Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File No. 001-37917
 Mammoth Energy Services, Inc.

(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
32-0498321
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
14201 Caliber Drive Suite 300
Oklahoma City, Oklahoma
 
73134
(Address of principal executive offices)
 
(Zip Code)
(405) 608-6007
(Registrant’s telephone number, including area code)
______________________________

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨

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

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

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

As of May 1, 2018, there were 44,714,296 shares of common stock, $0.01 par value, outstanding.
                                                            



MAMMOTH ENERGY SERVICES, INC.



TABLE OF CONTENTS
 
 
 
 
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2.
Item 4.
Item 5.
Item 6.
 
 




GLOSSARY OF OIL AND NATURAL GAS AND ELECTRICAL INFRASTRUCTURE TERMS
The following is a glossary of certain oil and natural gas and natural sand proppant industry terms used in this report:
Blowout
An uncontrolled flow of reservoir fluids into the wellbore, and sometimes catastrophically to the surface. A blowout may consist of salt water, oil, natural gas or a mixture of these. Blowouts can occur in all types of exploration and production operations, not just during drilling operations. If reservoir fluids flow into another formation and do not flow to the surface, the result is called an underground blowout. If the well experiencing a blowout has significant open-hole intervals, it is possible that the well will bridge over (or seal itself with rock fragments from collapsing formations) down-hole and intervention efforts will be averted.
Bottomhole assembly
The lower portion of the drillstring, consisting of (from the bottom up in a vertical well) the bit, bit sub, a mud motor (in certain cases), stabilizers, drill collar, heavy-weight drillpipe, jarring devices (“jars”) and crossovers for various threadforms. The bottomhole assembly must provide force for the bit to break the rock (weight on bit), survive a hostile mechanical environment and provide the driller with directional control of the well. Oftentimes the assembly includes a mud motor, directional drilling and measuring equipment, measurements-while-drilling tools, logging-while-drilling tools and other specialized devices.
Cementing
To prepare and pump cement into place in a wellbore.
Coiled tubing
A long, continuous length of pipe wound on a spool. The pipe is straightened prior to pushing into a wellbore and rewound to coil the pipe back onto the transport and storage spool. Depending on the pipe diameter (1 in. to 4 1/2 in.) and the spool size, coiled tubing can range from 2,000 ft. to 23,000 ft. (610 m to 6,096 m) or greater length.
Completion
A generic term used to describe the assembly of down-hole tubulars and equipment required to enable safe and efficient production from an oil or gas well. The point at which the completion process begins may depend on the type and design of the well.
Directional drilling
The intentional deviation of a wellbore from the path it would naturally take. This is accomplished through the use of whipstocks, bottomhole assembly (BHA) configurations, instruments to measure the path of the wellbore in three-dimensional space, data links to communicate measurements taken down-hole to the surface, mud motors and special BHA components and drill bits, including rotary steerable systems, and drill bits. The directional driller also exploits drilling parameters such as weight on bit and rotary speed to deflect the bit away from the axis of the existing wellbore. In some cases, such as drilling steeply dipping formations or unpredictable deviation in conventional drilling operations, directional-drilling techniques may be employed to ensure that the hole is drilled vertically. While many techniques can accomplish this, the general concept is simple: point the bit in the direction that one wants to drill. The most common way is through the use of a bend near the bit in a down-hole steerable mud motor. The bend points the bit in a direction different from the axis of the wellbore when the entire drillstring is not rotating. By pumping mud through the mud motor, the bit turns while the drillstring does not rotate, allowing the bit to drill in the direction it points. When a particular wellbore direction is achieved, that direction may be maintained by rotating the entire drillstring (including the bent section) so that the bit does not drill in a single direction off the wellbore axis, but instead sweeps around and its net direction coincides with the existing wellbore. Rotary steerable tools allow steering while rotating, usually with higher rates of penetration and ultimately smoother boreholes.
Down-hole
Pertaining to or in the wellbore (as opposed to being on the surface).
Down-hole motor
A drilling motor located in the drill string above the drilling bit powered by the flow of drilling mud. Down-hole motors are used to increase the speed and efficiency of the drill bit or can be used to steer the bit in directional drilling operations. Drilling motors have become very popular because of horizontal and directional drilling applications and the day rates for drilling rigs.
Drilling rig
The machine used to drill a wellbore.
Drillpipe or Drill pipe
Tubular steel conduit fitted with special threaded ends called tool joints. The drillpipe connects the rig surface equipment with the bottomhole assembly and the bit, both to pump drilling fluid to the bit and to be able to raise, lower and rotate the bottomhole assembly and bit.
Drillstring or Drill string
The combination of the drillpipe, the bottomhole assembly and any other tools used to make the drill bit turn at the bottom of the wellbore.
Horizontal drilling
A subset of the more general term “directional drilling,” used where the departure of the wellbore from vertical exceeds about 80 degrees. Note that some horizontal wells are designed such that after reaching true 90-degree horizontal, the wellbore may actually start drilling upward. In such cases, the angle past 90 degrees is continued, as in 95 degrees, rather than reporting it as deviation from vertical, which would then be 85 degrees. Because a horizontal well typically penetrates a greater length of the reservoir, it can offer significant production improvement over a vertical well.
Hydraulic fracturing
A stimulation treatment routinely performed on oil and gas wells in low permeability reservoirs. Specially engineered fluids are pumped at high pressure and rate into the reservoir interval to be treated, causing a vertical fracture to open. The wings of the fracture extend away from the wellbore in opposing directions according to the natural stresses within the formation. Proppant, such as grains of sand of a particular size, is mixed with the treatment fluid to keep the fracture open when the treatment is complete. Hydraulic fracturing creates high-conductivity communication with a large area of formation and bypasses any damage that may exist in the near-wellbore area.
Hydrocarbon
A naturally occurring organic compound comprising hydrogen and carbon. Hydrocarbons can be as simple as methane, but many are highly complex molecules, and can occur as gases, liquids or solids. Petroleum is a complex mixture of hydrocarbons. The most common hydrocarbons are natural gas, oil and coal.
Mesh size
The size of the proppant that is determined by sieving the proppant through screens with uniform openings corresponding to the desired size of the proppant. Each type of proppant comes in various sizes, categorized as mesh sizes, and the various mesh sizes are used in different applications in the oil and natural gas industry. The mesh number system is a measure of the number of equally sized openings per square inch of screen through which the proppant is sieved.

i


Mud motors
A positive displacement drilling motor that uses hydraulic horsepower of the drilling fluid to drive the drill bit. Mud motors are used extensively in directional drilling operations.
Natural gas liquids
Components of natural gas that are liquid at surface in field facilities or in gas processing plants. Natural gas liquids can be classified according to their vapor pressures as low (condensate), intermediate (natural gasoline) and high (liquefied petroleum gas) vapor pressure.
Nitrogen pumping unit
A high-pressure pump or compressor unit capable of delivering high-purity nitrogen gas for use in oil or gas wells. Two basic types of units are commonly available: a nitrogen converter unit that pumps liquid nitrogen at high pressure through a heat exchanger or converter to deliver high-pressure gas at ambient temperature, and a nitrogen generator unit that compresses and separates air to provide a supply of high pressure nitrogen gas.
Plugging
The process of permanently closing oil and gas wells no longer capable of producing in economic quantities. Plugging work can be performed with a well servicing rig along with wireline and cementing equipment; however, this service is typically provided by companies that specialize in plugging work.
Plug
A down-hole packer assembly used in a well to seal off or isolate a particular formation for testing, acidizing, cementing, etc.; also a type of plug used to seal off a well temporarily while the wellhead is removed.
Pounds per square inch
A unit of pressure. It is the pressure resulting from a one pound force applied to an area of one square inch.
Pressure pumping
Services that include the pumping of liquids under pressure.
Producing formation
An underground rock formation from which oil, natural gas or water is produced. Any porous rock will contain fluids of some sort, and all rocks at considerable distance below the Earth’s surface will initially be under pressure, often related to the hydrostatic column of ground waters above the reservoir. To produce, rocks must also have permeability, or the capacity to permit fluids to flow through them.
Proppant
Sized particles mixed with fracturing fluid to hold fractures open after a hydraulic fracturing treatment. In addition to naturally occurring sand grains, man-made or specially engineered proppants, such as resin-coated sand or high-strength ceramic materials like sintered bauxite, may also be used. Proppant materials are carefully sorted for size and sphericity to provide an efficient conduit for production of fluid from the reservoir to the wellbore.
Resource play
Accumulation of hydrocarbons known to exist over a large area.
Shale
A fine-grained, fissile, sedimentary rock formed by consolidation of clay- and silt-sized particles into thin, relatively impermeable layers.
Tight oil
Conventional oil that is found within reservoirs with very low permeability. The oil contained within these reservoir rocks typically will not flow to the wellbore at economic rates without assistance from technologically advanced drilling and completion processes. Commonly, horizontal drilling coupled with multistage fracturing is used to access these difficult to produce reservoirs.
Tight sands
A type of unconventional tight reservoir. Tight reservoirs are those which have low permeability, often quantified as less than 0.1 millidarcies.
Tubulars
A generic term pertaining to any type of oilfield pipe, such as drill pipe, drill collars, pup joints, casing, production tubing and pipeline.
Unconventional resource
An umbrella term for oil and natural gas that is produced by means that do not meet the criteria for conventional production. What has qualified as “unconventional” at any particular time is a complex function of resource characteristics, the available exploration and production technologies, the economic environment, and the scale, frequency and duration of production from the resource. Perceptions of these factors inevitably change over time and often differ among users of the term. At present, the term is used in reference to oil and gas resources whose porosity, permeability, fluid trapping mechanism, or other characteristics differ from conventional sandstone and carbonate reservoirs. Coalbed methane, gas hydrates, shale gas, fractured reservoirs and tight gas sands are considered unconventional resources.
Wellbore
The physical conduit from surface into the hydrocarbon reservoir.
Well stimulation
A treatment performed to restore or enhance the productivity of a well. Stimulation treatments fall into two main groups, hydraulic fracturing treatments and matrix treatments. Fracturing treatments are performed above the fracture pressure of the reservoir formation and create a highly conductive flow path between the reservoir and the wellbore. Matrix treatments are performed below the reservoir fracture pressure and generally are designed to restore the natural permeability of the reservoir following damage to the near wellbore area. Stimulation in shale gas reservoirs typically takes the form of hydraulic fracturing treatments.
Wireline
A general term used to describe well-intervention operations conducted using single-strand or multi-strand wire or cable for intervention in oil or gas wells. Although applied inconsistently, the term commonly is used in association with electric logging and cables incorporating electrical conductors.
Workover
The process of performing major maintenance or remedial treatments on an oil or gas well. In many cases, workover implies the removal and replacement of the production tubing string after the well has been killed and a workover rig has been placed on location. Through-tubing workover operations, using coiled tubing, snubbing or slickline equipment, are routinely conducted to complete treatments or well service activities that avoid a full workover where the tubing is removed. This operation saves considerable time and expense.
The following is a glossary of certain electrical infrastructure industry terms used in this report:
Distribution
The distribution of electricity from the transmission system to individual customers.
Substation
A part of an electrical transmission and distribution system that transforms voltage from high to low, or the reverse.
Transmission
The movement of electrical energy from a generating site, such as a power plant, to an electric substation.

ii


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Various statements contained in this report that express a belief, expectation, or intention, or that are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. In particular, the factors discussed in this report and detailed under Part II, Item 1A. Risk Factors in this report and our Annual Report on Form 10–K for the year ended December 31, 2017 could affect our actual results and cause our actual results to differ materially from expectations, estimates or assumptions expressed, forecasted or implied in such forward-looking statements.

Forward-looking statements may include statements about our:

business strategy;
pending or future acquisitions and future capital expenditures;
ability to obtain permits and governmental approvals;
technology;
financial strategy;
future operating results; and
plans, objectives, expectations and intentions.

All of these types of statements, other than statements of historical fact included in this annual report, are forward-looking statements. These forward-looking statements may be found in the “Business,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other sections of this annual report. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “would,” “expect,” “plan,” “project,” “budget,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “seek,” “objective,” “continue,” “will be,” “will benefit,” or “will continue,” the negative of such terms or other comparable terminology.

The forward-looking statements contained in this report are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors, which are difficult to predict and many of which are beyond our control. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, our management’s assumptions about future events may prove to be inaccurate. Our management cautions all readers that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to many factors including those described in Part II, Item 1A. Risk Factors in this report and our Annual Report on Form 10–K for the year ended December 31, 2017 and Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report. All forward-looking statements speak only as of the date of this report. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.



iii

MAMMOTH ENERGY SERVICES, INC.



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

MAMMOTH ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
ASSETS
 
March 31,
 
December 31,
 
 
2018
 
2017
CURRENT ASSETS
 
(in thousands)
Cash and cash equivalents
 
$
10,447

 
$
5,637

Accounts receivable, net
 
243,913

 
243,746

Receivables from related parties
 
46,338

 
33,788

Inventories
 
12,189

 
17,814

Prepaid expenses
 
12,030

 
12,552

Other current assets
 
1,112

 
886

Total current assets
 
326,029

 
314,423

 
 
 
 
 
Property, plant and equipment, net
 
365,757

 
351,017

Sand reserves
 
74,682

 
74,769

Intangible assets, net - customer relationships
 
7,436

 
9,623

Intangible assets, net - trade names
 
6,296

 
6,516

Goodwill
 
99,811

 
99,811

Deferred income tax asset
 
16,829

 
6,739

Other non-current assets
 
4,245

 
4,345

Total assets
 
$
901,085

 
$
867,243

LIABILITIES AND EQUITY
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
Accounts payable
 
$
151,509

 
$
141,306

Payables to related parties
 
2,228

 
1,378

Accrued expenses and other current liabilities
 
42,919

 
40,895

Income taxes payable
 
62,272

 
36,409

Total current liabilities
 
258,928

 
219,988

 
 
 
 
 
Long-term debt
 
39,000

 
99,900

Deferred income tax liabilities
 
31,897

 
34,147

Asset retirement obligation
 
3,124

 
2,123

Other liabilities
 
3,999

 
3,289

Total liabilities
 
336,948

 
359,447

 
 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 16)
 

 

 
 
 
 

EQUITY
 
 
 

Equity:
 
 
 
 
Common stock, $0.01 par value, 200,000,000 shares authorized, 44,714,296 and 44,589,306 issued and outstanding at March 31, 2018 and December 31, 2017, respectively
 
447

 
446

Additional paid in capital
 
509,265

 
508,010

Retained earnings
 
57,547

 
2,001

Accumulated other comprehensive loss
 
(3,122
)
 
(2,661
)
Total equity
 
564,137

 
507,796

Total liabilities and equity
 
$
901,085

 
$
867,243

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

1

MAMMOTH ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)


 
Three Months Ended March 31,
 
2018
 
2017(a)
REVENUE
(in thousands, except per share amounts)
Services revenue
$
408,659

 
$
27,092

Services revenue - related parties
49,088

 
32,962

Product revenue
25,040

 
3,372

Product revenue - related parties
11,462

 
11,540

Total revenue
494,249

 
74,966

 
 
 
 
COST AND EXPENSES
 
 
 
Services cost of revenue (exclusive of depreciation, depletion, amortization and accretion of $24,575 and $15,838, respectively, for the three months ended March 31, 2018 and 2017)
290,979

 
45,461

Services cost of revenue - related parties (exclusive of depreciation, depletion, amortization and accretion of $0 and $0, respectively, for the three months ended March 31, 2018 and 2017)
1,792

 
430

Product cost of revenue (exclusive of depreciation, depletion, amortization and accretion of $2,314 and $1,362, respectively, for the three months ended March 31, 2018 and 2017)
33,330

 
12,607

Selling, general and administrative
38,082

 
6,413

Selling, general and administrative - related parties
429

 
324

Depreciation, depletion, amortization and accretion
26,908

 
17,237

Total cost and expenses
391,520

 
82,472

Operating income (loss)
102,729

 
(7,506
)
 
 
 
 
OTHER (EXPENSE) INCOME
 
 
 
Interest expense, net
(1,237
)
 
(397
)
Other, net
(28
)
 
(184
)
Total other (expense) income
(1,265
)
 
(581
)
Income (loss) before income taxes
101,464

 
(8,087
)
Provision (benefit) for income taxes
45,918

 
(3,106
)
Net income (loss)
$
55,546

 
$
(4,981
)
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Foreign currency translation adjustment, net of tax of $186 and $20, respectively, for the three months ended March 31, 2018 and 2017
(461
)
 
228

Comprehensive income (loss)
$
55,085

 
$
(4,753
)
 
 
 
 
Net income (loss) per share (basic) (Note 12)
$
1.24

 
$
(0.13
)
Net income (loss) per share (diluted) (Note 12)
$
1.24

 
$
(0.13
)
Weighted average number of shares outstanding (basic) (Note 12)
44,650

 
37,500

Weighted average number of shares outstanding (diluted) (Note 12)
44,884

 
37,500

 
 
 
 
(a) Financial information has been recast to include results attributable to Sturgeon Acquisitions LLC ("Sturgeon"). See Note 4.


















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

2

MAMMOTH ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
Retained
Additional
 
 
 
Common Stock
Members'
Earnings
Paid-In
 
 
 
Shares
Amount
Equity
(Deficit)
Capital
AOCL
Total
 
(in thousands)
Balance at January 1, 2017
37,500

$
375

$
81,739

$
(56,323
)
$
400,206

$
(3,216
)
$
422,781

Net income of Sturgeon prior to acquisition


640




640

Stingray acquisition
1,393

14



25,748


25,762

Sturgeon acquisition
5,607

56

(82,379
)

78,313


(4,010
)
Equity based compensation
89

1



3,743


3,744

Net income



58,324



58,324

Other comprehensive income





555

555

Balance at December 31, 2017
44,589

$
446

$

$
2,001

$
508,010

$
(2,661
)
$
507,796

Equity based compensation
125

1



1,255


1,256

Net income



55,546



55,546

Other comprehensive loss




(461
)
(461
)
Balance at March 31, 2018
44,714

$
447

$

$
57,547

$
509,265

$
(3,122
)
$
564,137









































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

3

MAMMOTH ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


 
Three Months Ended
 
March 31,
 
2018
 
2017(a)
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
55,546

 
$
(4,981
)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
 
 
 
Equity based compensation
1,256

 
570

Depreciation, depletion, accretion and amortization
26,908

 
17,237

Amortization of coil tubing strings
565

 
492

Amortization of debt origination costs
100

 
151

Bad debt expense
25,527

 
(41
)
Gain on disposal of property and equipment
(184
)
 
(79
)
Deferred income taxes
(12,117
)
 
(3,801
)
Changes in assets and liabilities, net of acquisitions of businesses:
 
 
 
Accounts receivable, net
(25,722
)
 
(4,357
)
Receivables from related parties
(12,550
)
 
(4,842
)
Inventories
5,060

 
(466
)
Prepaid expenses and other assets
294

 
77

Accounts payable
8,302

 
13,302

Payables to related parties
851

 
451

Accrued expenses and other liabilities
1,636

 
733

Income taxes payable
25,851

 
(28
)
Net cash provided by operating activities
101,323

 
14,418

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(35,176
)
 
(31,110
)
Purchases of property and equipment from related parties
(598
)
 

Proceeds from disposal of property and equipment
286

 
369

Net cash used in investing activities
(35,488
)
 
(30,741
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Borrowings from lines of credit
31,000

 

Repayments of lines of credit
(91,900
)
 

Repayments of equipment financing note
(72
)
 

Net cash used in financing activities
(60,972
)
 

Effect of foreign exchange rate on cash
(53
)
 
11

Net change in cash and cash equivalents
4,810

 
(16,312
)
Cash and cash equivalents at beginning of period
5,637

 
29,239

Cash and cash equivalents at end of period
$
10,447

 
$
12,927

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
1,442

 
$
254

Cash paid for income taxes
$
32,184

 
$
701

Supplemental disclosure of non-cash transactions:
 
 
 
Purchases of property and equipment included in trade accounts payable
$
16,558

 
$
9,346

 
 
 
 
(a) Financial information has been recast to include results attributable to Sturgeon. See Note 4.
 
 
 





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

4

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.
Organization and Nature of Business
Mammoth Energy Services, Inc. (the “Company,” “Mammoth Inc.” or “Mammoth”), together with its subsidiaries, is an integrated, growth-oriented energy services company serving companies engaged in the exploration and development of North American onshore unconventional oil and natural gas reserves as well as government-funded utilities, private utilities, public investor owned utilities and co-operative utilities engaged in energy infrastructure. The Company was incorporated in Delaware in June 2016 as a wholly-owned subsidiary of Mammoth Energy Partners LP, a Delaware limited partnership (the “Partnership” or the “Predecessor”). The Partnership was originally formed by Wexford Capital LP (“Wexford”) in February 2014 as a holding company under the name Redback Inc. and was converted to a Delaware limited partnership in August 2014. On November 24, 2014, Mammoth Energy Holdings LLC (“Mammoth Holdings,” an entity controlled by Wexford), Gulfport Energy Corporation (“Gulfport”) and Rhino Resource Partners LP (“Rhino”) (collectively known as the “Predecessor Interest”) contributed their interest in certain of the entities presented below to the Partnership in exchange for 20 million limited partner units. Mammoth Energy Partners GP, LLC (the “General Partner”) held a non-economic general partner interest.

On October 12, 2016, the Partnership was converted into a Delaware limited liability company named Mammoth Energy Partners LLC (“Mammoth LLC”), and then Mammoth Holdings, Gulfport and Rhino, as all the members of Mammoth LLC, contributed their member interests in Mammoth LLC to Mammoth Inc. Prior to the conversion and the contribution, Mammoth Inc. was a wholly-owned subsidiary of the Partnership. Following the conversion and the contribution, Mammoth LLC (as the converted successor to the Partnership) was a wholly-owned subsidiary of Mammoth Inc. Mammoth Inc. did not conduct any material business operations until Mammoth LLC was contributed to it. On October 19, 2016, Mammoth Inc. closed its initial public offering of 7,750,000 shares of common stock (the “IPO”), which included an aggregate of 250,000 shares that were offered by Mammoth Holdings, Gulfport and Rhino, at a price to the public of $15.00 per share.

At March 31, 2018 and December 31, 2017, Mammoth Holdings (and certain of its affiliates), Gulfport and Rhino owned the following share of outstanding common stock of Mammoth Inc.:
 
 
At March 31, 2018
 
At December 31, 2017
 
 
Share Count
 
% Ownership
 
Share Count
 
% Ownership
Mammoth Holdings
 
25,009,319

 
55.9
%
 
25,009,319

 
56.1
%
Gulfport
 
11,171,887

 
25.0
%
 
11,171,887

 
25.1
%
Rhino
 
336,447

 
0.8
%
 
568,794

 
1.3
%
Outstanding shares owned by related parties
 
36,517,653

 
81.7
%
 
36,750,000

 
82.5
%
Total outstanding
 
44,714,296

 
100.0
%
 
44,589,306

 
100.0
%

Operations

The Company's pressure pumping services include equipment and personnel used in connection with the completion and early production of oil and natural gas wells. The Company's infrastructure services include electric utility contracting services focused on the repair, upgrade, maintenance and construction of transmission and distribution networks. The Company’s infrastructure services also provide storm repair and restoration services in response to hurricane, ice or other storm-related damage. The Company's natural sand proppant services include the distribution and production of natural sand proppant that is used primarily for hydraulic fracturing in the oil and gas industry. The Company's contract land and directional drilling services provides drilling rigs and directional tools for both vertical and horizontal drilling of oil and natural gas wells and salt water disposal wells. The Company also provides other services, including coil tubing units used to enhance the flow of oil and natural gas, flowback, cementing, equipment rentals and remote accommodations.

All of the Company’s operations are in North America. The Company operates its oil and natural gas businesses in the Permian Basin, the Utica Shale, the Eagle Ford Shale, the Marcellus Shale, the Granite Wash, the SCOOP, the STACK, the Cana-Woodford Shale, the Cleveland Sand and the oil sands located in Northern Alberta, Canada. The Company operates its energy infrastructure services in the northeast, southwest and midwest portions of the United States and Puerto Rico. The Company's oil and natural gas business depends in large part on the conditions in the oil and natural gas industry and, specifically, on the amount of capital spending by its customers. Any prolonged increase or decrease in oil

5

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

and natural gas prices affects the levels of exploration, development and production activity, as well as the entire health of the oil and natural gas industry. Changes in the commodity prices for oil and natural gas could have a material effect on the Company’s results of operations and financial condition. The Company’s business also depends on infrastructure spending on maintenance, upgrade, expansion and repair and restoration. Any prolonged decrease in spending by electric utility companies or delays or reductions in government appropriations could have a material adverse effect on the Company’s results of operations and financial condition.

2.
Basis of Presentation and Significant Accounting Policies

Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated. This report has been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, and reflects all adjustments, which in the opinion of management are necessary for the fair presentation of the results for the interim periods, on a basis consistent with the annual audited consolidated financial statements. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the summary of significant accounting policies and notes thereto included in the Company’s most recent annual report on Form 10-K.

On June 5, 2017, the Company acquired Sturgeon Acquisitions LLC ("Sturgeon") and Sturgeon's wholly owned subsidiaries Taylor Frac, LLC, Taylor Real Estate Investments, LLC and South River Road, LLC. Prior to its acquisition of Sturgeon, the Company and Sturgeon were under common control and it is required under GAAP to account for this common control acquisition in a manner similar to the pooling of interest method of accounting. Therefore, the Company's historical financial information for all periods included in the accompanying financial statements has been recast to combine Sturgeon with the Company as if the acquisition had been effective since the date Sturgeon commenced operations. Refer to Note 4 - Acquisitions for additional disclosure regarding the acquisition of Sturgeon.
 
Accounts Receivable
Accounts receivable include amounts due from customers for services performed and are recorded as the work progresses. The Company grants credit to customers in the ordinary course of business and generally does not require collateral. Most areas in which the Company operates provide for a mechanic’s lien against the property on which the service is performed if the lien is filed within the statutorily specified time frame. Customer balances are generally considered delinquent if unpaid by the 30th day following the invoice date and credit privileges may be revoked if balances remain unpaid.

The Company regularly reviews receivables and provides for estimated losses through an allowance for doubtful accounts. In evaluating the level of established reserves, the Company makes judgments regarding its customers’ ability to make required payments, economic events and other factors. As the financial conditions of customers change, circumstances develop, or additional information becomes available, adjustments to the allowance for doubtful accounts may be required. In the event the Company was to determine that a customer may not be able to make required payments, the Company would increase the allowance through a charge to income in the period in which that determination is made. Uncollectible accounts receivable are periodically charged against the allowance for doubtful accounts once final determination is made of their uncollectability.


6

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Following is a roll forward of the allowance for doubtful accounts for the year ended December 31, 2017 and the three months ended March 31, 2018 (in thousands):

Balance, January 1, 2017
 
$
5,377

Additions charged to expense
 
16,206

Additions other
 
179

Deductions for uncollectible receivables written off
 
(25
)
Balance, December 31, 2017
 
21,737

Additions charged to expense
 
25,541

Deductions for uncollectible receivables written off
 
(14
)
Balance, March 31, 2018
 
$
47,264


In October 2017, Cobra Acquisitions LLC ("Cobra"), one of the Company's subsidiaries, entered into a contract with the Puerto Rico Electric Power Authority ("PREPA") to perform repairs to PREPA’s electrical grid as a result of Hurricane Maria. At March 31, 2018 and December 31, 2017, the Company reviewed receivables due from PREPA and made specific reserves consistent with Company policy which resulted in additions to allowance for doubtful accounts totaling $25.4 million and $16.0 million, respectively, for the three months ended March 31, 2018 and year ended December 31, 2017.

Additionally, the Company has made specific reserves consistent with Company policy which resulted in additions to allowance for doubtful accounts totaling $0.1 million and $0.2 million, respectively, for the three months ended March 31, 2018 and year ended December 31, 2017. The Company will continue to pursue collection until such time as final determination is made consistent with Company policy.

Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents in excess of federally insured limits and trade receivables. Following is a summary of our significant customers based on percentages of total accounts receivable balances at March 31, 2018 and December 31, 2017 and percentages of total revenues derived for the three months ended March 31, 2018 and 2017:
 
REVENUES
 
ACCOUNTS RECEIVABLE
 
Three Months Ended March 31,
 
At March 31,
At December 31,
 
2018
2017
 
2018
2017
Customer A(a)
64
%
%
 
52
%
56
%
Customer B(b)
12
%
59
%
 
16
%
12
%
a.
Customer A is a third-party customer. Revenues and the related accounts receivable balances earned from Customer A were derived from the Company's infrastructure services segment.
b.
Customer B is a related party customer. Revenues and the related accounts receivable balances earned from Customer B were derived from the Company's pressure pumping services segment, natural sand proppant services segment, contract land and directional drilling services segment and other businesses.

Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents, trade receivables, trade payables and amounts receivable or payable to related parties. The carrying amount of cash and cash equivalents, trade receivables, receivables from related parties and trade payables approximates fair value because of the short-term nature of the instruments.

New Accounting Pronouncements
In February 2016, the FASB issued ASU No, 2016-2 “Leases” amending the current accounting for leases. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less.  All other leases will fall into one of two categories: (i) a financing lease or (ii) an operating lease. Lessor accounting remains substantially unchanged with the exception that no leases entered into after the effective date will be classified as leveraged leases. For sale leaseback transactions, a sale will only be recognized if the criteria in the new revenue recognition standard are met. ASU 2016-2 is effective for fiscal years beginning after December 15, 2018, and interim periods within that fiscal year. The Company plans to adopt this ASU effective January 1, 2019 utilizing the modified retrospective method of adoption. This new leasing guidance will impact

7

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

the Company in situations where it is the lessee, and in certain circumstances it will have a right-of-use asset and lease liability on its consolidated financial statements. The Company is currently evaluating the effect the new guidance will have on the Company's consolidated financial statements and results of operations.

3.
Revenues

Adoption of ASC 606 "Revenues from Contracts with Customers"
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and most industry-specific guidance. The new guidance requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.

On January 1, 2018, the Company adopted ASU 2014-09 and its related amendments (collectively, "ASC 606") using the modified retrospective method applied to contracts which were not completed as of January 1, 2018. Revenues for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts continue to be reported under previous revenue recognition guidance. While ASC 606 requires additional disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, its adoption has not had a material impact on the measurement or recognition of the Company's revenues.

The adoption of ASC 606 represents a change in accounting principle. After evaluation of all contracts not completed as of January 1, 2018, the Company determined the cumulative effect of adopting ASC 606 was immaterial, and as such, has not recorded an adjustment to the opening balance of retained earnings on January 1, 2018.

Revenue Recognition
The following table presents revenues disaggregated by service line (in thousands):
 
Three Months Ended
 
March 31, 2018
 
March 31, 2017
Revenue:
 
 
 
Pressure pumping services
$
101,138

 
$
40,640

Infrastructure services
325,459

 

Natural sand proppant services
51,015

 
15,597

Contract land and directional drilling services
15,230

 
10,751

Other services
22,895

 
8,850

Eliminations
(21,488
)
 
(872
)
Total revenue
494,249

 
74,966


Pressure Pumping Services
Pressure pumping services are typically provided based upon a purchase order, contract or on a spot market basis. Services are provided on a day rate, contracted or hourly basis. Generally, the Company accounts for pressure pumping services as a single performance obligation satisfied over time. In certain circumstances, the Company supplies proppant that is utilized for pressure pumping as part of the agreement with the customer. The Company accounts for these pressure pumping agreements as multiple performance obligations satisfied over time. Jobs for these services are typically short-term in nature and range from a few hours to multiple days. Revenue is recognized over time upon the completion of each day’s work based upon a completed field ticket, which includes the charges for the services performed, mobilization of the equipment to the location and personnel. Additional revenue is generated through labor charges and the sale of consumable supplies that are incidental to the service being performed. Such amounts are recognized ratably over the period during which the corresponding goods and services are consumed.

Infrastructure Services
Infrastructure services are typically provided pursuant to master service agreements, repair and maintenance contracts or fixed price and non-fixed price installation contracts. Pricing under these contracts may be unit priced, cost-plus/hourly (or time and materials basis) or fixed price (or lump sum basis). The Company accounts for infrastructure services as a

8

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

single performance obligation satisfied over time. Revenue is recognized over time as work progresses based on the days completed or as the contract is completed.

Natural Sand Proppant Services
The Company sells natural sand proppant through sand supply agreements with its customers. Under these agreements, sand is typically sold at a flat rate per ton or a flat rate per ton with an index-based adjustment. The Company recognizes revenue at the point in time when the customer obtains legal title to the product, which may occur at the production facility, rail origin or at the destination terminal.

Certain of the Company's sand supply agreements contain a minimum volume commitment related to sand purchases whereby the Company charges a shortfall payment if the customer fails to meet the required minimum volume commitment. These agreements may also contain make-up provisions whereby shortfall payments can be applied in future periods against purchased volumes exceeding the minimum volume commitment. If a make-up right exists, the Company has future performance obligations to deliver excess volumes of product in subsequent months. In accordance with ASC 606, if the customer fails to meet the minimum volume commitment, the Company will assess whether it expects the customer to fulfill its unmet commitment during the contractually specified make-up period based on discussions with the customer and management's knowledge of the business. If the Company expects the customer will make-up deficient volumes in future periods, revenue related to shortfall payments will be deferred and recognized on the earlier of the date on which the customer utilizes make-up volumes or the likelihood that the customer will exercise its right to make-up deficient volumes becomes remote. If the Company does not expect the customer will make-up deficient volumes in future periods, the breakage model will be applied and revenue related to shortfall payments will be recognized when the model indicates the customer's inability to take delivery of excess volumes. During the three months ended March 31, 2018, the Company did not recognize any material revenue or liabilities related to shortfall payments.

In certain of the Company's sand supply agreements, the customer obtains control of the product when it is loaded into rail cars and the customer reimburses the Company for all freight charges incurred. The Company has elected to account for shipping and handling as activities to fulfill the promise to transfer the sand. If revenue is recognized for the related product before the shipping and handling activities occur, the Company accrues the related costs of those shipping and handling activities.

Contract Land and Directional Drilling Services
Contract drilling services are provided under daywork contracts. Directional drilling services are provided on a day rate or hourly basis, and revenue is recognized as work progresses. Performance obligations are satisfied over time as the work progresses based on the measure of output. Mobilization revenue and costs are recognized over the days of actual drilling.

Other Services
The Company also provides coil tubing, pressure control, flowback, cementing, equipment rentals and remote accommodations services, which are reported under other services. These services are typically provided based upon a purchase order, contract or on a spot market basis. Services are provided on a day rate, contracted or hourly basis. Performance obligations for these services are satisfied over time and revenue is recognized as the work progresses based on the measure of output. Jobs for these services are typically short-term in nature and range from a few hours to multiple days.

Practical Expedients
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts in which variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied distinct good or service that forms part of a single performance obligation.

Performance Obligations and Contract Balances
As of March 31, 2018 and January 1, 2018, the Company had contract liabilities totaling $15.0 million, which are included in Accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets, and did not have any contract assets. Revenue recognized in the current period from performance obligations satisfied in previous periods was a nominal amount for the three months ended March 31, 2018. As of March 31, 2018, the Company had unsatisfied performance obligations totaling $86.4 million, which will be recognized over the next three years.


9

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4.
Acquisitions

(a) Description of Stingray Acquisition

On March 20, 2017, and as amended on May 12, 2017, the Company entered into two definitive contribution agreements, one such agreement with MEH Sub LLC (“MEH Sub”), Wexford Offshore Stingray Energy Corp., Gulfport and Mammoth LLC and the other with MEH Sub, Wexford Offshore Stingray Pressure Pumping Corp., Gulfport and Mammoth LLC (collectively, the “Stingray Contribution Agreements”). Under the Stingray Contribution Agreements, the Company agreed to acquire, through its wholly-owned subsidiary Mammoth LLC, all outstanding membership interests in Stingray Cementing LLC ("Cementing") and Stingray Energy Services LLC ("SR Energy") (the “2017 Stingray Acquisition”). The addition of their water transfer, equipment rentals and cementing services further expanded and vertically integrated Mammoth’s service offerings.

The 2017 Stingray Acquisition closed on June 5, 2017. Pursuant to the Stingray Contribution Agreements, Mammoth issued 1,392,548 shares of its common stock for all outstanding equity interests in SR Energy and Cementing. Based upon a closing price of Mammoth's common stock of $18.50 per share on June 5, 2017, the total purchase price was $25.8 million.

At the acquisition date, the components of the consideration transferred were as follows (in thousands):
Consideration attributable to Cementing (1)
 
$
12,975

Consideration attributable to SR Energy (1)
 
12,787

Total consideration transferred
 
$
25,762

(1)See Summary of acquired assets and liabilities below

 
 
SR Energy
Cementing
 
Total
 
 
(in thousands)
Cash and cash equivalents
 
$
1,611

$
1,060

 
$
2,671

Accounts receivable, net
 
3,913

495

 
4,408

Receivables from related parties
 
3,684

1,418

 
5,102

Inventories
 

306

 
306

Prepaid expenses
 
35

32

 
67

Property, plant and equipment(1)
 
13,061

7,459

 
20,520

Identifiable intangible assets - customer relationships(2)
 

1,140

 
1,140

Identifiable intangible assets - trade names(2)
 
550

270

 
820

Goodwill(3)
 
3,929

6,264

 
10,193

Other assets
 
7


 
7

Total assets acquired
 
$
26,790

$
18,444

 
$
45,234

 
 
 
 
 
 
Accounts payable and accrued liabilities
 
$
5,890

$
2,063

 
$
7,953

Long-term debt (4)
 
5,074

2,000

 
7,074

Deferred tax liability
 
3,039

1,406

 
4,445

Total liabilities assumed
 
$
14,003

$
5,469

 
$
19,472

Net assets acquired
 
$
12,787

$
12,975

 
$
25,762

(1) 
Property, plant and equipment fair value measurements were prepared by utilizing a combined fair market value and cost approach. The market approach relies on comparability of assets using market data information. The cost approach places emphasis on the physical components and characteristics of the asset. It places reliance on estimated replacement cost, depreciation and economic obsolescence.
(2) 
Identifiable intangible assets were measured using a combination of income approaches. Trade names were valued using a "Relief-from-Royalty" method. Non-contractual customer relationships were valued using a "Multi-period excess earnings" method. Identifiable intangible assets will be amortized over 5-10 years.
(3) 
Goodwill was the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill recorded in connection with the

10

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

acquisition is attributable to assembled workforces and future profitability based on the synergies expected to arise from the acquired entities.
(4) 
Long-term debt assumed was paid off subsequent to the acquisitions.
Since the acquisition date, the businesses acquired have provided the following activity (in thousands):
 
2018
 
2017
 
SR Energy
Cementing
 
SR Energy
Cementing
Revenues(a)
$
8,890

$
2,851

 
$
11,572

$
7,500

Net loss(b)
(481
)
(478
)
 
(1,626
)
(1,963
)
a.
Includes intercompany revenues of $0.7 million for SR Energy in 2018 and $0.6 million and a nominal amount for SR Energy and Cementing in 2017
b.
Includes depreciation and amortization expense of $1.5 million and $0.6 million, respectively, for SR Energy and Cementing in 2018 and $3.4 million and $4.1 million, respectively, for SR Energy and Cementing in 2017
The following table presents unaudited pro forma information as if the acquisition of SR Energy and Cementing had occurred on January 1, 2017 (in thousands):
 
Three Months Ended March 31, 2017
Revenues
$
8,753

Net loss
(613
)

The historical financial information was adjusted to give effect to the pro forma events that were directly attributable to the 2017 Stingray Acquisition. The unaudited pro forma consolidated results are not necessarily indicative of what the consolidated results of operations actually would have been had the 2017 Stingray Acquisition been completed on January 1, 2017. In addition, the unaudited pro forma consolidated results do not purport to project the future results of operations of the Company. The Company recognized $0.2 million of transaction related costs during the year ended December 31, 2017 related to this acquisition.

(b) Description of Chieftain Acquisition

On March 27, 2017, as amended as of May 24, 2017, the Company entered into a the Purchase Agreement with Chieftain Sand and Proppant, LLC and Chieftain Sand and Proppant Barron, LLC, unrelated third party sellers (the "Chieftain Sellers"), following the Company's successful bid in a bankruptcy court auction for substantially all of the assets of the Chieftain Sellers (the "Chieftain Assets"). This transaction (the "Chieftain Acquisition") closed on May 26, 2017. Mammoth funded the purchase price for the Chieftain Assets with cash on hand and borrowings under its revolving credit facility. The Chieftain Assets are held by the Company's wholly owned subsidiary Piranha and are included in the Company's sand segment. The Chieftain Acquisition added sand reserves, increased our production capacity and provided access to the Union Pacific railroad, which affords access to both the Mid-Continent and Permian basins in support of the Company’s pressure pumping services.

On the acquisition date, the $36.3 million in cash consideration consisted of the following components (in thousands):
 
 
Total
Property, plant and equipment (1)
 
$
23,373

Sand reserves (2)
 
20,910

Total assets acquired
 
$
44,283

 
 
 
Asset retirement obligation
 
1,732

Total liabilities assumed
 
$
1,732

Total allocation of purchase price
 
$
42,551

Bargain purchase price (3, 4)
 
(6,231
)
Total purchase price
 
$
36,320


11

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) 
Property, plant and equipment fair value measurements were prepared by utilizing a combined fair market value and cost approach. The market approach relies on comparability of assets using market data information. The cost approach places emphasis on the physical components and characteristics of the asset. It places reliance on estimated replacement cost, depreciation and economic obsolescence.
(2) 
The fair value of the sand reserves was determined based on the excess cash flow method, a form of the income approach. The method provides a value based on the estimated remaining life of sand reserves, projected financial information and industry projections.
(3) 
Amount reflected in Condensed Consolidated Statements of Comprehensive Loss reflected net of income taxes of $2.2 million.
(4) 
The fair value of the business was determined based on the excess cash flow method, a form of the income approach.
Since the acquisition date, the Chieftain Assets have provided the following activity (in thousands):
 
 
2018
 
2017
Revenues(a)
 
$
19,735

 
$
22,847

Net income(b)
 
5,791

 
5,520

a.Includes intercompany revenues of $8.8 million and $12.3 million, respectively, for 2018 and 2017
b.Includes depreciation, depletion, amortization and accretion of $1.0 million and $2.8 million, respectively, for 2018 and 2017
The following table presents unaudited pro forma information as if the acquisition of the Chieftain Assets had occurred as of January 1, 2017 (in thousands):
 
Three Months Ended March 31, 2017
Revenues
$

Net loss
(698
)

The Company's historical financial information was adjusted to give pro forma effect to the events that were directly attributable to the Chieftain Acquisition. The Company recognized $0.8 million of transaction related costs during the year ended December 31, 2017 related to this acquisition.

(c) Description of Sturgeon Acquisition

On March 20, 2017, and as amended on May 12, 2017, the Company entered into a definitive contribution agreement with MEH Sub, Wexford Offshore Sturgeon Corp., Gulfport, Rhino and Mammoth Energy Partners LLC (the “Sturgeon Contribution Agreement”). Under the Sturgeon Contribution Agreement, the Company agreed to acquire, through its wholly-owned subsidiary Mammoth LLC, all outstanding membership interests in Sturgeon, which owns all of the membership interests in Taylor Frac, Taylor RE and South River (collectively, the "Sturgeon subsidiaries"). The acquisition added sand reserves, increased our production capacity and provided access to the Canadian National Railway, which affords access to the Appalachian basin in support of the Company’s pressure pumping services as well as to western Canada.

The acquisition of Sturgeon closed on June 5, 2017. Pursuant to the Sturgeon Contribution Agreement, Mammoth issued 5,607,452 shares of its common stock for all outstanding equity interests in Sturgeon. Based upon a closing price of Mammoth's common stock of $18.50 per share on June 5, 2017, the total purchase price was $103.7 million.

As a result of this transaction, the Company's historical financial information has been recast to combine the Condensed Consolidated Statements of Operations and the Condensed Consolidated Balance Sheets of the Company for all periods included in the accompanying financial statements with those of Sturgeon as if the combination had been in effect since Sturgeon commenced operations on September 13, 2014. Any material transactions between the Company and Sturgeon were eliminated. Sturgeon's financial results were incorporated into the Company's natural sand proppant services division.

For the year ended December 31, 2017, $1.3 million of transaction related costs were expensed.

(d) Acquisition of Higher Power

On April 21, 2017, the Company completed its acquisition of Higher Power for total consideration of $3.3 million in cash to the sellers plus up to $0.8 million in contingent consideration to be paid in equal annual installments over the next three years subject to contractual conditions. As of March 31, 2018, $0.3 million and $0.5 million of the contingent consideration are reflected in the accrued expenses and other current liabilities and other liabilities, respectively.

12

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Mammoth funded the purchase price for Higher Power with cash on hand and borrowings under its credit facility. The acquisition of Higher Power added an energy infrastructure component to the Company's business, helping to diversify its service offerings.

The Company recognized $0.1 million of transaction related costs during the year ended December 31, 2017 related to this acquisition.

The following table summarizes the fair value of Higher Power as of April 21, 2017 (in thousands):
 
 
Higher Power
Property, plant and equipment
 
$
1,744

Identifiable intangible assets - customer relationships
 
1,613

Goodwill (1)
 
643

Total assets acquired
 
$
4,000

(1) 
Goodwill was the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill recorded in connection with the acquisition is attributable to assembled workforces and future profitability expected to arise from the acquired entity.
From its acquisition date through March 31, 2018, Higher Power has provided the following activity (in thousands):
 
 
2018
 
2017
Revenues(a)
 
$
55,156

 
$
39,571

Net income (b)
 
22,373

 
5,127

a.Includes intercompany revenues of $51.5 million and $27.4 million, respectively for 2018 and 2017
b.Includes depreciation and amortization expense of $1.1 million and $2.0 million, respectively, for 2018 and 2017
The following table presents unaudited pro forma information as if the acquisition of Higher Power had occurred as of January 1, 2017 (in thousands):
 
Three Months Ended March 31, 2017
Revenues
$
2,226

Net loss
(163
)

(e) Acquisition of 5 Star

On July 1, 2017, the Company completed its acquisition of 5 Star for total consideration of $2.4 million in cash to the sellers. Mammoth funded the purchase price for 5 Star with cash on hand and borrowings under its credit facility. The acquisition of 5 Star added to the infrastructure component of the Company's business.

The Company recognized $0.1 million of transaction related costs during the year ended December 31, 2017 related to this acquisition.


13

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the fair value of 5 Star as of July 1, 2017 (in thousands):
 
 
5 Star
Accounts receivable
 
$
2,440

Property, plant and equipment
 
1,863

Identifiable intangible assets - trade names (1)
 
300

Goodwill (2)
 
248

Total assets acquired
 
$
4,851

 
 
 
Long-term debt and other liabilities
 
$
2,413

Total liabilities assumed
 
$
2,413

Net assets acquired
 
$
2,438

(1) 
Identifiable intangible assets were measured using a combination of income approaches. Trade names were valued using a "Relief-from-Royalty" method. Identifiable intangible assets will be amortized over 10 years.
(2) 
Goodwill was the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill recorded in connection with the acquisition is attributable to assembled workforces and future profitability expected to arise from the acquired entity.
From its acquisition date through March 31, 2018, 5 Star has provided the following activity (in thousands):
 
 
2018
 
2017
Revenues(a)
 
$
37,745

 
$
25,216

Net income (b)
 
16,624

 
4,191

a.Includes intercompany revenues of $34.4 million and $16.0 million, respectively, for 2018 and 2017
b.Includes depreciation and amortization expense of $0.5 million and $0.8 million, respectively, for 2018 and 2017
The following table presents unaudited pro forma information as if the acquisition of 5 Star had occurred as of January 1, 2017 (in thousands):
 
Three Months Ended March 31, 2017
Revenues
$
3,314

Net loss
(164
)

5.
Inventories
Inventory consists of raw sand and processed sand available for sale, chemicals and other products sold as a bi-product of completion and production operations and supplies used in performing services. Inventory is stated at the lower of cost or market (net realizable value) on an average cost basis. The Company assesses the valuation of its inventories based upon specific usage and future utility. A summary of the Company's inventories is shown below (in thousands):
 
 
March 31,
 
December 31,
 
 
2018
 
2017
Supplies
 
$
8,069

 
$
9,437

Raw materials
 
224

 
219

Work in process
 
197

 
2,370

Finished goods
 
3,699

 
5,788

Total inventory
 
$
12,189

 
$
17,814



14

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6.
Property, Plant and Equipment     
Property, plant and equipment include the following (in thousands):
 
 
 
March 31,
 
December 31,
 
Useful Life
 
2018
 
2017
Pressure pumping equipment
3-5 years
 
$
196,428

 
$
190,211

Drilling rigs and related equipment
3-15 years
 
135,410

 
132,260

Machinery and equipment(a)
7-20 years
 
115,019

 
97,569

Buildings
15-39 years
 
45,138

 
45,992

Vehicles, trucks and trailers(b)
5-10 years
 
62,168

 
54,055

Coil tubing equipment
4-10 years
 
28,068

 
28,053

Land
N/A
 
11,794

 
11,317

Land improvements
15 years or life of lease
 
9,614

 
9,614

Rail improvements
10-20 years
 
8,865

 
5,540

Other property and equipment
3-12 years
 
13,613

 
12,687

 
 
 
626,117

 
587,298

Deposits on equipment and equipment in process of assembly
 
 
20,062

 
20,348

 
 
 
646,179

 
607,646

Less: accumulated depreciation(c)
 
 
280,422

 
256,629

Property, plant and equipment, net
 
 
$
365,757

 
$
351,017

a.
Included in machinery and equipment are assets under capital leases totaling $1.8 million and $1.8 million, respectively, at March 31, 2018 and December 31, 2017.
b.
Included in vehicles, trucks and trailers are assets under capital leases totaling $2.0 million and $1.0 million, respectively, at March 31, 2018 and December 31, 2017.
c.
Accumulated depreciation for assets under capital leases totaled $0.8 million and $0.8 million, respectively, at March 31, 2018 and December 31, 2017.

Proceeds from customers for horizontal and directional drilling services equipment damaged or lost down-hole are reflected in revenue with the carrying value of the related equipment charged to cost of service revenues and are reported as cash inflows from investing activities in the statement of cash flows. For the three months ended March 31, 2018 and 2017, proceeds from the sale of equipment damaged or lost down-hole were $0.2 million and $0.3 million, respectively, and gains on sales of equipment damaged or lost down-hole were $0.2 million and $0.2 million, respectively.

A summary of depreciation, depletion, amortization and accretion expense is below (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Depreciation expense(a)
$
24,398

 
$
14,967

Depletion expense
87

 
2

Amortization expense
2,408

 
2,268

Accretion expense
15

 

Depreciation, depletion, amortization and accretion
$
26,908

 
$
17,237

a.
Includes depreciation expense for assets under capital leases totaling $0.1 million and $0.1 million, respectively, for the three months ended March 31, 2018 and 2017.

Deposits on equipment and equipment in process of assembly represents deposits placed with vendors for equipment that is in the process of assembly and purchased equipment that is being outfitted for its intended use. The equipment is not yet placed in service.

15

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7.
Intangible Assets and Goodwill
The Company had the following definite lived intangible assets recorded (in thousands):
 
 
March 31,
 
December 31,
 
 
2018
 
2017
Customer relationships
 
$
35,795

 
$
35,795

Trade names
 
8,793

 
8,793

Less: accumulated amortization - customer relationships
 
(28,359
)
 
(26,172
)
Less: accumulated amortization - trade names
 
(2,497
)
 
(2,277
)
Intangible assets, net
 
$
13,732

 
$
16,139


Amortization expense for intangible assets was $2.4 million and $2.3 million, respectively, for the three months ended March 31, 2018 and 2017. The original life of customer relationships range from 4 to 10 years with a remaining average useful life of 2.6 years. The original life of trade names range from 10 to 20 years with a remaining average useful life of 8.2 years.

Aggregated expected amortization expense for the future periods is expected to be as follows (in thousands):
 
 
Amount
Remainder of 2018
 
$
6,278

2019
 
1,168

2020
 
1,168

2021
 
1,162

2022
 
1,140

Thereafter
 
2,816

 
 
$
13,732


Goodwill was $99.8 million at March 31, 2018 and December 31, 2017. Changes in the goodwill for the year ended December 31, 2017 and the three months ended March 31, 2018 are set forth below (in thousands):
Balance, January 1, 2017
 
$
88,727

Additions - 2017 Stingray Acquisition (Note 3)
 
10,193

Additions - Higher Power Acquisition (Note 3)
 
643

Additions - 5 Star Acquisition (Note 3)
 
248

Balance, December 31, 2017
 
99,811

Additions
 

Balance, March 31, 2018
 
$
99,811



16

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8.
Accrued Expenses and Other Current Liabilities
Accrued expense and other current liabilities included the following (in thousands):
 
 
March 31,
 
December 31,
 
 
2018
 
2017
Deferred revenue
 
15,019

 
15,210

Accrued compensation, benefits and related taxes
 
15,593

 
11,552

Financed insurance premiums
 
3,263

 
4,876

Insurance reserves
 
3,695

 
2,942

State and local taxes payable
 
2,080

 
2,126

Other
 
3,269

 
4,189

Total
 
$
42,919

 
$
40,895


Financed insurance premiums are due in monthly installments, are unsecured and mature within the twelve month period following the close of the year. As of March 31, 2018 and December 31, 2017, the applicable interest rate associated with financed insurance premiums was 2.75%.
9.
Debt
Mammoth Credit Facility

On November 25, 2014, Mammoth entered into a revolving credit and security agreement with a syndicate of banks that provides for maximum borrowings of $170 million. The facility, as amended in connection with the IPO, matures on November 25, 2019. Borrowings under this facility are secured by the assets of Mammoth, inclusive of the subsidiary companies. The maximum availability of the facility is subject to a borrowing base calculation prepared monthly. Concurrent with the execution of the facility, the initial advance was used to repay all the debt of the Company then outstanding. Interest is payable monthly at a base rate set by the lead institution’s commercial lending group plus an applicable margin. Additionally, at the Company's request, outstanding balances are permitted to be converted to LIBOR rate plus applicable margin tranches at set increments of $0.5 million. The LIBOR rate option allows the Company to select interest periods from one, two, three or six months. The applicable margin for either the base rate or the LIBOR rate option can vary from 1.5% to 3.0%, based upon a calculation of the excess availability of the line as a percentage of the maximum credit limit. The deferred loan costs associated with this facility are classified in other non-current assets. The weighted average interest rate for borrowings outstanding under the credit facility was 4.49% as of March 31, 2018.

At March 31, 2018, there were outstanding borrowings under the credit facility of $39.0 million, leaving an aggregate of $123.7 million of borrowing capacity under the facility, after giving effect to $6.5 million of outstanding letters of credit. At December 31, 2017, there were outstanding borrowings under the credit facility of $99.9 million, leaving an aggregate of $62.8 million of borrowing capacity under the facility, after giving effect to $6.5 million of outstanding letters of credit.

The Mammoth facility also contains various customary affirmative and restrictive covenants. Among the various covenants are specifically identified financial covenants placing requirements of a minimum interest coverage ratio (3.0 to 1.0), maximum leverage ratio (4.0 to 1.0), and minimum availability ($10 million). As of March 31, 2018 and December 31, 2017, the Company was in compliance with its covenants under the facility.

Sturgeon Credit Facility

On June 30, 2015, Sturgeon entered in to a three-year $25.0 million revolving line of credit secured by substantially all of the assets of Sturgeon (“the Sturgeon revolver”). Advances under the Sturgeon revolver bore interest at 2% plus the greater of (a) the Base Rate as set by the lender's commercial lending group, (b) the sum of the Federal Funds Open Rate plus one half of one percent and (c) the sum of the Daily LIBOR rate. Additionally, at Sturgeon’s request, advances could be obtained at LIBOR plus 3%. The LIBOR rate option allowed Sturgeon to select interest periods from one, two, three or six month LIBOR futures spot rates. The Sturgeon revolver was terminated on June 6, 2017.


17

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10.
Other Liabilities

Other liabilities included the following (in thousands):
    
 
 
March 31,
 
December 31,
 
 
2018
 
2017
Capital lease obligations
 
$
3,174

 
$
2,015

Equipment financing arrangement
 
1,509

 
1,605

Other
 
500

 
500

Total
 
5,183

 
4,120

Less: Current portion of capital lease and equipment financing obligations included in accrued expenses and other current liabilities
 
(1,184
)
 
(831
)
Total Other Liabilities
 
$
3,999

 
$
3,289


The Company leases vehicles and other equipment under capital leases with varying terms and expiration dates through 2020. The weighted average implied interest rate under our capital leases as of March 31, 2018 and December 31, 2017 was 15.7% and 19.1%, respectively. Additionally, the Company entered into a five-year equipment financing arrangement maturing in 2022 that bears interest at 4.6% as of March 31, 2018. Principal and interest on capital leases and the equipment financing arrangement are paid monthly. Aggregate future payments under the Company's non-cancelable capital leases and equipment financing arrangement as of March 31, 2018 are as follows (in thousands):

2018
$
1,083

2019
1,994

2020
1,105

2021
442

2022
360

Total future minimum payments
4,984

Less interest payments
(301
)
Present value of future minimum payments
$
4,683


11.
Income Taxes
The components of income tax (benefit) expense attributable to the Company for the three months ended March 31, 2018 and 2017, are as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Foreign current income tax expense
 
$
58,047

 
$
585

Foreign deferred income tax benefit
 
(10,120
)
 
(6
)
U.S. current income tax benefit
 
(12
)


U.S. deferred income tax benefit
 
(1,997
)

(3,685
)
Total
 
$
45,918

 
$
(3,106
)

The Company's effective tax rate was 45% and 39%, respectively, for the three months ended March 31, 2018 and 2017. The increase in the effective tax rate is primarily due to a higher tax rate in Puerto Rico, where most of our income was generated during the three months ended March 31, 2018, compared to the United States tax rate. No income was generated in Puerto Rico during the three months ended March 31, 2017. Additionally, the Company's effective tax rate can fluctuate as a result of, among other things, state income taxes, permanent differences and changes in pre-tax income.

A valuation allowance for deferred tax assets is recognized when it is more likely than not that the benefit of deferred tax assets will not be realized. To assess that likelihood, the Company uses estimates and judgments regarding future taxable income, as well as the jurisdiction in which such taxable income is generated, to determine whether a valuation allowance

18

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

is required. During the three months ended March 31, 2018, the Company recorded a change in valuation allowance of $34.4 million related to foreign tax credits that are not expected to be utilized.

On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the “Tax Act”). As a result, the Company recorded a provisional amount for effects of the Tax Act totaling $31.0 million during the fourth quarter of 2017. The Company continues to evaluate the impact of the Tax Act and no revisions were recorded to the provisional amount during the three months ended March 31, 2018. The Company expects to complete its detailed analysis of the effects of the Tax Act no later than the fourth quarter of 2018.

12.
Earnings (Loss) Per Share

Reconciliations of the components of basic and diluted net income (loss) per common share are presented in the table below (in thousands, except per share data):
 
Three Months Ended March 31,
 
2018
 
2017
Basic earnings (loss) per share:
 
 
 
Allocation of earnings:
 
 
 
Net income (loss)
$
55,546

 
$
(4,981
)
Weighted average common shares outstanding
44,650

 
37,500

Basic earnings (loss) per share
$
1.24

 
$
(0.13
)
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
Allocation of earnings (loss):
 
 
 
Net income (loss)
$
55,546

 
$
(4,981
)
Weighted average common shares, including dilutive effect (a)
44,884

 
37,500

Diluted earnings (loss) per share
$
1.24

 
$
(0.13
)
a. 
No incremental shares of potentially dilutive restricted stock awards were included for the three months ended March 31, 2017 as their effect was antidulitive under the treasury stock method.
13.
Equity Based Compensation
Upon formation of certain Operating Entities (including the acquired Stingray Entities), specified members of management (“Specified Members”) were granted the right to receive distributions from their respective Operating Entity, after the contribution member’s unreturned capital balance was recovered (referred to as “Payout” provision). Additionally, non-employee members were included in the award class (“Non-Employee Members”).

On November 24, 2014, the awards were modified in conjunction with the contribution of the Operating Entities to Mammoth. Awards are not granted in limited or general partner units. Agreements are for interest in the distributable earnings of Mammoth Holdings, Mammoth’s majority equity holder.

On the IPO closing date, Mammoth Holdings unreturned capital balance was not fully recovered from its sale of common stock in the IPO. As a result, Payout did not occur and no compensation cost was recorded. Future offerings or sales of common stock to recover outstanding unreturned capital remain not probable.

Payout is expected to occur following the sale by Mammoth Holding's of its shares of the Company's common stock, which is considered not probable until the event occurs. Therefore, for the awards that contained the Payout provision, no compensation cost was recognized as the distribution rights do not vest until Payout is reached. For the Specified Member awards, the unrecognized amount, which represents the fair value of the award as of the modification dates or grant date, was $5.6 million. For the Non-Employees Member awards, the unrecognized cost, which represents the fair value of the awards as of March 31, 2018 was $101.0 million.


19

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

14.
Stock Based Compensation

The 2016 Plan authorizes the Company's Board of Directors or the compensation committee of the Company's Board of Directors to grant restricted stock, restricted stock units, stock appreciation rights, stock options and performance awards. There are 4.5 million shares of common stock reserved for issuance under the 2016 Plan.

Restricted Stock Units

The fair value of restricted stock unit awards was determined based on the fair market value of the Company's common stock on the date of the grant. This value is amortized over the vesting period.

A summary of the status and changes of the unvested shares of restricted stock under the 2016 Plan is presented below.
 
 
Number of Unvested Restricted Shares
 
Weighted Average Grant-Date Fair Value
Unvested shares as of January 1, 2018
 
640,632

 
$
19.44

Granted
 
59,485

 
21.13

Vested
 
(123,076
)
 
21.23

Forfeited
 

 

Unvested shares as of March 31, 2018
 
577,041

 
$
19.21


As of March 31, 2018, there was $9.6 million of total unrecognized compensation cost related to the unvested restricted stock. The cost is expected to be recognized over a weighted average period of approximately 2.0 years.

Included in cost of revenue and selling, general and administrative expenses is stock-based compensation expense of $1.3 million and $0.6 million, respectively, for the three months ended March 31, 2018 and 2017.

15.
Related Party Transactions
Transactions between the subsidiaries of the Company and the following companies are included in Related Party Transactions: Gulfport; Grizzly Oil Sands ULC (“Grizzly”); El Toro Resources LLC (“El Toro”); Cementing and SR Energy (collectively, prior to the 2017 Stingray Acquisition, the “2017 Stingray Companies”); Everest Operations Management LLC (“Everest”); Elk City Yard LLC (“Elk City Yard”); Double Barrel Downhole Technologies LLC (“DBDHT”); Caliber Investment Group LLC (“Caliber”); Dunvegan North Oilfield Services ULC (“Dunvegan”); Predator Drilling LLC (“Predator”); and T&E Flow Services LLC (“T&E”).

Following is a summary of related party transactions (in thousands):
 
 
REVENUES
 
ACCOUNTS RECEIVABLE
 
 
Three Months Ended March 31,
 
At March 31,
At December 31,
 
 
2018
2017
 
2018
2017
Pressure Pumping and Gulfport
(a)
$
38,546

$
31,746

 
$
26,367

$
25,054

Muskie and Gulfport
(b)
11,462

11,541

 
9,509

1,947

Panther Drilling and Gulfport
(c)
56

1,042

 
14

872

Cementing and Gulfport
(d)
2,828


 
2,058

2,255

SR Energy and Gulfport
(e)
6,953


 
7,758

3,348

Panther Drilling and El Toro
(f)
345


 
135


Redback Energy and El Toro
(g)

124




Coil Tubing and El Toro
(h)
360


 
360


Bison Drilling and Predator
(i)


 
83

234

Other Relationships
 

49

 
54

78

 
 
$
60,550

$
44,502

 
$
46,338

$
33,788

a.
Pressure Pumping provides pressure pumping, stimulation and related completion services to Gulfport.
b.
Muskie has agreed to sell and deliver, and Gulfport has agreed to purchase, specified annual and monthly amounts of natural sand proppant, subject to certain exceptions specified in the agreement, and pay certain costs and expenses.

20

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

c.
Panther Drilling performs drilling services for Gulfport pursuant to a master service agreement.
d.
Cementing performs well cementing services for Gulfport.
e.
SR Energy performs rental services for Gulfport.
f.
The contract land and directional drilling segment provides services for El Toro, an entity controlled by Wexford, pursuant to a master service agreement.
g.
Redback Energy performs completion and production services for El Toro pursuant to a master service agreement.
h.
Coil Tubing provides to El Toro services in connection with completion and drilling activities.
i.
Bison Drilling provides equipment rentals to Predator, an entity in which Wexford owns a minority interest.
 
 
COST OF REVENUE
 
ACCOUNTS PAYABLE
 
 
Three Months Ended March 31,
 
At March 31,
At December 31,
 
 
2018
2017
 
2018
2017
Cobra and T&E
(a)
$
1,275

$

 
$
50

$
457

Higher Power and T&E
(a)
509


 
563

3

Panther and DBDHT
(b)

128

 

77

The Company and 2017 Stingray Companies
(c)

237

 


Other
 
8

65

 
8

218

 
 
$
1,792

$
430

 
$
621

$
755

 
 
 
 
 
 
 
 
 
SELLING, GENERAL AND ADMINISTRATIVE COSTS
 
 
 
The Company and Everest
(d)
$
31

$
58

 
$
16

$
19

The Company and Wexford
(e)
183

234

 
109

150

The Company and Caliber
(f)
201


 
58

1

Other
 
14

32

 

2

 
 
$
429

$
324

 
$
183

$
172

 
 
 
 
 
 
 
 
 
CAPITAL EXPENDITURES
 
 
 
Cobra and T&E
(a)
$
374

$

 
$
323

$
66

Higher Power and T&E
(a)
1,198


 
1,101

385

 
 
$
1,572

$

 
$
1,424

$
451

 
 
 
 
 
$
2,228

$
1,378

a.
Cobra and Higher Power purchase materials and services from T&E, an entity in which a member of management's family owns a minority interest.
b.
Panther rents rotary steerable equipment in connection with its directional drilling services from DBDHT.
c.
Prior to the 2017 Stingray Acquisition, the 2017 Stingray Companies provided certain services to the Company and, from time to time, the 2017 Stingray Companies paid for goods and services on behalf of the Company.
d.
Everest has historically provided office space and certain technical, administrative and payroll services to the Company and the Company has reimbursed Everest in amounts determined by Everest based on estimates of the amount of office space provided and the amount of employees’ time spent performing services for the Company.
e.
Wexford provides certain administrative and analytical services to the Company and, from time to time, the Company pays for goods and services on behalf of Wexford.
f.
Caliber leases office space to Mammoth.
16.
Commitments and Contingencies
Lease Obligations

The Company leases real estate, rail cars and other equipment under long-term operating leases with varying terms and expiration dates through 2062.

Minimum Purchase Commitments

The Company has entered into agreements with suppliers that contain minimum purchase obligations. Failure to purchase the minimum amounts may require the Company to pay shortfall fees. However, the minimum quantities set forth in the agreements are not in excess of currently expected future requirements.

Capital Spend Commitments

The Company has entered into agreements with suppliers to acquire capital equipment.

21

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Aggregate future minimum payments under these obligations in effect at March 31, 2018 are as follows (in thousands):
Year ended December 31:
 
Operating Leases
 
Capital Spend Commitments
 
Minimum Purchase Commitments
Remainder of 2018
 
$
16,556

 
$
20,183

 
$
25,656

2019
 
15,651

 

 
11,436

2020
 
13,474

 

 

2021
 
10,911

 

 

2022
 
8,285

 

 

Thereafter
 
6,340

 

 

 
 
$
71,217

 
$
20,183

 
$
37,092


For the three months ended March 31, 2018 and 2017, the Company recognized rent expense of $4.5 million and $2.0 million, respectively.

The Company has various letters of credit that were issued under the Company's revolving credit agreement which is collateralized by substantially all of the assets of the Company. The letters of credit are categorized below (in thousands):
 
 
March 31,
 
December 31,
 
 
2018
 
2017
Environmental remediation
 
$
3,582

 
$
3,582

Insurance programs
 
2,486

 
2,486

Rail car commitments
 
455

 
455

Total letters of credit
 
$
6,523

 
$
6,523


The Company has insurance coverage for physical partial loss to its assets, employer’s liability, automobile liability, commercial general liability, workers’ compensation and insurance for other specific risks. The Company has also elected in some cases to accept a greater amount of risk through increased deductibles on certain insurance policies. As of March 31, 2018 and December 31, 2017, the policies require a deductible per occurrence of up to $0.3 million. The Company establishes liabilities for the unpaid deductible portion of claims incurred relating to physical loss to its assets, employer's liability, automobile liability, commercial general liability and workers’ compensation based on estimates. As of March 31, 2018 and December 31, 2017, the policies contained an aggregate stop loss of $2.0 million. The Company also self-insures its employee health insurance. The Company has coverage on its self-insurance program in the form of a stop loss of $0.2 million per participant and an aggregate stop-loss of $5.8 million for the calendar year ending December 31, 2018. These estimates may change in the near term as actual claims continue to develop. As of March 31, 2018 and December 31, 2017, accrued insurance claims were $3.7 million and $2.9 million, respectively.

Pursuant to certain customer contracts in our infrastructure services segment, the Company warrants equipment and labor performed under the contracts for a specified period following substantial completion of the work. Generally, the warranty is for one year or less. No liabilities were accrued as of March 31, 2018 and December 31, 2017 and no expense was recognized during the three months ended March 31, 2018 or 2017 related to warranty claims. However, if warranty claims occur, the Company could be required to repair or replace warrantied items, which in most cases are covered by warranties extended from the manufacturer of the equipment. In the event the manufacturer of equipment failed to perform on a warranty obligation or denied a warranty claim made by the Company, the Company could be required to pay for the cost of the repair or replacement.

The Company is routinely involved in state and local tax audits. During 2015, the State of Ohio assessed taxes on the purchase of equipment the Company believes is exempt under state law. The Company appealed the assessment and a hearing was held in 2017. As a result of the hearing, the Company received a decision from the State of Ohio. The Company is appealing the decision and while it is not able to predict the outcome of the appeal, this matter is not expected to have a material adverse effect on the Company's financial position, results of operations or cash flows.


22

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On August 1, 2016, a putative class and collective action lawsuit alleging that Energy Services failed to pay a class of workers overtime in compliance with the Fair Labor Standards Act and Texas law was filed titled Michael Caffey, individually and on behalf of all others similarly situated v. Redback Energy Services LLC in the U.S. District Court for the Western District of Texas. The Company is evaluating the background facts and at this time is not able to predict the outcome of this lawsuit or whether it will have a material impact on the Company’s financial position, results of operations or cash flows.

On January 26, 2017, a collective action lawsuit alleging that Pressure Pumping failed to pay a class of workers in compliance with the Fair Labor Standards Act was filed titled Ryan Crosby vs. Stingray Pressure Pumping, in the United Stated District Court for the Southern District of Ohio Eastern Division. The Company is evaluating the background facts at this time and is not able to predict the outcome of this lawsuit or whether it will have a material impact on the Company’s financial position, results of operations or cash flows.

On June 27, 2017, a complaint alleging negligence, as a result of a motor vehicle accident, was filed titled Donnelle Banks, individually and as parent and next Friend for Leila Ann Hollis, a minor, vs. Redback Coil Tubing LLC and Mammoth Energy Services, Inc. in the District Court of Gregg County, Texas. The Company is evaluating the background facts and at this time is not able to predict the outcome of this lawsuit or whether it will have a material impact on the Company’s financial position, results of operations or cash flows.

The Company is involved in various other legal proceedings in the ordinary course of business. Although the Company cannot predict the outcome of these proceedings, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of these matters could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows.

Defined contribution plan

The Company sponsors a 401(k) defined contribution plan for the benefit of substantially all employees at their date of hire. The plan allows eligible employees to contribute up to 92% of their annual compensation, not to exceed annual limits established by the federal government. The Company makes discretionary matching contributions of up to 3% of an employee’s compensation and may make additional discretionary contributions for eligible employees. For the three months ended March 31, 2018, the Company paid $1.6 million in contributions to the plan. The Company did not make contributions to the plan during the three months ended March 31, 2017.

17.
Reporting Segments
As of March 31, 2018, our revenues, income before income taxes and identifiable assets are primarily attributable to four reportable segments. The Company principally provides energy services in connection with on-shore drilling of oil and natural gas wells for small to large domestic independent oil and natural gas producers and electric infrastructure services to government-funded utilities, private utilities, public investor-owned utilities and co-operative utilities.

The Company's Chief Executive Officer and Chief Financial Officer comprise the Company's Chief Operating Decision Maker function ("CODM"). Segment information is prepared on the same basis that the CODM manages the segments, evaluates the segment financial statements and makes key operating and resource utilization decisions. Segment evaluation is determined on a quantitative basis based on a function of operating income (loss), as well as a qualitative basis, such as nature of the product and service offerings and types of customers.

As of March 31, 2018, the Company’s four reportable segments include pressure pumping services ("Pressure Pumping"), infrastructure services ("Infrastructure"), natural sand proppant services ("Sand") and contract land and directional drilling services ("Drilling").

The pressure pumping services segment provides hydraulic fracturing services primarily in the Utica Shale of Eastern Ohio, Marcellus Shale in Pennsylvania, Permian Basin in Texas and the mid-continent region in Oklahoma. The infrastructure services segment provides electric utility infrastructure services to government-funded utilities, private utilities, public investor-owned utilities and co-operative utilities in Puerto Rico and the northeast, southwest and midwest portions of the United States. The sand segment mines, processes and sells sand for use in hydraulic fracturing. The sand segment primarily services the Utica Shale, Permian Basin, SCOOP, STACK and Montney Shale in British

23

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Columbia and Alberta, Canada. The contract land and directional drilling services segment provides vertical, horizontal and directional drilling services in the Permian Basin in West Texas.

The Company also provides coil tubing services, pressure control services, flowback services, cementing services, equipment rental services and remote accommodation services. The businesses that provide these services are distinct operating segments, which the CODM reviews independently when making key operating and resource utilization decisions. None of these operating segments meet the quantitative thresholds of a reporting segment and do not meet the aggregation criteria set forth in ASC 280 Segment Reporting. Therefore, results for these operating segments are included in the column labeled "All Other" in the tables below. Additionally, assets for corporate activities, which primarily include cash and cash equivalents, inter-segment accounts receivable, prepaid insurance and certain property and equipment, are included in the All Other column. Although Mammoth LLC, which holds these corporate assets, meets one of the quantitative thresholds of a reporting segment, it does not engage in business activities from which it may earn revenues and its results are not regularly reviewed by the Company's CODM when making key operating and resource utilization decisions. Therefore, the Company does not include it as a reportable segment.

Sales from one segment to another are generally priced at estimated equivalent commercial selling prices. Total revenue and Total cost of revenue amounts included in the Eliminations column in the following tables include inter-segment transactions conducted between segments. Receivables due for sales from one segment to another and for corporate allocations to each segment are included in the Eliminations column for Total assets in the following tables. All transactions conducted between segments are eliminated in consolidation. Transactions conducted by companies within the same reporting segment are eliminated within each reporting segment. The following tables set forth certain financial information with respect to the Company’s reportable segments (in thousands):
Three months ended March 31, 2018
Pressure Pumping
Infrastructure
Sand
Drilling
All Other
Eliminations
Total
Revenue from external customers
$
96,579

$
325,459

$
36,503

$
15,228

$
20,480

$

$
494,249

Intersegment revenues
4,559


14,512

2

2,415

(21,488
)

Total revenue
101,138

325,459

51,015

15,230

22,895

(21,488
)
494,249

Cost of revenue, exclusive of depreciation, depletion, amortization and accretion
66,612

194,076

33,330

14,475

17,608


326,101

Intersegment cost of revenues
15,402

1,791

4,286

162

105

(21,746
)

Total cost of revenue
82,014

195,867

37,616

14,637

17,713

(21,746
)
326,101

Selling, general and administrative
2,663

31,851

1,644

1,253

1,100


38,511

Depreciation, depletion, amortization and accretion
13,986

2,407

2,316

4,355

3,844


26,908

Operating income (loss)
2,475

95,334

9,439

(5,015
)
238

258

102,729

Interest expense
504

76

80

395

182


1,237

Other expense
12

2

(13
)
40

(13
)

28

Income (loss) before income taxes
$
1,959

$
95,256

$
9,372

$
(5,450
)
$
69

$
258

$
101,464

As of March 31, 2018:
 
 
 
 
 
 
 
Total assets(a)
$
291,070

$
225,922

$
200,068

$
88,821

$
191,523

$
(96,319
)
$
901,085

a.
Total assets included in the All Other column include Mammoth LLC corporate assets totaling $88.1 million, of which $74.4 million are inter-segment accounts receivable which are eliminated in consolidation.


24

MAMMOTH ENERGY SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended March 31, 2017
Pressure Pumping
Infrastructure
Sand
Drilling
All Other
Eliminations
Total
Revenue from external customers
$
40,453

$

$
14,912

$
10,751

$
8,850

$

$
74,966

Intersegment revenues
187


685



(872
)

Total revenue
40,640


15,597

10,751

8,850

(872
)
74,966

Cost of revenue, exclusive of depreciation, depletion, amortization and accretion
28,707

86

12,608

10,953

6,144


58,498

Intersegment cost of revenues
685


187



(872
)

Total cost of revenue
29,392

86

12,795

10,953

6,144

(872
)
58,498

Selling, general and administrative
1,777

48

2,058

1,293

1,561


6,737

Depreciation, depletion, amortization and accretion
9,158


1,363

4,968

1,748


17,237

Operating income (loss)
313

(134
)
(619
)
(6,463
)
(603
)

(7,506
)
Interest expense
128


133

217

(81
)

397

Other expense
3


14

164

3


184

Income (loss) before income taxes
$
182

$
(134
)
$
(766
)
$
(6,844
)
$
(525
)
$

$
(8,087
)
As of March 31, 2017:
 
 
 
 
 
 
 
Total assets
$
229,231

$

$
131,437

$
97,839

$
172,005

$
(115,089
)
$
515,423

a.
Total assets included in the All Other column include Mammoth LLC corporate assets totaling $106.4 million, of which $94.1 million are inter-segment accounts receivable which are eliminated in consolidation.
18.
Subsequent Events
Subsequent to March 31, 2018, the Company entered into rail car, property and equipment lease agreements with aggregate commitments of $12.0 million.

Subsequent to March 31, 2018, the Company ordered additional capital equipment with aggregate commitments of $20.1 million and additional coil tubing string totaling $3.7 million.

Subsequent to March 31, 2018, subsidiaries in the Company's infrastructure segment entered into air charter agreements with aggregate commitments of $6.1 million, housing service agreements with aggregate commitments of $3.8 million and a medical service agreement with aggregate commitments of $0.2 million for services in Puerto Rico.





25


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the unaudited condensed consol