# ProFrac Holding Corp.: Form 10-Q for the period ended Sep 30, 2023

- Company: [ProFrac Holding Corp.](/companies/acdc.md) (CIK 1881487)
- Form: 10-Q
- Filed: 2023-11-09
- Accepted by EDGAR: Nov 9, 2023, 16:05 ET
- Period: 2023-09-30
- Accession: 0000950170-23-062012
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1881487/000095017023062012/acdc-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1881487/000095017023062012/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $574.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $2.14bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $61.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $209.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $20.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $180.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $40.2m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $116.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | −$6.7m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $9.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$24.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$5.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.21 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.12 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.21 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.12 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 159,400,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 121,300,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $510.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $233.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-09-30 | $25.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $678.6m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $3.22bn | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $703.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $1.86bn | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $934.3m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-09-30 | $122.8m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-09-30 | $1.25bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 21,005 characters.

*The following discussion and analysis of our financial condition and results of operations should be in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included in this Quarterly Report, as well as our Annual Report.*

### Overview

We are a vertically integrated and innovation-driven energy services holding company providing hydraulic fracturing, proppant production, other completion services and other complementary products and services to leading upstream oil and natural gas companies engaged in the exploration and production ("E&P") of North American unconventional oil and natural gas resources.

We operate in three reportable business segments: stimulation services, proppant production and manufacturing. Our stimulation services segment owns and operates a fleet of mobile hydraulic fracturing units and other auxiliary equipment that generates revenue by providing stimulation services to our customers. Our proppant production segment provides proppant to oilfield service providers and E&P companies. Our manufacturing segment sells highly engineered, tight tolerance machined, assembled, and factory tested products such as high horsepower pumps, valves, piping, swivels, large-bore manifold systems, and fluid ends.

Before our corporate reorganization on May 17, 2022, our unaudited condensed consolidated financial statements presented herein consisted of the accounts of the Predecessors. Subsequent to May 17, 2022, our unaudited condensed consolidated financial statements presented herein include our accounts and those of our subsidiaries that are wholly-owned, controlled by us or a VIE where we are the primary beneficiary.

### Summary Financial Results

- Consolidated revenues for the three months ended September 30, 2023, was $574.2 million, which represented a decrease of $122.5 million from the same period in 2022 and a decrease of $135.0 million from the second quarter of 2023. Consolidated revenues for the nine months ended September 30, 2023, was $2,140.9 million, which represented an increase of $509.4 million from the same period in 2022.
- Consolidated net loss for the three months ended September 30, 2023, was $17.9 million, which represented a decrease of $157.2 million from the same period in 2022 and a decrease of $13.3 million from the second quarter of 2023. Consolidated net income for the nine months ended September 30, 2023, was $37.3 million, which represented a decrease of $189.4 million from the same period in 2022.

### 2023 Developments

We have been impacted by reduced demand for our fleets in 2023 and we have reacted by lowering our active fleet count in June and again in August. We have taken a disciplined approach to capital allocation to align with our customers' activity levels this year; however, we believe we will be increasing our fleet count at the beginning of 2024 and we are currently preparing for those fleet deployments.

On February 24, 2023, we acquired 100% of the issued and outstanding membership interests in Performance Proppants for an aggregate purchase price of $462.5 million consisting of (i) the issuance of our Class A common stock valued at $6.2 million; (ii) cash consideration of $454.4 million; and (iii) the settlement of a pre-existing receivable of $4.2 million; reduced by (iv) a post-closing working capital adjustment of $2.3 million finalized and paid to us.

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. For more information, see Note 8 and Note 17 to the unaudited condensed consolidated financial statements.

### Results of Operations

### Revenues

Revenues by reportable segment are as follows:

| Revenues | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Stimulation services | $489.5 | $668.6 | $1,887.9 | $1,581.3 |
| Proppant production | 98.4 | 24.7 | 290.4 | 54.6 |
| Manufacturing | 43.8 | 48.7 | 142.0 | 115.6 |
| Other | 48.6 | 46.9 | 149.5 | 62.2 |
| Eliminations | (106.1) | (92.2) | (328.9) | (182.2) |
| Total revenues | $574.2 | $696.7 | $2,140.9 | $1,631.5 |

*Stimulation Services.* Stimulation services revenues for the three months ended September 30, 2023 decreased by $179.1 million from the same period in 2022. This decrease was primarily attributable to a decrease in average active fleets and lower fleet utilization. Stimulation services revenues for the nine months ended September 30, 2023 increased by $306.6 million from the same period in 2022. This increase was attributable to an increase in average active fleets and higher pricing in the first three months of 2023.

*Proppant Production.* Proppant production revenues for the three and nine months ended September 30, 2023 increased by $73.7 million and $235.8 million, respectively, from the same periods in 2022. The increases were primarily attributable to acquisitions which increased the number of mines operated and the related tonnage mined. Revenue recognized for the amortization of acquired off-market contracts for the three and nine months ended September 30, 2023 was $16.4 and $41.0 million, respectively. During the three and nine months ended September 30, 2023, approximately 29% and 31%, respectively, of the Proppant Production segment's revenues were intercompany, compared with 56% and 62%, respectively, in the same periods last year.

*Manufacturing.* Manufacturing revenues for the three months ended September 30, 2023 decreased by $4.9 million from the same period in 2022 which was attributable to decreased intercompany demand for manufacturing products due to decreased activity levels for internal customers. Manufacturing revenues for the nine months ended September 30, 2023 increased by $26.4 million from the same period in 2022. The increase was primarily attributable to an increase in demand for manufacturing products due to increased activity levels for internal customers. During the three and nine months ended September 30, 2023, approximately 97% and 91%, respectively, of the Manufacturing segment's revenues were intercompany, compared with 95% and 91%, respectively, in the same periods last year.

*Other.* Other revenues for the three and nine months ended September 30, 2023 increased by $1.7 million and $87.3 million, respectively, from the same periods in 2022. The increase for the first nine months of 2023 was partially attributable to the consolidation of Flotek beginning in May 2022. During the three and nine months ended September 30, 2023, approximately 63% and 68%, respectively, of other revenue was intercompany, compared with 68% and 66%, respectively, in the same periods last year. Flotek recorded $10.0 million of intercompany revenue related to contract shortfalls because the stimulation services segment did not purchase the minimum contractual commitment of chemistry products from Flotek.

### Cost of Revenues

Cost of revenues by reportable segment is as follows:

| Cost of revenues, exclusive of depreciation, depletion, and amortization: | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Stimulation services | $353.9 | $373.8 | $1,331.7 | $966.8 |
| Proppant production | 42.6 | 13.2 | 128.2 | 26.7 |
| Manufacturing | 38.8 | 48.4 | 117.7 | 88.5 |
| Other | 39.4 | 48.3 | 133.7 | 67.4 |
| Eliminations | (106.2) | (91.7) | (329.1) | (181.7) |
| Total cost of revenues, exclusive of depreciation, depletion, and amortization | $368.5 | $392.0 | $1,382.2 | $967.7 |

*Stimulation Services*. Stimulation services cost of revenues for the three months ended September 30, 2023 decreased by $19.9 million from the same period in 2022. Stimulation services cost of revenues for the nine months ended September 30, 2023 increased by $364.9 million from the same period in 2022. These increases were primarily attributable to an increase in average active fleets and increased volume and cost of fracturing materials. Cost of revenues for this segment included an intercompany supply commitment charge of $10.0 million because the stimulation services segment did not purchase the minimum contractual commitment of chemistry products from Flotek.

*Proppant Production*. Proppant production cost of revenues for the three and nine months ended September 30, 2023 increased by $29.4 million and $101.5 million, respectively, from the same periods in 2022. The increase was primarily attributable to acquisitions which increased the number of mines operated and the related tonnage mined.

*Manufacturing*. Manufacturing cost of revenues for the three and nine months ended September 30, 2023 decreased by $9.6 million and increased by $29.2 million, respectively, from the same periods in 2022. These changes were primarily attributable to changes in demand for these products.

*Other*. Other cost of revenues for the three and nine months ended September 30, 2023 decreased by $8.9 million and increased by $66.3 million, respectively, from the same periods in 2022. The increase for the first nine months of 2023 was partially attributable to the consolidation of Flotek beginning in May 2022.

### Selling, General and Administrative

Selling, general and administrative expenses are comprised of the following:

| Selling, general and administrative: | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Selling, general and administrative, excluding stock-based compensation | $56.6 | $51.6 | $181.9 | $115.7 |
| Stock-based compensation related to deemed contributions | 2.1 | 10.2 | 19.7 | 49.1 |
| Stock-based compensation | 2.3 | 2.7 | 7.6 | 4.2 |
| Total selling, general and administrative | $61.0 | $64.5 | $209.2 | $169.0 |

Selling, general and administrative expenses, excluding stock-based compensation for the three and nine months ended September 30, 2023 increased by $5.0 million and $66.2 million, respectively, from the same periods in 2022. The increase for the first nine months of 2023 was primarily due to higher labor and non-labor costs associated with our acquisitions. Subsequent to June 30, 2023, we adjusted our cost structure to right size our organization, through the acceleration of acquisition synergies and headcount reductions.

### Depreciation, Depletion, and Amortization

Depreciation, depletion, and amortization for the three and nine months ended September 30, 2023 and 2022 increased by $42.4 million and $152.6 million, respectively, from the same periods in 2022. The increases were primarily attributable to the impact of the acquisitions made subsequent to September 30, 2022 and increased capital expenditures in recent periods.

### Acquisition and Integration Costs

Acquisition and integration costs primarily relate to professional fees, severance and other costs associated with our acquisition and integration activities. These costs for the three and nine months ended September 30, 2023 and 2022 decreased by $3.2 million and $2.8 million, respectively.

### Other Operating Expense, Net

Other operating expense, net for the three and nine months ended September 30, 2023 were $10.1 million and $17.8 million, respectively, compared with other operating expense, net of $0.6 million and $6.6 million for the three and nine months ended September 30, 2022, respectively. The increases were primarily attributable to $10.3 million and $23.5 million of legal costs incurred in connection with a patent infringement lawsuit against Halliburton (see Note 7), for the three and nine months ended September 30, 2023, respectively. These increased costs were partially offset by a non-cash gain of $6.6 million related to the change in fair value of an acquisition earnout during the nine months ended September 30, 2023.

### Interest Expense, Net

Interest expense, net of interest income, for the three and nine months ended September 30, 2023 was $40.2 million and $116.1 million, respectively, compared with $16.3 million and $39.0 million, respectively, in the same periods in 2022. These increases were due to higher average debt balances and higher average interest rates for our term loan facility and ABL credit facility in both the three and nine months ended September 30, 2023.

### Gain (Loss) on Extinguishment of Debt

In the nine months ended September 30, 2023, we recognized a net gain of $4.1 million, which was primarily due to the forgiveness of Flotek's Paycheck Protection Program loan. In the three and nine months ended September 30, 2022, we recognized $0.2 million and $17.3 million loss on extinguishment of debt as a result of debt refinancing transactions and debt repayments.

### Other (Expense) Income, Net

For the three and nine months ended September 30, 2023 we recognized expense of $4.9 million and income of $22.0 million, respectively. These amounts were due to non-cash losses of $5.1 million and $24.1 million, respectively, primarily related to the change in fair value of our Munger make-whole provision and a decrease in the fair value of our investment in BPC. In May 2023, the expiration date of the Munger make-whole provision was extended until May 17, 2024. See our Annual Report for more information on the Munger make-whole provision.

For the three and nine months ended September 30, 2022, we recognized expense of $1.0 million and income of $8.2 million, respectively. The income for the nine months ended September 30, 2023, primarily related to the change in fair values of our investment in BPC and our investment in Flotek's convertible notes prior to May 2022.

### Income Taxes

Our effective tax rate for the nine months ended September 30, 2023 was 20.5%, compared with 5.2% in the same period in 2022. The difference between our effective tax rate and the federal statutory rate in 2022 related to the income that was earned within the financial statement consolidated group that was not subject to tax within the financial statement consolidated group.

### Liquidity and Capital Resources

*We have excluded cash and other sources of liquidity related to our VIE from the following discussion of our liquidity and capital resources as we do not have the ability to access or use these items in our operations. As of September 30, 2023, there is substantial doubt about our VIE's ability to continue as a going concern. We believe that this substantial doubt does not materially affect our business, financial condition or results of operation as we do not guarantee any of our VIE's liabilities.*

### Sources of Liquidity

Historically, our primary sources of liquidity have been borrowings under our term loan facility or ABL credit facility and cash flows from operations. In the three months ended September 30, 2023, the Company raised $50.0 million from the sale of its Series A preferred stock to THRC Holdings and FARJO Holdings. The Company presently does not expect any further funds from these sources. THRC Holdings and FARJO Holdings are Wilks Parties. See Note 17 to the unaudited condensed consolidated financial statements.

At September 30, 2023, we had $20.6 million of cash and cash equivalents, excluding Flotek, and $116.0 million available for borrowings under our ABL credit facility, resulting in a total liquidity position of $136.6 million. Refer to Note 6 in the notes to our unaudited condensed consolidated financial statements contained herein and our Annual Report for more information regarding our ABL credit facility.

We believe that our cash and cash equivalents, cash provided by operations and the availability under our ABL credit facility will be sufficient to fund our capital expenditures and satisfy our financial obligations for at least the next 12 months. Our management regularly evaluates our debt obligations and, where necessary, alters our strategy to ensure ongoing compliance with our existing debt covenants, including most recently taking steps designed to ensure ongoing compliance with our leverage ratio. There can be no assurance that our management will be successful in these efforts.

### Cash Flows

Cash flows provided by (used in) each type of activity were as follows:

| Net cash provided by (used in): | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Operating activities | $510.8 | $256.6 |
| Investing activities | (692.7) | (629.8) |
| Financing activities | 169.8 | 434.5 |
| Net change in cash, cash equivalents, and restricted cash | $(12.1) | $61.3 |

***Operating Activities.*** The $254.2 million increase in net cash provided by operating activities was due to increased cash provided by the net change in operating assets and liabilities, which was partially offset by lower earnings after adjustments for non-cash reconciling items. The increased cash provided by the net change in operating assets and liabilities was primarily due to a decrease in our accounts receivable balance as of September 30, 2023.

***Investing Activities.*** The $62.9 million increase in net cash used in investing activities was primarily due to an increase in cash paid for acquisitions, partially offset by a decrease in cash paid for other investments.

***Financing Activities.*** The $264.7 million decrease in net cash provided by financing activities was primarily due to a decrease in net proceeds from the issuance of common stock, a decrease in net borrowings of long-term debt and revolving credit agreements, offset by and an increase in net proceeds from the issuance of Preferred Stock.

### Cash Requirements

Our material cash requirements have consisted of, and we anticipate will continue to consist of the following:

- debt service obligations, including interest,
- capital expenditures, and
- acquisitions of strategic businesses.

### Debt Service Obligations

As of September 30, 2023, we have $1.1 billion in aggregate principal amount of long-term debt outstanding, with $122.8 million coming due over the next twelve months. For additional information about our long-term debt, please see Note 6 of this Quarterly Report and Item 8 "Financial Statements and Supplementary Data" in our Annual Report.

### Capital Expenditures

The nature of our capital expenditures consists of a base level of investment required to support our current operations and amounts related to growth and company initiatives.

During the nine months ended September 30, 2023, our capital expenditures were $233.9 million, consisting of maintenance capital expenditures for our fleet, building four electric-powered hydraulic fracturing fleets, and engine upgrades to convert legacy pumps to next generation technology. During the second quarter, we decided to reduce capital expenditures for the remainder of the year to more closely align with our customers’ activity levels and our reduced number of active fleets as well as to maintain target return thresholds on capital investments. We now estimate capital expenditures in 2023 will range from $280 million to $290 million.

We continually evaluate our capital expenditures and the amount that we ultimately spend will depend on a number of factors, including customer demand for new fleets and expected industry activity levels.

### Acquisitions of Strategic Businesses

Our growth strategy includes potential acquisitions and other strategic transactions. From time to time we enter into non-binding letters of intent to make investments or acquisitions. These letters of intent may provide for purchase consideration including cash, notes payable by us, equity or some combination, the use of which could impact our liquidity needs. These potential transactions are subject to the completion of satisfactory due diligence, the negotiation and resolution of significant business and legal issues, the negotiation, documentation and completion of mutually satisfactory definitive agreements among the parties, the consent of our lenders, our ability to finance any cash payment at closing, and approval of our board of directors. We cannot guarantee that any such potential transaction would be completed on acceptable terms, if at all.

We have historically funded our acquisitions through issuances of our equity securities and borrowings under our term loan facility or ABL credit facility. For any future acquisitions, we may utilize borrowings under our ABL credit facility and various financing sources available to us, including the issuance of equity or debt securities through public offerings or private placements, to fund these acquisitions. Our ability to complete future offerings of equity or debt securities and the timing of these offerings will depend on various factors including prevailing market conditions and our financial condition.

## Market risk

As filed, 344 characters.

We do not utilize financial instruments for trading or other speculative purposes, nor do we utilize leveraged financial instruments. Our exposure to other market risks has not materially changed since December 31, 2022. For additional information, see Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report.

## Controls and procedures

As filed, 2,597 characters.

### Evaluation of Disclosure Controls and Procedures

In accordance with Exchange Act Rule 13a-15, we carried out an evaluation, under the supervision and with the participation of management, including our Executive Chairman (our principal executive officer) and our Chief Financial Officer (our principal financial officer), of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Executive Chairman and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2023 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Executive Chairman and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

### Limitations on Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.

### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 193 characters.

There have been no material changes in the significant risk factors that may affect our business, results of operations or liquidity as described in Item 1A "Risk Factors" in our Annual Report.

Filed Nov 9, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-062012. Last ingested by Listed: Oct 24, 2026, 15:06 ET. No prices; not investment advice.