iii) Performance Royalty, LLC, (iv) Performance Proppants International, LLC, and (v) Sunny Point Aggregates, LLC (together, “Performance Proppants”) for a total purchase consideration of $462.8 million, consisting of (i)Class A common stock valued at $6.2 million based on the acquisition date closing price of $19.67; (ii) cash consideration of $452.4 million; and (iii) the settlement of a pre-existing receivable of $4.2 million. Performance Proppants is a frac sand provider in the Haynesville basin. The Performance Proppants acquisition contributed revenues of $204.9 million and pretax income of $99.9 million, before intercompany eliminations, to our consolidated statement of operations for the year ended December 31, 2023. The Performance Proppants acquisition contributed revenues of $154.8 million, after intercompany eliminations, to our consolidated statement of operations for the year ended December 31, 2023.

The following table represents our allocation of total purchase consideration of Producers and Performance Proppants to the identifiable assets acquired and liabilities assumed based on the fair values on their acquisition dates:

We generally used the cost approach to value acquired property, plant and equipment adjusted for the age, condition and utility of the associated assets. The market approach valuation technique was used for assets that had comparable market data available. Included in Performance Proppants property, plant and equipment valuation is mineral reserves valued at $248.3 million using the income approach, which is predicated upon the value of the future cash flows that an asset will generate over its economic life. The intangible assets related to the Performance Proppants acquisition represent customer relationships and the fair value was determined using the with-and-without method which is an income approach and considers the time needed to rebuild the customer base.

The amounts allocated to goodwill are attributable to the organized workforce and potential or expected synergies. The goodwill for Producers and Performance Proppants was recognized in the stimulation services and proppant production segments, respectively. We estimate that substantially all of the goodwill will be deductible for income tax purposes.

The allocations of purchase price to the identifiable assets acquired and liabilities assumed for the Producers acquisition are final. The allocations of purchase price to the identifiable assets acquired and liabilities assumed for the Performance Proppants acquisition is preliminary and subject to revisions during the measurement period, up to one year from the date the acquisition closed. These determinations include the use of estimates based on information that was available at the time these unaudited condensed consolidated financial statements were prepared. We believe that the estimates used are reasonable; however, the estimates are subject to change as additional information becomes available.

Prior Year Acquisitions

FTS International, Inc. (“FTSI”)

On March 4, 2022 (“FTSI Acquisition Date”), we acquired all of the outstanding stock of FTSI (the “FTSI Acquisition”) for a purchase price of $405.7 million, consisting of cash consideration of $332.8 million, and THRC Holdings, LP (“THRC Holdings”) equity interest of $72.9 million (“THRC FTSI Related Equity”).

Immediately following the closing of the cash acquisition pursuant to an Agreement and Plan of Merger, dated as of October 21, 2021, by and among FTSI, ProFrac LLC and ProFrac Acquisitions, Inc. (the “FTSI Merger Agreement”), ProFrac LLC distributed the 80.5% of the FTSI equity it acquired in such merger to Farris Wilks and THRC Holdings in a manner that resulted in each of them owning 50.0% of FTSI (the “FTSI Distribution”), with THRC Holdings receiving a smaller share of the FTSI Distribution and instead receiving certain preferred equity in ProFrac LLC in lieu of its redemption in connection with such distribution. The THRC FTSI Related Equity was the result of a transaction whereby THRC Holdings, which owned approximately 19.5% of FTSI, agreed to retain that interest in FTSI in lieu of receiving cash pursuant to the FTSI Merger Agreement.

The following table summarizes the fair value of consideration transferred in the FTSI Acquisition and the allocation of the purchase price to the fair values of assets acquired and liabilities assumed at the FTSI Acquisition Date:

For the three months ended March 31, 2022, revenues and pretax earnings associated with the FTSI acquired operations were $48.6 million and a $0.1 million loss, respectively. FTSI acquisition-related costs of $3.7 million were incurred during the three months ended March 31, 2022, consisting of external legal and consulting fees, which are classified in acquisition related expenses in the consolidated statements of operations. Additionally, we incurred $9.3 million in severance costs in connection with the FTSI acquisition, which are classified in acquisition related expenses in the consolidated statements of operations. Throughout the second quarter of 2022, we integrated FTSI’s operations. As a result, we track all stimulation services assets as one group and it would be impracticable to separately report FTSI revenues or pretax earnings subsequent to March 31, 2022.

Acquisition of Flotek Industries, Inc.

On February 2, 2022, we entered into an agreement with Flotek Industries, Inc. (“Flotek”), pursuant to which Flotek would provide full downhole chemistry solutions for a minimum often hydraulic fleets forthree years starting on April 1, 2022, at a price of cost plus 7.0% (“Flotek Supply Agreement”). In exchange for entry into the Flotek Supply Agreement, we received $10.0 million in initial principal amount of convertible notes payable (“Flotek Convertible Notes”) and acquired an additional $10.0 million in principal amount of Flotek Convertible Notes in a separate transaction. Our equity ownership in Flotek on a fully diluted basis as a result of this investment was approximately 17.0%. In addition, we received the right to designate up to two directors to Flotek’s board of directors.

On February 16, 2022, we and Flotek agreed to amend the Flotek Supply Agreement to increase the term toten years and increase the scope to 30 fleets. In exchange for our entry into the amendment to the Flotek Supply Agreement (the “Flotek Supply Agreement Amendment”), Flotek agreed to issue us $50.0 million in initial principal amount of Flotek Convertible Notes that was convertible into Flotek common stock. The Flotek Supply Agreement Amendment and issuance to us of additional Flotek Convertible Notes were conditioned upon customary closing conditions including the approval of Flotek’s shareholders. In May 2022, the Flotek shareholders approved the Flotek Convertible Notes issuance and the Flotek Supply Agreement Amendment. Our equity ownership in Flotek on a fully diluted basis after the consummation of these transactions was approximately 43.0%, and we were permitted to designatetwo additional directors, or up tofour directors to Flotek’s board of directors. Because of our power to appoint directors to the board of directors without a direct equity interest in Flotek, we determined that Flotek was a VIE. We further determined that we were the primary beneficiary of the VIE, due to our ability to appoint four of seven directors to Flotek’s board of directors. As a result, subsequent to May 17, 2022, we accounted for this transaction as a business combination using the acquisition method of accounting and Flotek’s financial statements have been included in our consolidated financial statements from May 17, 2022. As we had no direct equity interest in Flotek during 2022, we allocated 100% of Flotek’s loss to noncontrolling interests in our consolidated financial statements.

The Flotek Supply Agreement Amendment includes a minimum annual volume commitment whereby we are obligated to pay Flotek liquidated damages equal to 25.0% of the shortfall for such year, should we fail to meet the minimum purchase amount. At May 17, 2022, we had a supply agreement contract liability of $9.9 million, which was included as purchase consideration for Flotek as a settlement of a pre-existing relationship. All effects of the Supply Agreement have been eliminated from our consolidated financial statements subsequent to May 17, 2022.

The Flotek Convertible Notes issued to ProFrac accrued paid-in-kind interest at a rate of 10% per annum, had a maturity ofone year, and converted into common stock of Flotek. We initially recognized the Flotek Convertible Notes with an initial principal balance of $20.0 million at $20.0 million. On May 17, 2022, we estimated the fair value of these Flotek Convertible Notes to be $30.2 million, which was included as purchase consideration for Flotek as a settlement of a pre-existing relationship. All effects of the Flotek Convertible Notes have been eliminated from our consolidated financial statements subsequent to May 17, 2022.

Before May 17, 2022, we designated our investment in the Flotek Convertible Notes as trading securities. Securities designated as trading securities are reported at fair value, with gains or losses resulting from changes in fair value recognized in net investment income on the consolidated statements of operations. For the period from February 2, 2022 through May 17, 2022 we recognized noncash income of $10.2 million as other (expense) income on our consolidated statements of operations related to the change in fair value of the Flotek Convertible Notes.

In June 2022, Flotek issued and sold to ProFrac II LLC, a wholly-owned subsidiary of ProFrac LLC, pre-funded warrants to purchase from Flotek up to approximately 13.1 million shares of Flotek common stock at any time and at an exercise price equal to $0.0001 per share, in exchange for $19.5 million in cash. ProFrac II LLC and its affiliates may not receive any voting or consent rights in respect of these warrants or the underlying shares unless and until (i) Flotek has obtained approval from a majority of its shareholders excluding ProFrac II LLC and its affiliates and (ii) ProFrac II LLC has paid an additional $4.5 million to Flotek. We entered into this transaction to provide additional working capital to Flotek to enable it to perform under the Flotek Supply Agreement Amendment. These pre-funded warrants have been eliminated from our consolidated financial statements.

The following table summarizes the fair value of consideration transferred in the transaction, which consisted of settlement of pre-existing relationships, and its allocation to the fair values of Flotek’s assets, liabilities and noncontrolling interest as of May 17, 2022 (the“Flotek Acquisition Date”):

The fair value of the noncontrolling interest was based on the Flotek common stock price reported by the New York Stock Exchange at the Flotek Acquisition Date, which represented Level 1 inputs. No portion of the recorded goodwill is tax deductible. The allocation of the purchase price to Flotek’s net tangible assets and liabilities and identifiable intangible assets is final.

Our consolidated results included revenue of $37.2 million and a pretax loss of$29.4 million from Flotek in 2022. The entire pretax loss was allocated to noncontrolling interests.

In May 2023, a portion of our Flotek convertible notes matured and were converted into 63.5 million shares of Flotek common stock. In September 2023, Flotek's shareholders approved a 6-for-1 reverse stock split. Also in September 2023, Flotek's shareholders approved the issuance of 4.2 million shares (post-split) of common stock to the Company to settle a prefunded warrant related to the February 2022 Flotek convertible notes held by the Company that matured in February 2023.

As of December 31, 2023, we owned approximately 50.8% of Flotek's outstanding common stock. As of December 31, 2023 and 2022, $62.7 million and $79.2 million, respectively, of Flotek's assets and $55.5 million and $72.0 million, respectively, of Flotek's liabilities are included in our unaudited condensed consolidated balance sheets. These amounts are exclusive of goodwill and are after intercompany eliminations. The assets of Flotek can only be used to settle its obligations and the creditors of Flotek have no recourse to our assets. Our exposure to Flotek is generally limited to the carrying value of our equity and variable interests.

SP Silica of Monahans, LLC and SP Silica Sales, LLC (“Monahans”)

On July 25, 2022 (the “Monahans Acquisition Date”), we acquired 100% of the issued and outstanding membership interests of each of SP Silica of Monahans, LLC and SP Silica Sales, LLC (collectively “Monahans”), the West Texas subsidiaries of Signal Peak Silica, for a final purchase price of $97.4 million in cash (the “Monahans Acquisition”).

The following table summarizes the fair value of consideration transferred in the Monahans Acquisition and the allocation of the purchase price to the fair values of assets acquired and liabilities assumed at the Monahans Acquisition Date:

For the acquired property, plant and equipment, the valuation technique utilized was the cost approach, which adjusted estimates of replacement cost for the age, condition and utility of the associated assets. In addition, the market approach valuation technique was used for assets that had comparable market data available. Included in our property, plant and equipment valuation is mineral reserves valued at $26.5 million using the income approach, which is predicated upon the value of the future cash flows that an asset will generate over its economic life. The intangible asset represents customer relationship and its fair value was determined using the with-and-without method which is an income approach and considers the time needed to rebuild the customer base. The allocation of the purchase price to Monahans’ net tangible assets and liabilities and identifiable intangible assets is final.

The goodwill in this acquisition was primarily attributable to Monahans’ organized workforce and potential or expected synergies, and is tax deductible. We recognized this goodwill in the proppant production segment.

Our consolidated results included revenue of approximately $34.0 million and pretax income of$11.5 million from this acquisition in 2022.

U.S. Well Services, Inc. (“USWS”)

On June 21, 2022, ProFrac Holding Corp. entered into an Agreement and Plan of Merger (the “USWS Merger Agreement”) by and among ProFrac Holding Corp., USWS, a Delaware corporation, and Thunderclap Merger Sub I, Inc., a Delaware corporation and an indirect subsidiary of ProFrac Holding Corp. (“Merger Sub”), to effect a stock-for-stock merger transaction. The USWS Merger Agreement also provides for, among other things, the merger of Merger Sub with and into USWS, with USWS surviving the merger as the surviving corporation and an indirect subsidiary of ProFrac Holding Corp. (the “USWS Acquisition”).

The USWS Acquisition was completed on November 1, 2022 (“USWS Acquisition Date”) for (i) equity consideration of 12.9 million shares of our Class A Common Stock valued at $282.1 million based on the $21.91 closing price of our Class A Common stock on the day immediately prior to USWS Acquisition date, pursuant to the USWS Merger Agreement, (ii) consideration in the form of replacement warrants valued at its estimated fair value of $1.1 million, and (iii) cash consideration of $195.9 million, which included payments for indebtedness on behalf of USWS. The replacement warrants consist of public warrants and private warrants exercisable into 153,613 and 106,857 shares, respectively, of our Class A Common Stock.

In connection with the USWS Acquisition, we borrowed approximately $164.0 million under our 2022 ABL Credit Facility. See “Note 6 - Debt” for additional discussion regarding the 2022 ABL Credit Facility.

The Wilks Parties hold a controlling interest in ProFrac Holding Corp. and certain Wilks Parties also owned certain securities of USWS. Upon consummation of the USWS Acquisition, certain Wilks Parties received approximately 4.1 million shares of our Class A Common Stock which was included as part of equity consideration.

The following table summarizes the fair value of consideration transferred in the USWS Acquisition and the allocation of the purchase price to the fair values of assets acquired and liabilities assumed at the USWS Acquisition Date:

For the acquired property, plant and equipment, the valuation technique utilized was the cost approach, which adjusted estimates of replacement cost for the age, condition and utility of the associated assets. The intangible assets related to the USWS Acquisition represent developed technology and customer relationship. The fair value of the developed technology was determined using the income approach, which is predicated upon the value of the future cash flows that an asset will generate over its economic life. The fair value of customer relationship was determined using the with-and-without method which is an income approach and considers the time needed to rebuild the customer base. The allocation of the purchase price to USWS’s net tangible assets and liabilities and identifiable intangible assets is final.

The goodwill in this acquisition was primarily attributable to USWS’ organized workforce and potential or expected synergies. We recognized this goodwill in the stimulation services segment. No portion of the recorded goodwill is tax deductible.

Our consolidated results included revenue of $62.1 million and a pretax loss of$11.4 million from this acquisition in 2022.

Monarch Silica, LLC (“Monarch”)

On December 5, 2022, ProFrac II LLC (i) entered into a Membership Interest Purchase Agreement (the “Monarch Purchase Agreement”) by and among ProFrac II LLC, Monarch Capital Holdings, LLC, a Texas limited liability company (“Monarch Capital”), Monarch, David E. Welch and Paul A. Welch, pursuant to which ProFrac II LLC agreed to purchase from Monarch Capital 100% of the issued and outstanding membership interests of Monarch (the “Monarch Equity Transaction”, and (ii) entered into a Real Property Purchase and Sale Agreement by and between ProFrac II LLC and DPW Investments, LLC, a Texas limited liability company (“DPW”), pursuant to which ProFrac II LLC agreed to purchase from DPW all of its right, title and interest in and to certain real property located in Bexar County, Texas (the “Monarch Real Property Transaction” and, together with the Monarch Equity Transaction, the “Monarch Acquisition”).

The Monarch Acquisition was completed on December 23, 2022 (the“Monarch Acquisition Date”) for (i) consideration in the form of a long-term secured note payable to Monarch Capital (the “Monarch Note”) valued at its estimated fair value of $79.0 million, and (ii) cash consideration of$87.5 million.

The following table summarizes the fair value of consideration transferred in the Monarch Acquisition and the allocation of the purchase price to the fair values of assets acquired and liabilities assumed at the Monarch Acquisition Date:

For the acquired property, plant and equipment, the valuation technique utilized was the cost approach, which adjusted estimates of replacement cost for the age, condition and utility of the associated assets. In addition, the market approach valuation technique was used for assets that had comparable market data available. Included in our property, plant and equipment valuation is mineral reserves valued at $99.2 million using the income approach, which is predicated upon the value of the future cash flows that an asset will generate over its economic life. The intangible asset represents customer relationship and its fair value was determined using the with-and-without method which is an income approach and considers the time needed to rebuild the customer base. The allocation of the purchase price to Monarch’s net tangible assets and liabilities and identifiable intangible assets is final.

The goodwill in this acquisition was primarily attributable to Monarch’s organized workforce and potential or expected synergies, and is tax deductible. We recognized this goodwill in the proppant production segment.

Our consolidated results included an immaterial amount of revenue and pretax earnings from this acquisition in 2022.

REV Energy Holdings, LLC (“REV”)

On December 23, 2022, ProFrac II LLC entered into a Membership Interest Purchase Agreement (the “REV Purchase Agreement”) by andamong ProFrac II LLC, REV, Jason Kuzov, an individual (“Kuzov”), Mitchell Winnick, an individual (“Winnick”), Buffalo Creek, LLC, an Idaho limited liability company (together with Kuzov and Winnick, the “REV Sellers”), and BCKW LLC, a Colorado limited liability company (the “REV Sellers’ Representative”), pursuant to which ProFrac II LLC agreed to purchase from the REV Sellers 100% of the issued and outstanding membership interests of REV (the “REV Acquisition”).

The REV Acquisition was completed on December 30, 2022 (the“REV Acquisition Date”) for (i) equity consideration of 3.1 million shares (of which there is a Holdback Amount, as defined in the REV Purchase Agreement, equivalent to 31.8 thousand shares) of our Class B Common Stock valued at $78.0 million based on the REV Acquisition Date closing price of our Class A Common Stock of $25.20, (ii) consideration in the form of a long-term secured note payable to REV Sellers’ Representative (the“REV Note”) valued at its estimated fair value of $36.1 million, (iii) contingent consideration with an estimated fair value of $6.6 million, and (iv) cash consideration of $19.9 million, which included payments of $17.4 million and $6.0 million for indebtedness and transaction costs, respectively, on behalf of REV. The contingent consideration represented up to $20.0 million of earn-out payments to REV Sellers if certain EBITDA-based performance targets were achieved during 2023, as described in the REV Purchase Agreement. These performance targets were not met in 2023.

The following table summarizes the fair value of consideration transferred in the REV Acquisition and the allocation of the purchase price to the fair values of assets acquired and liabilities assumed at the REV Acquisition Date:

For the acquired property, plant and equipment, the valuation technique utilized was the cost approach, which adjusted estimates of replacement cost for the age, condition and utility of the associated assets. The intangible assets related to the REV Acquisition represent customer relationships and the fair value was determined using the income approach, which is predicated upon the value of the future cash flows that an asset will generate over its economic life. The allocation of the purchase price to REV’s net tangible assets and liabilities and identifiable intangible assets is final.

The goodwill in this acquisition was primarily attributable to REV’s organized workforce and potential or expected synergies. We recognized this goodwill in the stimulation services segment. A portion of the recorded goodwill is tax deductible.

Our consolidated results included an immaterial amount of revenue and pretax earnings from this acquisition in 2022.

The following combined pro forma results of operations have been prepared as though the Producers and Performance Proppants acquisitions had been completed on January 1, 2022, and the USWS, FTSI, Flotek, Monahans, REV, and Monarch acquisitions had been completed on January 1, 2021. Pro forma amounts presented below are for illustrative purposes only and do not reflect future events that occurred after December 31, 2023 or any operating efficiencies or inefficiencies that may result from these significant acquisitions. The results of operations are not necessarily indicative of results that would have been achieved had we controlled Performance Proppants, Producers, USWS, FTSI, Flotek, Monahans, REV, and Monarch during the periods presented.

We incurred $16.2 million and $25.1 million of acquisition costs related to these acquisitions in 2023 and 2022, respectively. Acquisition costs are included in acquisition and integration costs within the consolidated statements of operations.

5. INVESTMENTS

Basin Production and Completion LLC

On February 9, 2022, we entered into an agreement to purchase all the series A-1 and B-1 preferred units of Basin Production and Completion LLC (“BPC”), for $46.0 million, consisting of $40.0 million to BPC for series A-1 and B-1 preferred units and $6.0 million to selling holders of BPC series B-1 preferred units. Additionally, on February 14, 2022, we made a loan to FHE USA LLC (“FHE”), a subsidiary of BPC for $1.25 million. The loan bears interest at the rate of 5.0% per annum. Interest is either paid at each calendar quarter end or added to the principal balance at the election of BPC. The loan matures on February 14, 2027. The total amount invested in BPC through February 9, 2022, was $51.4 million.

Subsequent to February 9, 2022, our investments in BPC provide us the ability to have significant influence, but not control over BPC’s operations. BPC's business and affairs are managed under the direction of its board of directors, which we do not control. Based on our evaluation, we determined that BPC is a VIE, but we are not the primary beneficiary of the VIE. We have elected the fair value option to account for our equity method investment in BPC. See “Note 14 – Fair Value of Financial Instruments” for more information on our instruments using Level 3 measurements. As of December 31, 2023, the estimated fair value of our investment in BPC was $23.4 million.

6. DEBT

Long-term debt is comprised of the following:

(1)

In December 2023, the Company refinanced all of the outstanding principal amount of 2022 Term Loan, the REV Note, and the First Financial Loan with a new issuance of 2029 Secured Notes and the 2023 Alpine Term Loan.

(2)

Related party debt agreements.

Senior Secured Notes Due 2029

In December 2023, ProFrac Holdings II, LLC completed an offering of $520 million of senior secured floating rate notes due in December 2029 in a private offering to qualified institutional buyers (“2029 Senior Notes”). The Company primarily used these proceeds to repay outstanding principal amounts of the 2022 Term Loan, the REV Note, and the First Financial loan.

The 2029 Senior Notes bear interest at an adjusted Secured Overnight Financing Rate (“Adjusted SOFR”) plus a margin of 7.25% per annum with a 2.00% Adjusted SOFR floor. The Adjusted SOFR rate is equal to the applicable Secured Overnight Financing Rate plus 0.26161% per annum. Interest is payable quarterly, in arrears, on March 31, June 30, September 30 and December 31. The effective interest rate was 14.0% as of December 31, 2023. No interest was due on December 31, 2023. The first interest payment date is March 31, 2024.

The 2029 Senior Notes were issued at a discount of $5.2 million for aggregate consideration of $514.8 million and resulted in net proceeds to the Company of $498.8 million after debt issuance costs of $16.0 million.

The 2029 Senior Notes require minimum quarterly payments including principal payments of $10.0 million on June 30, 2024, September 30, 2024, and December 31, 2024, and $15.0 million at the end of each calendar quarter thereafter. On each of March 29, 2024, June 28, 2024, September 30, 2024 and December 31, 2024, an aggregate of $20.0 million aggregate principal amount of 2029 Senior Notes are redeemable, at our option, with no premium. The 2029 Senior Notes are redeemable, at our option, beginning on January 15, 2025, at a premium of 5% through January 14, 2026. This premium declines to 2.0% through January 14, 2027, and 1.0% through January 14, 2028, after which we may redeem the notes at par value.

The obligation to pay principal and interest on the 2029 Senior Notes is jointly and severally guaranteed on a full and unconditional basis by ProFrac LLC, and subject to certain exceptions, our domestic subsidiaries. The 2029 Senior Notes are secured on a first priority basis by substantially all of the assets of ProFrac Corp. and ProFrac LLC and our wholly owned domestic subsidiaries.

The 2029 Senior Notes contain a covenant requiring us to maintain a minimum loan to value (“LTV”) ratio of 0.75 to 1.00. This ratio is the aggregate unpaid principal amount of the 2019 Senior Notes divided by the orderly liquidation value of our applicable assets. The 2029 Senior Notes contain covenants that could, in certain circumstances, limit our ability to issue additional debt, repurchase or pay dividends on our common or preferred stock, sell our assets, or enter into certain other transactions. We were in compliance with all of the covenants in the indenture governing our 2029 Senior Notes at December 31, 2023.

Alpine 2023 Term Loan

In December 2023, our Alpine subsidiary entered into a senior secured term loan credit agreement (the “Alpine Term Loan Credit Agreement”) that matures in January 2029, with CLMG Corp. as administrative agent and collateral agent, and the lenders party thereto, providing for a term loan of $365.0 million (the “Alpine 2023 Term Loan”). The Company primarily used these proceeds to repay outstanding principal amounts of the 2022 Term Loan, the REV Note, and the First Financial loan.

Borrowings under the Alpine 2023 Term Loan accrue interest at either an Adjusted SOFR rate or a base rate, plus an applicable margin of 7.25% per annum with a 3.00% Adjusted SOFR floor. The Adjusted SOFR rate is equal to the applicable Secured Overnight Financing Rate plus 0.11448% per annum. The effective interest rate was 14.3% as of December 31, 2023.

The Alpine 2023 Term Loan requires minimum quarterly payments including principal payments of $5.0 million on June 30, 2024, September 30, 2024, and December 31, 2024, and $15.0 million on the last day of each calendar quarter thereafter. In connection with any voluntary prepayment of the Alpine 2023 Term Loan prior to December 27, 2025, Alpine will be required to pay the Minimum Earnings Amount (as defined in the Alpine Term Loan Credit Agreement), which generally represents the interest on the principal amount repaid that would be owed through December 27, 2025. Voluntary prepayments made after December 27, 2025 through December 27, 2026, will incur a premium of 2%. This premium declines to 1.0% for voluntary prepayments made after December 27, 2026 through December 27, 2027. The Alpine 2023 Term Loan may be prepaid at par after December 27, 2027.

The Alpine 2023 Term Loan is guaranteed by ProFrac Holding Corp. and all of Alpine’s subsidiaries. The Alpine 2023 Term Loan is secured by a lien on, and security interest in, substantially all of Alpine’s assets.

Commencing with the fiscal quarter ending September 30, 2024, the Alpine 2023 Term Loan contains a covenant requiring us not to exceed a maximum Total Net Leverage Ratio (as defined in the Alpine Term Loan Credit Agreement) of 2.00 to 1.00. This ratio is generally the consolidated total debt of Alpine divided by an adjusted EBITDA calculation. The Alpine 2023 Term Loan contains covenants that limit Alpine’s ability to issue additional debt, pay dividends or distributions, sell its assets, or enter into certain other transactions.

Alpine was in compliance with all covenants, and there were no existing defaults or events of default related to the Alpine 2023 Term Loan as of December 31, 2023.

2022 ABL Credit Facility

On March 4, 2022, ProFrac LLC, ProFrac II, LLC, as borrower, and certain of the Company’s wholly owned subsidiaries as obligors, entered into a senior secured asset-based revolving credit agreement that expires on March 4, 2027 (asamended, the

“2022 ABL Credit Facility”), with a group of lenders with JPMorgan Chase Bank N.A., as administrative agent and collateral agent.

The 2022 ABL Credit Facility, as amended, provides for a maximum availability of $325.0 million. The maximum availability of credit under the 2022 ABL Credit Facility is limited at any time to the lesser of the lenders committed amounts or a borrowing base. The borrowing base is based on percentages of eligible accounts receivable and eligible inventory, which serve as collateral for the ABL Credit Facility, and is subject to certain reserves. Assets of our Alpine subsidiary are excluded from the borrowing base. If at any time borrowings and letters of credit issued under the credit facility exceed the borrowing base, we will be required to repay an amount equal to such excess. As of December 31, 2023, the maximum availability under the ABL credit facility was limited to our eligible borrowing base of $210.9 million with $117.4 million of borrowings outstanding and $10.1 million of letters of credit outstanding, resulting in approximately $83.4 million of remaining availability.

Borrowings under the 2022 ABL Credit Facility accrue interest at either a SOFR rate or a base rate, plus an applicable margin. The applicable margin for SOFR rate loans ranges from 1.5% to 2.0% and for base rate loans ranges from 0.5% to 1.0%. The 2022 ABL Credit Facility bears an unused line fee ranging from 0.250% to 0.375%. The effective interest rate was 9.5% as of December 31, 2023.

We are required by the 2022 ABL Credit Facility to maintain minimum liquidity of $15.0 million at all times. If the amount available under the 2022 ABL Credit Facility is less than the greater of 12.5% of our maximum availability or $30.0 million, we will be required to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0, to the extent such conditions continue for at least five consecutive business days, and we will be subject to the cash dominion provisions under the agreement.

The 2022 ABL Credit Facility contains certain customary representations and warranties and affirmative and negative covenants. The negative covenants include, subject to customary exceptions, limitations on indebtedness, dividends, distributions and certain other payments, investments, acquisitions, prepayments of specified junior indebtedness, amendments of specified junior indebtedness, transactions with affiliates, dispositions, mergers and consolidations, liens, restrictive agreements, sale and leaseback transactions, changes in fiscal periods and changes in line of business. The Company was in compliance with all covenants, and there were no existing defaults or events of default related to the 2022 ABL Credit Facility as of December 31, 2023.

Monarch Note

In connection with our acquisition of Monarch in December 2022, $87.5 million of the purchase price was financed through a seller-financed note (the “Monarch Note”, see “Note 4 - Business Combinations” for additional information). The Monarch Note matures in December 2024 and bears interest at an annual rate of 2.5%.

The Monarch Note requires minimum quarterly payments of $10.9 million. Alpine has an option to prepay the loan in whole or in part without penalty or premium. The Monarch Note is secured by Alpine’s equity interest in Monarch, substantially all of the assets of Monarch, and real property acquired in connection with the Monarch Acquisition.

The Monarch Note was initially measured at fair value in connection with the Monarch Acquisition, resulting in recording a debt discount of $10.4 million. We amortize such discount as an adjustment to interest expense using the effective interest method over the term of the Monarch Note. As of December 31, 2023, our effective interest rate on the Monarch Note was 12.1%.

Equify Notes

In connection with our acquisition of USWS in November 2022 (see “Note 4 - Business Combinations” for additional information), we assumed two equipment financing notes with Equify Financial, LLC, a related party to the Company controlled by the Wilks Parties. At acquisition, these notes had principal balances of $11.9 million and $12.3 million, have terms through August 2027 and October 2027, and bear interest at an annual rate of 14.8% and 15.5%, respectively. The Equify Notes were initially measured at fair value in connection with the USWS Acquisition, resulting in recording a debt premium of $3.6 million. We amortize such premium as an adjustment to interest expense using the effective interest method over the term of the Equify Notes. As of December 31, 2023, the effective interest rates on the Equify Notes were 3.4% and 4.2%. These notes are collateralized by certain equipment in our stimulation services segment.

Other Indebtedness

The Company has other indebtedness of $13.8 million including equipment financing notes, insurance premium financing and light-duty vehicle loans.

Restricted Assets

Our Alpine 2023 Term Loan requires us to segregate collateral associated with Alpine and limits our ability to use Alpine's cash or assets to satisfy our obligations or the obligations of our other subsidiaries. We also have limited ability to provide Alpine with liquidity to satisfy its obligations. See “Note 15 - Business Segments” for certain financial information for Alpine, which is our proppant production segment.

2022 Term Loan Credit Facility (Extinguished)

On March 4, 2022, ProFrac LLC, ProFrac Holdings II, LLC (“ProFrac II LLC”), as borrower, and certain of the Company’s wholly owned subsidiaries as obligors, entered into a senior secured term loan credit agreement that expires on March 4, 2025 (as amended, the “2022 Term Loan Credit Facility”), with Piper Sandler Finance LLC, as administrative agent and collateral agent, and the lenders party thereto, providing for a term loan facility in an aggregate amount of $450.0 million.

In December 2023, amounts outstanding under the 2022 Term Loan were repaid with proceeds received from the issuance of our Senior Secured Notes and the 2023 Alpine Term Loan, resulting in loss on extinguishment of debt of $35.4 million.

Borrowings under the 2022 Term Loan Credit Facility accrued interest at either a SOFR rate or a base rate, plus an applicable margin. The applicable margin for SOFR rate loans ranged from 7.25% to 8.00% and for base rate loans ranged from 6.25% to 7.00%.

The 2022 Term Loan Credit Facility was guaranteed by ProFrac LLC and all of the Company’s material existing subsidiaries and certain direct and indirect future U.S. restricted subsidiaries of the Company. The 2022 Term Loan Credit Facility was secured by a lien on, and security interest in, substantially all of ours and each such guarantor’s assets.

The 2022 Term Loan Credit Facility contained certain customary representations and warranties and affirmative and negative covenants. The 2022 Term Loan Credit Facility contained customary events of default. The Company was in compliance with all covenants, and there were no defaults or events of default related to the 2022 Term Loan Credit Facility.

REV Note (Extinguished)

In connection with our acquisition of REV in December 2022, $39.0 million of the purchase price was financed through a seller-financed note (the “REV Note”, see “Note 4 - Business Combinations” for additional information). The REV Note matured on June 30, 2025 and bore interest at an annual rate of 2.25%.

In December 2023, amounts outstanding under the REV Note were repaid with proceeds received from the issuance of our Senior Secured Notes and the 2023 Alpine Term Loan, resulting in loss on extinguishment of debt of $1.0 million.

One of the REV Sellers joined the Company in a management capacity upon the acquisition of REV.

First Financial Loan (Extinguished)

In December 2021, the Company entered into a $30.0 million loan with First Financial Bank, N.A. (“First Financial Loan”). The First Financial Loan had a maturity date of January 1, 2024 with an interest rate of LIBOR plus 3.5%, and the loan was to be repaid by equal payments of principal and interest beginning in February 2022.

In December 2023, amounts outstanding under the First Financial Loan were repaid with proceeds received from the issuance of our Senior Secured Notes and the 2023 Alpine Term Loan.

Flotek Convertible Notes (Extinguished)

In February 2022, Flotek entered into a private investment in public equity transaction (the “PIPE Transaction”) with a consortium of investors to secure growth capital. Pursuant to the PIPE Transaction, Flotek issued $11.2 million in aggregate initial principal amount of Flotek Convertible Notes to parties other than the Company. The Flotek Convertible Notes accrued paid-in-kind interest at a rate of 10% per annum, had a maturity of one year, and were convertible into common stock of Flotek. In March 2022, $3.0 million of Flotek Convertible Notes were converted at a holder’s option into approximately 2.8 million shares of Flotek common stock. In February 2023, Flotek's convertible notes matured and all $12.7 million principal amount were converted to shares of Flotek common stock, which is classified as "Noncontrolling interests" in our consolidated balance sheets.

The Flotek Convertible Notes were obligations of Flotek and had no recourse or claim against the assets of ProFrac Holding Corp. or its other consolidated subsidiaries.

Maturities of Debt

As of December 31, 2023, theprincipal maturity schedule for our debt outstanding is as follows:

7. LEASES

Our leasing arrangements consist of both operating and finance leases. We are a lessee on several leases of real estate, administrative offices, manufacturing and maintenance facilities, heavy duty equipment, light duty vehicles, tractors, and power generation equipment. We do not have any material lessor arrangements.

In connection with the completion of the FTSI Acquisition, FTSI conveyed to Wilks Development, LLC, an affiliate of ProFrac LLC, substantially all of FTSI’s owned real property, consisting primarily of FTSI’s hydraulic fracturing equipment manufacturing facilities, in exchange for cash consideration of approximately $44.4 million (the “FTSI Sale Leaseback”). We now lease such real property from Wilks Development, LLC in exchange for aggregate monthly lease payments of $51.6 million through March 2032. The cash consideration received was $3.7 million less than the carrying value of these assets. Because this sale was to an affiliate under common control, we accounted for the $3.7 million as an equity transaction recorded as a deemed distribution within our consolidated statements of changes in equity.

Our finance lease balances are as follows:

The components of our lease costs are as follows:

The weighted-average remaining lease term and discount rates used in the measurement of our right-of-use assets and lease liabilities are as follows:

The following table includes other supplemental information for our leases:

As of December 31, 2023, the future maturities of our leases liabilities are as follows:

8. PREFERRED STOCK

In September 2023, we issued and sold 50,000 shares of Series A preferred stock, par value $0.01 per share (the "Preferred Stock"), totwo entities controlled by the Wilks Parties. The Preferred Stock was sold for aggregate consideration of $50.0 million, and resulted in net proceeds to the Company of $48.9 million after the payment of $1.1 million in issuance costs.

The Preferred Stock ranks senior to our common stock with respect to dividend rights and distribution rights in the event of any liquidation, winding-up or dissolution of the Company. The amount that each share of Preferred Stock is entitled to in liquidation is equal to a liquidation preference. The liquidation preference initially equals the original issue price per share of $1,000.00 for each share of Preferred Stock and is increased as the result of any paid-in-kind dividends (“Liquidation Preference”).

Whether or not declared by the board of directors and whether or not there are funds legally available for the payment of dividends, holders of outstanding shares of Preferred Stock shall be entitled to cumulative paid-in-kind dividends at a rate per share equal to an annual rate of 8% on the then-applicable Liquidation Preference. Such dividends shall compound and be payable quarterly in arrears.

After one year, the Preferred Stock holders will have the option to convert each Preferred Stock share into shares of our common stock at a conversion ratio. The conversion ratio is defined as the Liquidation Preference as of the date of the conversion divided by the conversion price of $20.00, where such conversion price is subject to adjustment upon the occurrence of specified events set forth under terms of the Preferred Stock. At December 31, 2023, the Preferred Stock was convertible into 2.5 million common shares.

The Preferred Stock is redeemable at the Company's option at any time. The redemption price per share is an amount in cash equal to the Liquidation Preference as of the date of redemption multiplied by 1.15 (“Redemption Amount”). As of December 31, 2023, the Redemption Amount of the Preferred Stock would be $58.7 million.

Upon a change of control, the Company will have the options to convert the Preferred Stock into common shares or to redeem the Preferred Stock for cash.

If the Company elects to convert the Preferred Stock into common shares, it will do so at a conversion rate equal to the greater of:

•

The Liquidation Preference divided by $10.95, or

•

The Liquidation Preference divided by the 30-day volume-weighted average price (“VWAP”) of our common stock at the public announcement of the change of control transaction.

If the Company elects to redeem the Preferred Stock for cash, it will pay out the greater of (1) the Liquidation Preference as of the date of such payment or (2) the amount such holder would receive in the change of control transaction if such share of Preferred Stock had been converted into a number of shares of common stock equal to the greater of:

•

The Liquidation Preference divided by $20.00 (which is subject to adjustment upon the occurrence of specified events set forth under the terms of the Preferred Stock), and

•

The Liquidation Preference divided by the 30-day VWAP of our common stock at the change of control date.

The holders of the Preferred Stock are also common stockholders of the Company and collectively control our board of directors. Therefore, the Preferred Stock holders could direct the Company to redeem the Preferred Stock at any time. As a result, we have classified the Preferred Stock as temporary equity on our consolidated balance sheets and have measured its carrying value at its maximum redemption value with a corresponding charge to retained earnings.

9. OTHER OPERATING EXPENSE, NET

Other operating expense, net is comprised of the following:

Gain or loss on disposal of assets, net consists of gains or losses on excess property, early equipment failures, and other asset dispositions.

Litigation expenses and accruals for legal contingencies generally represent legal and professional fees incurred in litigation as well as estimates for loss contingencies with regards to certain vendor disputes and litigation matters. In 2023 more than half of these costs are related to litigation costs incurred in connection with multiple patent infringement lawsuits against Halliburton. See “Note 13 - Commitments and Contingencies” for further discussion.

Severance charges in 2023 related to the departure of two executives.

Impairments of long-lived assets in 2023 related to certain construction-in-process assets at one of our acquired sand mines that were abandoned.

The acquisition earnout adjustments represent a decrease in the fair value of the contingent consideration related to our acquisition of REV in December 2022.

10. STOCK-BASED COMPENSATION

The compensation cost charged against income for all stock-based compensation was $29.8 million and $67.4 million in 2023 and 2022, respectively and was classified as selling, general, and administrative expenses in our consolidated statements of operations. The total income tax benefit for all stock-based compensation was $0.2 million and $0.4 million in 2023 and 2022 respectively; however, such benefit was substantially offset by the valuation allowance against our deferred tax assets.

Stock-based Compensation Related to Deemed Contributions

In connection with the Company’s IPO, our majority shareholders, Farris Wilks (“Farris”) and Dan Wilks (“Dan”) (together with certain family members or entities they control), sold Units representing approximately 1% of the equity interest in ProFrac LLC to an entity controlled by our Chief Executive Officer, Ladd Wilks (“Ladd”), and our Executive Chairman, Matt Wilks (“Matt”), respectively. These equity interests in ProFrac LLC entitled each of Ladd and Matt to 1,220,978 shares of Class B Common Stock in ProFrac Corp. These Units were sold in exchange for promissory notes. While some of the documentation relating to these transfers was subject to completion, we concluded that both transactions were consummated in connection with the Company’s IPO and, for accounting purposes, should be treated in accordance with ASC Topic 718, Compensation — Stock Compensation, as deemed contributions to the Company by Farris and Dan and grants of stock-based compensation to Ladd and Matt by the Company similar to stock options. As no future service period was required and because the promissory notes are prepayable at any time, all related stock-based compensation expense was recognized in the second quarter of 2022. The stock-based compensation expense was $33.7 million using the Black-Scholes-Merton option-pricing model with an average contractual term of 16.5 years, a volatility rate of 64%, and a 0% dividend yield.

Also in connection with the IPO, Farris engaged in estate planning that may result, subject to other terms and conditions, in additional shares being transferred by Farris to Ladd if the Company’s total market capitalization increases to certain target levels within the next five years, which resulted in a performance award being deemed granted by the Company to Ladd. We concluded that this arrangement should be treated, for accounting purposes, in accordance with ASC Topic 718, Compensation — Stock Compensation, as a deemed contribution to the Company by a related party and the grant of stock-based compensation with market conditions to Ladd by the Company.

The grant date fair value of this award was estimated to be $45.3 million and will be recognized over the estimated derived service period of approximatelyone year. The grant date fair value and the derived service period of this award was determined using a Monte Carlo simulation method, which incorporates the possibility that the market capitalization targets may not be satisfied. The Monte Carlo simulation is affected by a number of variables, including the fair value of our underlying common shares ($18.00 at grant date), the expected common share price volatility over the expected term (79.2%), the expected dividend yield of our common shares over the expected term (0.0%), the risk-free interest rates over the expected term (2.86%), and the performance period of the award (five years).

The derived service period for the award was determined based on the median vesting time for the simulations that achieved the vesting hurdle. Stock-based compensation expense associated with this award was recognized over the derived service period. Stock-based compensation expense for this award was $19.7 million and $25.6 million in 2023 and 2022, respectively. As of December 31, 2023, there wasno unrecognized compensation cost related to this award.

Long Term Incentive Plan

In May 2022, we adopted the ProFrac Holding Corp. 2022 Long Term Incentive Plan (“2022 Plan”) to attract and retain officers, employees, directors, and other key personnel and to provide those persons incentives and awards for performance. The 2022 Plan originally allocated 3,120,708 shares of our Class A Common Stock in the form of incentive stock options, non-qualified stock options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights, or other stock-based awards. As of December 31, 2023, up to 2,542,708 shares were available for future grants under the 2022 Plan.

Pursuant to the 2022 Plan, we have granted time-based vesting RSUs to certain employees and directors. The RSUs granted generally vest over one to four years from the grant date. The grant date fair value of the RSUs is determined using the closing price of our Class A Common Stock on the grant date.

The following table summarizes the current year activity related to our time-based vesting RSUs:

Stock-based compensation expense for these RSUs was $9.3 million and 6.0 million in 2023 and 2022, respectively. The weighted-average grant-date fair value per share of RSUs granted was $11.94 and $17.89 in 2023 and 2022, respectively. The weighted-average fair value of RSUs vested was $17.40 in 2023. As of December 31, 2023, there was $5.1 million of total unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted average period of 0.6 years.

Pursuant to the 2022 Plan, the Company authorized performance-based vesting RSUs (“PRSU”) to certain company executives. The PRSUs that met the definition of having a grant date for accounting purposes in 2023 have a service component that vests one year from the grant date and two performance conditions. The grant date fair value of the PRSUs was determined using the closing price of our Class A Common Stock on the grant date. The performance conditions are based on an earnings metric and a cash flow metric and have an achievement range of 0% to 200% of the PRSUs granted. The performance conditions were not met during 2023 and therefore no stock-based compensation expense was recognized for these awards in 2023.

The following table summarizes the current year activity related to our performance-based vesting RSUs:

Flotek Stock-Based Compensation

Flotek stockholders have approved long-term incentive plans under which Flotek may grant equity awards to officers, key employees, non-employee directors and service providers in the form of stock options, restricted stock, restricted stock units, and certain other incentive awards. Stock-based compensation expense related to Flotek awards was $0.3 million and $2.1 million in 2023 and 2022, respectively. As of December 31, 2023, there was $2.2 million of unrecognized compensation cost for Flotek equity awards, which is expected to be recognized over a weighted-average period of 2 years.

11. INCOME TAXES

Before May 17, 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, we were not required to account for U.S. federal income taxes in our consolidated financial statements. Certain state income-based taxes are imposed on the Company which are reflected as income tax expense or benefit in historical periods. In connection with the IPO in May 2022, the Company reorganized and ProFrac LLC became partially owned by ProFrac Corp., a C-Corporation. ProFrac Corp. is a taxable entity and is required to account for income taxes under the asset and liability method for periods subsequent to May 17, 2022.

The following table summarizes the components of income tax expense (benefit):

Actual income tax expense (benefit) differed from the amount computed by applying the statutory federal income tax rate to income (loss) before income taxes as follows:

The Company’s effective tax rate was generally lower than the federal corporate income tax rate of 21% because income allocated to our Class B shareholders before the conversion of our Class B common stock to Class A common stock was not be subject to tax on the Company’s tax returns as well as the valuation allowance against our deferred tax assets.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

(1)

The December 31, 2022 balance was originally reported as $19.3 million and has been corrected in this presentation. See “Correction of an Immaterial Error on Previously Issued Financial Statements” in “Note 1 - Organization and Description of Business” for discussion of this immaterial error correction.

As of December 31, 2023, the Company had approximately $2.4 billion of federal net operating loss ("NOL") carryforwards, of which $1.5 billion will expire on various dates between 2032 and 2037 with the remaining losses carried forward indefinitely. The Company's NOLs were acquired through its acquisition of FTSI and USWS during 2022. FTSI filed for bankruptcy protection on September 22, 2020 and upon emergence on November 19, 2020 elected Section 382(l)(5) with respect to its tax attributes, including NOLs. Section 382(l)(5) completely limits utilization of NOLs if a company making the election experiences a second "ownership change" under Section 382 within a two year period. FTSI experienced a second "ownership change" when it was acquired by the Company on March 2, 2022, within the two year period after it elected Section 382(l)(5). As such, $1.9 billion of federal NOLs are fully limited and unable to be utilized in the future. Of the Company's remaining $483.8 million federal NOLs, $424.6 million are also subject to limitation under Section 382.

The Company also has $704.3 million of state NOLs, of which $600.8 million will expire on various dates between 2032 and 2042 with the remaining losses carried forward indefinitely. NOLs that are fully limited under Section 382(l)(5) were $510.0 million and the remaining $194.3 million are subject to limitation under Section 382.

Before the conversion of our Class B common stock to Class A common stock in April 2023 (see Note 1), we had established a valuation allowance on substantially all of the Company’s net deferred tax assets. As a result, we only recorded income tax expense for current year tax expense. The conversion of our Class B common stock to Class A common stock resulted in a shift from a net deferred tax asset position before the conversion to a net deferred tax liability position after the conversion. The recognition of this net deferred tax liability was recorded as an equity transaction because the holders of Class B common stock and their affiliates control us through their Class A common stock holdings. The reversal of the valuation allowance was also recorded as an equity transaction at that time.

Since the conversion, our results of operations have returned us to a net deferred tax asset position and as of December 31, 2023, we have reestablished a valuation allowance on substantially all of our net deferred tax assets. Deferred tax assets related to our U.S. federal and state tax net operating losses are still available to us to offset future taxable income, subject to limitations in the event of a change of control under Section 382 of the Internal Revenue Code. At December 31, 2023, we had not incurred such an ownership change.

At each reporting date, we consider all available positive and negative evidence to evaluate whether our deferred tax assets are more likely than not to be realized. A significant piece of negative evidence that we consider is whether we have incurred cumulative losses (generally defined as losses before income taxes) in recent years. Such negative evidence weighs heavily against other more subjective positive evidence such as our projections for future taxable income. We noted that for the three years ended December 31, 2023, we recorded cumulative income before income taxes of $250.1 million as a result of income reported in 2022. Notwithstanding this three-year cumulative income, we concluded that a valuation allowance was still required at December 31, 2023, because it is more likely than not that the deferred tax assets will not be realized. We based this conclusion on the positive and negative evidence discussed below.

The primary positive evidence we noted was:

•

Our income before income taxes in 2022 was $351.8 million.

•

We are forecasting that 2024 will be a profitable year.

The primary negative evidence we noted was:

•

In 2023 we recorded a loss before income taxes of $58.0 million.

•

Our income before income taxes in 2023 was substantially below our annual budget.

•

2022 was the first profitable year for the Company since 2018.

•

FTSI recorded losses before income taxes in 2021.

•

USWS recorded losses before income taxes in 2021 and in 2022 before being acquired by us.

•

The forecasts of our results and the consensus forecasts of the hydraulic fracturing industry have been historically volatile due to the up-and-down cycles experienced by the industry.

•

The price of oil has fluctuated significantly over the past three years. A significant decrease in the price of oil has historically resulted in a decrease in our customers’ activity levels and a corresponding decrease in our earnings.

•

We do not have prudent and feasible tax-planning strategies available to us to realize deferred tax assets.

If we continue to generate income before income taxes in future periods, we may be able to recognize a portion of our net deferred tax assets in future periods. We will adjust the valuation allowance based on our evaluation of new information as it becomes available and new circumstances as they occur. A change in our assessment could cause a decrease to the valuation allowance, which could materially impact our results of operations. Due to the prevailing negative evidence cited above, we believe that the earliest period when we may adjust the valuation allowance is the fourth quarter of 2024.

At December 31, 2023, we hadno liability for uncertain tax positions. We recognize accrued interest and penalties related to any uncertain tax positions as part of income tax expense. At December 31, 2023, we hadno accrued interest expense associated with unrecognized tax benefits. Interest expense associated with unrecognized tax benefits waszero for all periods presented.

ProFrac LLC is obligated to make cash distributions to the redeemable noncontrolling interest holders to fund their respective income tax liabilities relating to their share of the income of ProFrac LLC. In the fourth quarter of 2022, the Company paid a distribution of $8.0 million to the redeemable noncontrolling interest holders. The revised estimate for the full year liability to these shareholders was $2.8 million. As of December 31, 2022, we recorded the $5.3 million overpayment of the distribution in prepaid expenses and other current assets on our consolidated balance sheets to be offset against future tax distributions. In connection with the conversion of our Class B common stock to Class A common stock, ProFrac LLC will no longer be required to make tax distributions to our former Class B shareholders. As a result, we recorded the $5.3 million overpayment as an equity transaction as of December 31, 2023.

ProFrac Holding Corp and its U.S. subsidiaries join in the filing of a U.S. federal consolidated income tax return. Our income tax returns, along with income tax returns for our acquired subsidiaries, are currently subject to examination in federal and state jurisdictions primarily for tax years from 2019-2022.

Tax Receivable Agreement

In connection with our initial public offering, ProFrac Corp. entered into a tax receivable agreement (the “TRA”) with certain holders of limited liability company interests in ProFrac LLC (the “TRA Holders”). The TRA generally provides for payment by ProFrac Corp. to the TRA Holders of 85%of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that ProFrac Corp. actually realizes (or is deemed to realize in certain circumstances) as a result of (i) certain increasesin tax basis that occur as a result of ProFrac Corp.'s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s ProFrac LLC units in connection with the initial public offering or the exercise of the Redemption Right (as defined in the TRA) or the Call Right (as defined in the TRA), and (ii) imputed interest deemed to be paid by ProFrac Corp. as a result of, and additional tax basis arising from, any payments ProFrac Corp. makes under the TRA. Payments will generally be made under the TRA as ProFrac Corp. realizes actual cash tax savings from the tax benefits covered by the TRA. As a result of our IPO and the conversion of all our Class B common stock to Class A common stock (see “Note 1 – Organization and Description of Business”) and the tax effects of these transactions, we recorded a $68.1 million noncurrent TRA liability. The recognition of the TRA liability was recorded as an equity transaction because the holders of Class B common stock and their affiliates control us through their Class A common stock holdings. As of December 31, 2023, the current liability for our TRA obligation was an additional $2.8 million.

12. EARNINGS PER SHARE

The calculation of earnings per share ("EPS") for our Class A common stock is as follows:

The basic and diluted earnings per share (“EPS”) for the year ended December 31, 2022, represents only the period from the IPO date of May 17, 2022, to December 31, 2022, which represents the period wherein the Company had outstanding Class A common stock.

The dilutive potential of employee restricted stock units was calculated using the treasury stock method. At December 31, 2023, there were 0.2 million common stock equivalents related to employee restricted stock units that were not included in diluted earnings per share because the effect of their inclusion would be antidilutive.

The dilutive potential of our Preferred Stock is calculated using the if-converted method. At December 31, 2023, there were 2.5 million common stock equivalents related to Preferred Stock that were not included in diluted earnings per share because the effect of their inclusion would be antidilutive.

13. COMMITMENTS AND CONTINGENCIES

Litigation

In the ordinary course of business, we are the subject of, or party to a number of pending or threatened legal actions and administrative proceedings. While many of these matters involve inherent uncertainty, we believe that, other than as described below, the amount of the liability, if any, ultimately incurred with respect to proceedings or claims will not have a material adverse effect on our consolidated financial position as a whole or on our liquidity, capital resources or future annual results of operations.

We estimate and provide for potential losses that may arise out of legal proceedings and claims to the extent that such losses are probable and can be reasonably estimated. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different from these estimates. When preparing our estimates, we consider, among other factors, the progress of each legal proceeding and claim, our experience and the experience of others in similar legal proceedings and claims, and the opinions and views of legal counsel. Legal costs related to litigation contingencies are expensed as incurred.

U.S. Well Services Inc. and U.S. Well Services, LLC (collectively, “USWS”) v. Halliburton Company and Cimarex Energy Co. (collectively, “Halliburton”): In April 2021, USWS filed a patent infringement suit against Halliburton in United States District Court for the Western District of Texas Waco Division. In the suit, USWS alleges willful infringement of seven U.S. patents based on Halliburton’s “All-Electric Fracturing Fleet.” In August 2023, a jury returned a verdict in this case in favor of USWS, which Halliburton has indicated it intends to appeal.

In June 2021, Halliburton filed inter partes review (“IPR”) petitions against these USWS patents. In January 2023, the Patent Trial and Appeal Board (“PTAB”) entered final written decisions finding certain claims of these patents invalid. In March 2023, USWS filed a notice of appeal of the final written decisions invalidating certain claims of three of these patents. Other appeal deadlines remain open. In May 2023, the Western District of Texas ruled certain claims of five of the USWS patents are invalid.

In May 2022, Halliburton filed an amended answer to this patent infringement suit counterclaiming for declaratory judgment of invalidity of USWS’ patents asserted against Halliburton in this matter and willful infringement of seven of Halliburton’s U.S. patents based on USWS’ clean fleets and conventional fleets. In June 2022, USWS filed IPR petitions against four of Halliburton’s patents. In December 2022, the PTAB denied institution of IPR against these four patents.

The outcome of Halliburton’s counterclaim against us is uncertain and the ultimate resolution of it could have a material adverse effect on our consolidated financial statements in the period in which the resolution is recorded.

Halliburton Energy Services, Inc., Halliburton US Technologies, Inc., and Halliburton Group Technologies, Inc. (collectively, “Halliburton”) v. U.S. Well Services, LLC (“USWS”): In September 2022, Halliburton filed two patent infringement suits against USWS in United States District Court for the Western District of Texas Waco Division. In the first lawsuit, Halliburton alleges willful infringement of three of its previously asserted patents as well as five additional U.S. patents. In the second lawsuit, Halliburton alleges willful infringement of two of its previously asserted patents as well as five additional U.S. patents. Both lawsuits allege infringement based on all of USWS and ProFrac LLC’s fleets. The two lawsuits are scheduled together and set for trial in June 2024.

In January 2023, USWS filed amended answers to these patent infringement suits counterclaiming for declaratory judgment of invalidity of Halliburton’s patents asserted against USWS in this matter and willful infringement of two additional USWS’ U.S. patents based on Halliburton’s “All-Electric Fracturing Fleet.” In February 2023, Halliburton filed IPR petitions against these USWS patents.

However, this case has been stayed pending resolution of certain IPRs filed by USWS.

We are currently unable to estimate the reasonably possible loss or range of loss in respect of these matters. These matters remain in an early stage, with few or no substantive legal decisions by the court defining the scope of the claims or the potential damages. As these matters develop and we receive additional information, we may be able to estimate reasonably possible losses or range of loss for these matters. The outcomes of these cases are uncertain and the ultimate resolution of them could have a material adverse effect on our consolidated financial statements in the period in which the resolution is recorded.

Purchase Commitments

As of December 31, 2023, we had purchase commitments of $29.8 million in 2024 for hydraulic fracturing equipment components.

14. FAIR VALUE MEASUREMENTS

Recurring Measurements

Our assets and liabilities measured at fair value on a recurring basis consist of the following:

Investment in BPC

We have elected the fair value option to account for our investment in Basin Production and Completion LLC ("BPC") due to the complexities of the terms of the equity investment. The significant unobservable inputs used in the fair value measurement, which was valued using the income approach and the market approach, are forecasted results and a weighted-average cost of capital. The fair value of this asset is classified as investments in our consolidated balance sheets.

REV Earnout Payment

The fair value of the earnout payment was estimated using a Black-Scholes model, adjusted for the capped amount of the earnout. The fair value was discounted using a company specific credit spread to account for the counterparty credit risk in making the payment. The significant unobservable inputs used in the fair value measurement are the risk-free rate, credit spread of the acquirer, discount rate, forecasted results and volatility. The performance targets were not met in 2023.

The fair value of the public warrants was determined using quoted market prices, as they were traded in active markets.

Munger Make-Whole Provision

In November 2021, we entered into an agreement (“Munger Right Agreement”) to acquire approximately 6,700 acres near Lamesa, Texas (“West Munger Property”) for a purchase price of $30.0 million (“West Munger Purchase”). Under the Munger Right Agreement, the sellers elected to receive their consideration in shares of our Class A common stock, which was valued at $38.1 million at our IPO date.

The Munger Right Agreement includes a ‘Make Whole’ provision. Under the Make Whole provision, as amended, if any seller liquidates 100% of their Class A Common Stock prior to the two-year anniversary of the IPO and the value of the shares sold does not equal such seller’s share of the $30.0 million cash purchase price, then we will pay the difference between their share of the cash purchase price and the amount they ultimately received upon the sale of their Class A shares. This Make Whole provision is accounted for as a written put option with a fair value of $7.5 million as of December 31, 2023 and is presented within other current liabilities in our consolidated balance sheet. The fair value of the Munger make-whole provision was estimated using a Black-Scholes model. The significant unobservable inputs used in the fair value measurement are the risk-free rate and volatility. The expiration date of the Munger make-whole provision is on May 17, 2024. The intrinsic value of the Munger Make-Whole provision was $7.7 million at December 31, 2023.

The following is a reconciliation of our recurring Level 3 fair value measurements:

All of the changes in fair value of Level 3 fair value instruments were charged to income and classified as other income (expense), net on our consolidated statements of operations.

The estimated fair value of the Flotek Convertible Notes prior to our consolidation of Flotek on May 17, 2022 was valued using a Monte Carlo simulation with inputs such as the market trading price of Flotek’s common stock, the expected volatility of the Flotek’s stock price based on historical trends, a risk-free rate of interest based on US Treasury note rates and the term of the debt, the time to liquidation based on the maturity date of the notes, and a discount rate adjusted based on the credit risk of Flotek.

The key inputs into the Monte Carlo simulation used to estimate the fair value the Flotek Convertible Notes were as follows:

Nonrecurring Measurements

We have certain assets and liabilities that are not measured at fair value on an ongoing basis but were subjected to fair value adjustments at the time of acquisition. These include long-lived assets and liabilities acquired through our business combination activities and purchase consideration in the form of seller-financed long-term notes payable, the fair values of which were determined using applicable valuation models based on significant unobservable inputs classified as Level 3 in the fair value hierarchy. See “Note 4 – Business Combinations” for additional information.

Financial Instruments

The estimated fair values of our financial instruments have been determined at discrete points in time based on relevant market information. Our financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, certain investments, accounts payable, accrued expenses and long-term debt.

The carrying amounts of our financial instruments other than long-term debt approximate fair value because of the short-term nature of the items. The carrying amounts of our floating rate debt approximate fair value due to their variable interest rates. The fair value of our fixed rate debt, classified as Level 2 in the fair value hierarchy, was as follows:

15. BUSINESS SEGMENTS

We manage our business segments primarily on the type of product or services provided. We have three reportable segments which we operate within the United States of America: stimulation services, proppant production and manufacturing. Amounts in the other category reflect our business activities that are not separately reportable, which primarily includes Flotek for the periods presented.

We account for intersegment transactions as if the transactions were with third parties, that is, at estimated current market prices. Intersegment revenues for the proppant production segment were 30%,62% and 40%, in 2023, 2022, and 2021, respectively. Intersegment revenues for the manufacturing segment were 89%,92% and 90%, in 2023, 2022, and 2021, respectively.

Revenue to external customers for the stimulation services segment are classified as service revenue on our consolidated statements of operations. Revenue to external customers for the proppant production segment, the manufacturing segment, and our other business activities represent product sales for these businesses and are classified as such on our consolidated statements of operations.

Summarized financial information for our reportable segments is as follows:

(1)

Our proppant production segment recognized noncash revenue associated with acquired contract liabilities of $57.5 million and $6.6 million in 2023 and 2022, respectively.

(2)

In our other business activities, Flotek recorded $20.1 million of revenue related to contract shortfalls because the stimulation services segment did not purchase the minimum contractual commitment of chemistry products from Flotek.

(3)

We evaluate the performance of our segments based on Adjusted EBITDA. We define Adjusted EBITDA as our net income (loss) before (i) interest expense, net, (ii) income taxes, (iii) depreciation, depletion and amortization, (iv) (loss)

gain on disposal of assets, net, (v) stock-based compensation, and (vi) other charges, such as reorganization costs and other costs related to our initial public offering, certain credit losses, gain (loss) on extinguishment of debt, gain (loss) on investments, acquisition and integration expenses, litigation expenses and accruals for legal contingencies, acquisition earnout adjustments, severance charges and impairments of long-lived assets.

(4)

Adjusted EBITDA for the stimulated services segment included an intercompany supply commitment charge of $20.1 million because this segment did not purchase the minimum contractual commitment of chemistry products from Flotek.

(5)

Total assets for the stimulation services segment includes our investment in BPC, which was $23.4 million and $53.6 as of December 31, 2023 and 2022, respectively. The gains and losses associated with this investment are not included in our segment profit measure of adjusted EBITDA.

The following table reconciles Adjusted EBITDA for our reportable segments to net income (loss):

16. RELATED PARTY TRANSACTIONS

In the normal course of business, we have entered into transactions with related parties where the Wilks Parties hold a controlling financial interest. In the three year period ended December 31, 2023, the Company had related party transactions with the following related party entities:

•

Automatize, LLC (“Automatize”) is a logistics broker that facilitates the last-mile delivery of proppants on behalf of its customers, including the Company. Amounts paid to Automatize include costs passed through to third-party trucking companies and a commission retained by Automatize. These payments are recorded in cost of revenues, exclusive of depreciation and depletion in our consolidated statements of operations.

•

Cisco Logistics, LLC (“Cisco Logistics”) is a logistics company that delivers sand and equipment on behalf of its customers, including the Company. Amounts paid to Cisco Logistics are recorded in cost of revenues, exclusive of depreciation and depletion in our consolidated statements of operations.

•

Equify Financial, LLC (“Equify Financial”) is a finance company that provides equipment and other financing to its customers, including the Company. Amounts paid to Equify Financial are recorded in interest expenses in our consolidated statements of operations, and repayments of long-term debt in our consolidated statements of cash flows. See “Note 6 –Debt” for additional disclosures related to related party credit agreements.

•

Wilks Brothers, LLC (“Wilks Brothers”) is a management company which provides administrative support to various businesses within its portfolio. Wilks Brothers and certain entities under its control will at times incur expenses on our behalf, billing us for these expenses at cost as well as certain management fees. Amounts paid to

Wilks Brothers are generally recorded in selling, general and administrative expenses in our consolidated statements of operations.

•

Interstate Explorations, LLC (“Interstate”) is an exploration and development company for which we perform pressure pumping services.

•

Flying A Pump Services, LLC (“Flying A”) is an oilfield services company which provides pressure pumping, acid, and cementing services, to which we rent and sell equipment and frac fleet components.

•

MC Estates, LLC, The Shops at Willow Park, and FTSI Industrial, LLC (collectively, the “Related Lessors”) own various industrial parks and office space leased by us. Amounts paid to the Related Lessors are recorded in selling, general and administrative expenses in our consolidated statements of operations.

•

Wilks Construction Company, LLC (“Wilks Construction”) is a construction company that has built and made renovations to several buildings for us, including construction of a new sand plant in 2022. Amounts paid to Wilks Construction are recorded as capital expenditures in our consolidated statements of cash flows.

•

3 Twenty-Three, LLC (“3 Twenty-Three”) is a payroll administrator which performs payroll services on behalf of its customers, including us. Amounts paid to 3 Twenty-Three are recorded in cost of revenues, exclusive of depreciation and depletion and selling, general and administrative expenses in our consolidated statements of operations.

•

Wilks Earthworks, LLC ("Wilks Earthworks") is an oilfield services company that provides mining, wet and dry loading, hauling and other services and equipment to its customers, including us. These payments are recorded in cost of revenues, exclusive of depreciation and depletion in our consolidated statements of operations.

•

Carbo Ceramics Inc. (“Carbo”) is a provider of ceramic proppant which will at times purchase conventional proppant from us to act as a broker for its customers. Additionally, we will at times purchase manufactured proppant from Carbo for the stimulation services segment.

•

Cisco Aero, LLC (“AERO”) is a private aviation company.

•

FHE USA LLC (“FHE”) is a subsidiary of BPC that provides production and well completion equipment used at the wellsite. Amounts paid to FHE are recorded as capital expenditures.

The following table summarizes revenue from related parties:

The following table summarizes expenditures with related parties:

The following table summarizes accounts receivable–related party:

The following table summarizes accounts payable–related party:

Additionally, in January and February of 2021, ProFrac LLC executed two agreements with one of ProFrac LLC’s members for the sale of certain lots of equipment, in exchange for $8.7 million in cash, an amount that approximates the net book value of the assets. Under these agreements, for any assets subsequently resold by the member, ProFrac LLC would reimburse the member for a certain percentage of the net loss, or conversely would be entitled to a certain percentage of the net gain, at rates established in the agreements. As of December 31, 2022, substantially all of the assets have been sold by the member and no adjustment to the consideration paid was necessary.

On February 4, 2022, THRC Holdings entered into a Rights Agreement with Encantar Properties LP, one of the sellers from whom the Company purchased the West Munger property, under which the related party was assigned rights to $8.1 million of the $30.0 million in consideration related to the West Munger Acquisition. In May 2022, as part of the IPO, the sellers of West Munger were issued 2,114,273 shares of Class A Common Stock in exchange for the $30.0 million consideration related to the West Munger Acquisition.

On January 11, 2023, the board of directors of ProFrac Corp. approved the appointment of Mr. Coy Randle, the then Chief Operating Officer of ProFrac Corp., to the board of directors of ProFrac Corp. Additionally, Mr. Randle entered into a consulting agreement with ProFrac Corp., effective as of January 13, 2023, pursuant to which Mr. Randle agreed to provide general operational advice to ProFrac Corp. and its direct and indirect operating subsidiaries for an annual fee of $0.2 million. Pursuant to the consulting agreement, ProFrac Corp. paid healthcare insurance premiums on behalf of Mr. Randle and allowed Mr. Randle to use a Company vehicle for the duration of the consulting agreement. The consulting agreement had a term of one year.

In June 2023, we arranged to sell certain surplus equipment and inventory components and to assign certain pre-orders for equipment to Flying A, at prices which we believe to be fair market value, for a total consideration of $36.3 million. We received the proceeds from this sale in June 2023. Subsequent to June 30, 2023, Flying A requested changes to the mix of the assets being sold to it by the Company without altering the total consideration, and the Company and Flying A agreed to add to the transaction agreement a most favored nation clause on pricing and a condition to closing that the Company’s Audit Committee approve the final mix of assets to be transferred to Flying A. We delivered $28.9 million of these components to Flying A in 2023. We expect to deliver the remaining components to Flying A in the first half of 2024. We accounted for the unapplied proceeds from this transaction as a related party deposit presented as "Other current liabilities - related party" in our consolidated balance sheets.

In September 2023, Robert Willette resigned as our Chief Legal Officer, Chief Compliance Officer, and Corporate Secretary. We entered into a severance agreement with Mr. Willette, pursuant to which, among other things, Mr. Willette received a severance payment of $673 thousand and which contains, among other standard provisions, a general release and waiver of claims against the Company by Mr. Willette.

In September 2023, the Company entered into a purchase agreement with THRC Holdings, LP and FARJO Holdings, LP, pursuant to which the Company issued and sold 50,000 shares of Preferred Stock for gross proceeds of $50.0 million. THRC Holdings, LP and FARJO Holdings, LP are Wilks Parties. See “Note 8 – Preferred Stock” for more information.