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 JUNE 30, 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 August 3, 2018, there were 44,755,678 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 industry terms used in this report:
Acidizing
To pump acid into a wellbore to improve a well's productivity or injectivity.
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.

i


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.
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.

ii


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.

iii


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 quarterly 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 quarterly 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.



iv

MAMMOTH ENERGY SERVICES, INC.



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

MAMMOTH ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
ASSETS
 
June 30,
 
December 31,
 
 
2018
 
2017
CURRENT ASSETS
 
(in thousands)
Cash and cash equivalents
 
$
10,702

 
$
5,637

Accounts receivable, net
 
312,850

 
243,746

Receivables from related parties
 
30,674

 
33,788

Inventories
 
12,717

 
17,814

Prepaid expenses
 
13,811

 
12,552

Other current assets
 
816

 
886

Total current assets
 
381,570

 
314,423

 
 
 
 
 
Property, plant and equipment, net
 
423,315

 
351,017

Sand reserves
 
73,759

 
74,769

Intangible assets, net - customer relationships
 
6,204

 
9,623

Intangible assets, net - trade names
 
6,726

 
6,516

Goodwill
 
101,511

 
99,811

Deferred income tax asset
 
31,892

 
6,739

Other non-current assets
 
4,146

 
4,345

Total assets
 
$
1,029,123

 
$
867,243

LIABILITIES AND EQUITY
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
Accounts payable
 
$
177,353

 
$
141,306

Payables to related parties
 
1,916

 
1,378

Accrued expenses and other current liabilities
 
54,701

 
40,895

Income taxes payable
 
131,210

 
36,409

Total current liabilities
 
365,180

 
219,988

 
 
 
 
 
Long-term debt
 

 
99,900

Deferred income tax liabilities
 
31,036

 
34,147

Asset retirement obligation
 
3,138

 
2,123

Other liabilities
 
4,100

 
3,289

Total liabilities
 
403,454

 
359,447

 
 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 18)
 

 

 
 
 
 

EQUITY
 
 
 

Equity:
 
 
 
 
Common stock, $0.01 par value, 200,000,000 shares authorized, 44,752,765 and 44,589,306 issued and outstanding at June 30, 2018 and December 31, 2017, respectively
 
448

 
446

Additional paid in capital
 
528,421

 
508,010

Retained earnings
 
100,247

 
2,001

Accumulated other comprehensive loss
 
(3,447
)
 
(2,661
)
Total equity
 
625,669

 
507,796

Total liabilities and equity
 
$
1,029,123

 
$
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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
REVENUE
(in thousands, except per share amounts)
Services revenue
$
455,545

 
$
29,659

 
$
864,204

 
$
56,751

Services revenue - related parties
40,611

 
44,603

 
89,699

 
77,565

Product revenue
27,708

 
10,395

 
52,748

 
13,767

Product revenue - related parties
9,730

 
13,605

 
21,192

 
25,145

Total revenue
533,594

 
98,262

 
1,027,843

 
173,228

 
 
 
 
 
 
 
 
COST AND EXPENSES
 
 
 
 
 
 
 
Services cost of revenue (exclusive of depreciation, depletion, amortization and accretion of $26,898, $51,473, $17,651 and $33,489, respectively, for the three and six months ended June 30, 2018 and three and six months ended June 30, 2017)
302,283

 
57,104

 
593,262

 
102,565

Services cost of revenue - related parties (exclusive of depreciation, depletion, amortization and accretion of $0, $0, $0 and $0, respectively, for the three and six months ended June 30, 2018 and three and six months ended June 30, 2017)
2,428

 
262

 
4,220

 
692

Product cost of revenue (exclusive of depreciation, depletion, amortization and accretion of $3,879, $6,193, $2,204 and $3,566, respectively, for the three and six months ended June 30, 2018 and three and six months ended June 30, 2017)
35,117

 
19,974

 
68,447

 
32,581

Selling, general and administrative (Note 12)
64,595

 
7,393

 
102,677

 
13,806

Selling, general and administrative - related parties
532

 
307

 
961

 
631

Depreciation, depletion, amortization and accretion
30,795

 
19,893

 
57,703

 
37,130

Impairment of long-lived assets
187

 

 
187

 

Total cost and expenses
435,937

 
104,933

 
827,457

 
187,405

Operating income (loss)
97,657

 
(6,671
)
 
200,386

 
(14,177
)
 
 
 
 
 
 
 
 
OTHER (EXPENSE) INCOME
 
 
 
 
 
 
 
Interest expense, net
(959
)
 
(1,112
)
 
(2,196
)
 
(1,509
)
Bargain purchase gain, net of tax

 
4,012

 

 
4,012

Other, net
(486
)
 
(203
)
 
(514
)
 
(387
)
Total other (expense) income
(1,445
)
 
2,697

 
(2,710
)
 
2,116

Income (loss) before income taxes
96,212

 
(3,974
)
 
197,676

 
(12,061
)
Provision (benefit) for income taxes
53,512

 
(2,804
)
 
99,430

 
(5,910
)
Net income (loss)
$
42,700

 
$
(1,170
)
 
$
98,246

 
$
(6,151
)
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax of $86, $272, $434 and $454, respectively, for the three and six months ended June 30, 2018 and three and six months ended June 30, 2017
(325
)
 
181

 
(786
)
 
409

Comprehensive income (loss)
$
42,375

 
$
(989
)
 
$
97,460

 
$
(5,742
)
 
 
 
 
 
 
 
 
Net income (loss) per share (basic) (Note 14)
$
0.95

 
$
(0.03
)
 
$
2.20

 
$
(0.16
)
Net income (loss) per share (diluted) (Note 14)
$
0.95

 
$
(0.03
)
 
$
2.18

 
$
(0.16
)
Weighted average number of shares outstanding (basic) (Note 14)
44,737

 
39,500

 
44,700

 
38,506

Weighted average number of shares outstanding (diluted) (Note 14)
45,059

 
39,500

 
44,977

 
38,506

 
 
 
 
 
 
 
 
 
 
 
 
 








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
)
Stock 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 (Note 15)




17,487


17,487

Stock based compensation
164

2



2,924


2,926

Net income



98,246



98,246

Other comprehensive loss




(786
)
(786
)
Balance at June 30, 2018
44,753

$
448

$

$
100,247

$
528,421

$
(3,447
)
$
625,669








































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)


 
Six Months Ended June 30,
 
2018
 
2017
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
98,246

 
$
(6,151
)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
 
 
 
Equity based compensation (Note 15)
17,487

 

Stock based compensation
2,916

 
1,620

Depreciation, depletion, accretion and amortization
57,703

 
37,130

Amortization of coil tubing strings
1,120

 
1,046

Amortization of debt origination costs
199

 
199

Bad debt expense
53,790

 
19

(Gain) loss on disposal of property and equipment
(128
)
 
127

Gain on bargain purchase

 
(4,012
)
Impairment of long-lived assets
187

 

Deferred income taxes
(27,906
)
 
(6,529
)
Changes in assets and liabilities, net of acquisitions of businesses:
 
 
 
Accounts receivable, net
(122,908
)
 
(4,793
)
Receivables from related parties
3,114

 
(12,995
)
Inventories
4,156

 
(4,932
)
Prepaid expenses and other assets
(1,195
)
 
1,528

Accounts payable
34,186

 
20,557

Payables to related parties
538

 
(83
)
Accrued expenses and other liabilities
10,193

 
1,301

Income taxes payable
94,753

 
(28
)
Net cash provided by operating activities
226,451

 
24,004

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(105,349
)
 
(66,575
)
Purchases of property and equipment from related parties
(3,436
)
 

Business acquisitions
(13,356
)
 
(39,570
)
Proceeds from disposal of property and equipment
898

 
781

Business combination cash acquired (Note 4)

 
2,671

Net cash used in investing activities
(121,243
)
 
(102,693
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Borrowings from lines of credit
52,000

 
79,150

Repayments of lines of credit
(151,900
)
 
(14,150
)
Repayments of equipment financing note
(145
)
 

Repayment of Stingray acquisition long-term debt

 
(7,074
)
Net cash (used in) provided by financing activities
(100,045
)
 
57,926

Effect of foreign exchange rate on cash
(98
)
 
73

Net change in cash and cash equivalents
5,065

 
(20,690
)
Cash and cash equivalents at beginning of period
5,637

 
29,239

Cash and cash equivalents at end of period
$
10,702

 
$
8,549

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
2,543

 
$
1,086

Cash paid for income taxes
$
32,584

 
$
912

Supplemental disclosure of non-cash transactions:
 
 
 
Purchases of property and equipment included in accounts payable and accrued expenses
$
20,897

 
$
7,836

Acquisition of Sturgeon, Stingray Cementing LLC and Stingray Energy Services LLC (Note 4)
$

 
$
23,091

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 company serving both the oil and gas and the electric utility industries in North America and U.S. territories. Mammoth's subsidiaries provide a diversified set of drilling and completion services to the exploration and production industry and its infrastructure division provides transmission, distribution and logistics services to various public and privately owned utilities throughout the U.S. and Puerto Rico. 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.

On June 29, 2018, Gulfport and MEH Sub LLC ("MEH Sub"), an entity controlled by Wexford, (collectively, the "Selling Stockholders") completed an underwritten secondary public offering of 4,000,000 shares of the Company’s common stock at a purchase price to the Selling Stockholders of $38.01 per share. The Selling Stockholders granted the underwriters an option to purchase up to an aggregate of 600,000 additional shares of the Company's common stock at the same purchase price. This option was exercised, in part, and on July 30, 2018, the underwriters purchased an additional 385,000 shares of common stock from the Selling Stockholders at the same price per share. The Selling Stockholders received all proceeds from this offering.

At June 30, 2018 and December 31, 2017, Wexford, Gulfport and Rhino beneficially owned the following shares of outstanding common stock of Mammoth Inc.:
 
 
At June 30, 2018
 
At December 31, 2017
 
 
Share Count
 
% Ownership
 
Share Count
 
% Ownership
Wexford
 
22,252,277

 
49.7
%
 
25,009,319

 
56.1
%
Gulfport
 
9,943,645

 
22.2
%
 
11,171,887

 
25.1
%
Rhino
 
104,100

 
0.2
%
 
568,794

 
1.3
%
Outstanding shares owned by related parties
 
32,300,022

 
72.1
%
 
36,750,000

 
82.5
%
Total outstanding
 
44,752,765

 
100.0
%
 
44,589,306

 
100.0
%

Operations

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 natural disasters including hurricanes, ice or other storm-related damage. 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 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

5

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

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, aciziding, equipment rentals, crude oil hauling and remote accommodations.

All of the Company’s operations are in North America and in the Caribbean. 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 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 and the variable interest entity ("VIE") for which the Company is the primary beneficiary. 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 condition of customers changes, 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 a final determination is made regarding 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 six months ended June 30, 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
 
53,790

Deductions for uncollectible receivables written off
 
(1,758
)
Balance, June 30, 2018
 
$
73,769


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 June 30, 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 the allowance for doubtful accounts totaling $53.6 million and $16.0 million, respectively, for the six months ended June 30, 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 $0.2 million and $0.2 million, respectively, for the six months ended June 30, 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 June 30, 2018 and December 31, 2017 and percentages of total revenues derived for the three and six months ended June 30, 2018 and 2017:
 
REVENUES
 
ACCOUNTS RECEIVABLE
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
At June 30,
At December 31,
 
2018
2017
 
2018
2017
 
2018
2017
Customer A(a)
65
%
%
 
65
%
%
 
59
%
56
%
Customer B(b)
9
%
59
%
 
11
%
59
%
 
9
%
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, amounts receivable or payable to related parties, and long-term debt. 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. The fair value of long-term debt approximates its carrying value because the cost of borrowing fluctuates based upon market conditions.

New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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,

7

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

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 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 may have on the Company's consolidated financial statements and results of operations.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Accounting,” which simplifies the accounting for share-based payments granted to non-employees by aligning the accounting with requirements for employee share-based compensation. Upon transition, this ASU requires non-employee awards to be measured at fair value as of the adoption date. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within that fiscal year. Early adoption is permitted. Currently, the Company has not elected to early adopt this ASU and is evaluating the impact it will have on the Company's consolidated financial statements.

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
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Revenue:
 
 
 
 
 
 
 
Pressure pumping services
$
101,406

 
$
50,196

 
$
202,544

 
$
90,836

Infrastructure services
360,250

 
1,709

 
685,709

 
1,709

Natural sand proppant services
52,845

 
24,762

 
103,860

 
40,359

Contract land and directional drilling services
17,210

 
12,472

 
32,440

 
23,223

Other services
20,167

 
10,242

 
43,062

 
19,092

Eliminations
(18,284
)
 
(1,119
)
 
(39,772
)
 
(1,991
)
Total revenue
$
533,594

 
$
98,262

 
$
1,027,843

 
$
173,228


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. Generally, revenue is recognized over time upon the

8

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

completion of each segment of work based upon a completed field ticket, which includes the charges for the services performed, mobilization of the equipment to the location and personnel.

Pursuant to a contract with one of its customers, the Company has agreed to provide that customer with use of two pressure pumping fleets for the period covered by the contract. Under this agreement, performance obligations are satisfied as services are rendered based on the passage of time rather than the completion of each segment of work. The Company has the right to receive consideration from this customer even if circumstances prevent us from performing work. All consideration owed to the Company for services performed during the contractual period is fixed and the right to receive it is unconditional.

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 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 and six months ended June 30, 2018, the Company recognized $0.3 million in revenue 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, including motor rentals, 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, acidizing, equipment rentals, crude oil hauling 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

9

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

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 June 30, 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 unaudited 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 and six months ended June 30, 2018. As of June 30, 2018, the Company had unsatisfied performance obligations totaling $68.5 million, which will be recognized over the next 2.5 years.

4.
Acquisitions

(a) Acquisition of WTL Oil

On May 31, 2018, the Company completed its acquisition of WTL Oil LLC ("WTL") for total consideration of $5.5 million in cash to the sellers plus $0.6 million in consideration to be paid upon completion of certain contractual obligations. As of June 30, 2018, the $0.6 million of contingent consideration is reflected in accrued expenses and other current liabilities on the unaudited condensed consolidated balance sheet. The seller completed these obligations and the Company paid the additional $0.6 million to the seller in July 2018.

The Company used cash on hand and borrowings under its credit facility to fund the acquisition. The acquisition of WTL expanded the Company's service offerings into the crude oil hauling business.

The following table summarizes the fair value of WTL as of May 31, 2018 (in thousands):
 
 
WTL
Property, plant and equipment
 
$
2,960

Identifiable intangible assets - customer relationships(a)
 
930

Identifiable intangible assets - trade name(a)
 
650

Goodwill(b)
 
1,567

Total assets acquired
 
$
6,107

a.
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 10-20 years.
b.
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 the assembled workforce and future profitability expected to arise from the acquired entity.

From the acquisition date through June 30, 2018, WTL provided the following activity (in thousands):
 
 
2018
Revenues
 
$
595

Net income(a)
 
5

a.    Includes depreciation and amortization expense of $0.1 million.

The following table presents unaudited pro forma information as if the acquisition of WTL had occurred as of January 1, 2017 (in thousands):

10

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

 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
Revenues
$
3,354

 
$
1,553

Net income
90

 
62


The Company recognized $0.1 million of transaction related costs during the three months ended June 30, 2018 related to this acquisition.

(b) Acquisition of RTS Energy Services

On June 15, 2018, the Company completed its acquisition of RTS Energy Services LLC ("RTS") for total consideration of $7.6 million in cash to the sellers plus $0.5 million to be paid 90 days after closing subject to contractual conditions. As of June 30, 2018, the $0.5 million of contingent consideration is reflected in accrued expenses and other current liabilities on the unaudited condensed consolidated balance sheet. The Company used cash on hand and borrowings under its credit facility to fund the acquisition. The acquisition of RTS expanded Mammoth's cementing services into the Permian Basin and added acidizing to the Company's service offerings.

The following table summarizes the fair value of RTS as of June 15, 2018 (in thousands):
 
 
RTS
Inventory
 
$
180

Property, plant and equipment
 
7,787

Goodwill(a)
 
133

Total assets acquired
 
$
8,100

a.
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 the assembled workforce and future profitability expected to arise from the acquired entity.

From the acquisition date through June 30, 2018, RTS provided the following activity (in thousands):
 
 
2018
Revenues
 
$
630

Net income(a)
 
7

a.    Includes depreciation expense of $0.1 million.

The following table presents unaudited pro forma information as if the acquisition of RTS had occurred as of January 1, 2017 (in thousands):
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
Revenues
$
10,160

 
$
8,326

Net income (loss)
(848
)
 
653


The Company recognized a nominal amount of transaction related costs during the three months ended June 30, 2018 related to this acquisition.

(c) 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.


11

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 (a)
 
300

Goodwill (b)
 
248

Total assets acquired
 
$
4,851

 
 
 
Long-term debt and other liabilities
 
$
2,413

Total liabilities assumed
 
$
2,413

Net assets acquired
 
$
2,438

a.
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.
b.
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 the assembled workforce and future profitability expected to arise from the acquired entity.
From the acquisition date through June 30, 2018, 5 Star provided the following activity (in thousands):
 
 
2018
 
2017
Revenues(a)
 
$
86,720

 
$
25,216

Net income (b)
 
12,903

 
4,191

a.Includes intercompany revenues of $77.5 million and $16.0 million, respectively, for 2018 and 2017.
b.Includes depreciation and amortization expense of $1.0 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):
 
Six Months Ended June 30, 2017
Revenues
$
6,332

Net loss
(282
)

(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 June 30, 2018, $0.3 million and $0.3 million, respectively, of the contingent consideration are reflected in accrued expenses and other current liabilities and other liabilities on the unaudited condensed consolidated balance sheet. 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.


12

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

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 (a)
 
643

Total assets acquired
 
$
4,000

a.
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 the assembled workforce and future profitability expected to arise from the acquired entity.
From the acquisition date through June 30, 2018, Higher Power provided the following activity (in thousands):
 
 
2018
 
2017
Revenues(a)
 
$
122,734

 
$
39,571

Net income (b)
 
16,205

 
5,127

a.Includes intercompany revenues of $111.4 million and $27.4 million, respectively for 2018 and 2017.
b.Includes depreciation and amortization expense of $2.3 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):
 
Six Months Ended June 30, 2017
Revenues
$
4,481

Net loss
(411
)

(e) Acquisition of Sturgeon

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 unaudited condensed consolidated statements of operations and the unaudited 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.

(f) Acquisition of Chieftain

On March 27, 2017, as amended as of May 24, 2017, the Company entered into a 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

13

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

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.

The following table summarizes the fair value of the Chieftain Acquisition as of May 26, 2017 (in thousands):
 
 
Total
Property, plant and equipment (a)
 
$
23,373

Sand reserves (b)
 
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 (c,d)
 
(6,231
)
Total purchase price
 
$
36,320

a.
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.
b.
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.
c.
Amount reflected in unaudited condensed consolidated statements of comprehensive income (loss) reflected net of income taxes of $2.2 million.
d.
The fair value of the business was determined based on the excess cash flow method, a form of the income approach.
From the acquisition date through June 30, 2018, the Chieftain Assets provided the following activity (in thousands):
 
 
2018
 
2017
Revenues(a)
 
$
35,128

 
$
22,847

Net income(b)
 
10,694

 
5,520

a.Includes intercompany revenues of $9.6 million and $12.3 million, respectively, for 2018 and 2017
b.Includes depreciation, depletion, amortization and accretion of $2.3 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):
 
Six Months Ended June 30, 2017
Revenues
$
1,312

Net loss
(72
)

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.

14

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


(g) Acquisition of Stingray

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, 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.

The following tables summarize the fair values of Cementing and SR Energy as of June 5, 2017 (in thousands):
Consideration attributable to Cementing (a)
 
$
12,975

Consideration attributable to SR Energy (a)
 
12,787

Total consideration transferred
 
$
25,762

a.    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(a)
 
13,061

7,459

 
20,520

Identifiable intangible assets - customer relationships(b)
 

1,140

 
1,140

Identifiable intangible assets - trade names(b)
 
550

270

 
820

Goodwill(c)
 
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 (d)
 
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

a.
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.
b.
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.
c.
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 the assembled workforces and future profitability expected to arise from the acquired entities.
d.
Long-term debt assumed was paid off subsequent to the acquisitions.

15

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

From the acquisition date through June 30, 2018, SR Energy and Cementing provided the following activity (in thousands):
 
2018
 
2017
 
SR Energy
Cementing
 
SR Energy
Cementing
Revenues(a)
$
16,034

$
5,131

 
$
11,572

$
7,500

Net loss(b)
(1,586
)
(806
)
 
(1,626
)
(1,963
)
a.
Includes intercompany revenues of $1.6 million and $0.6 million for SR Energy in 2018 and 2017.
b.
Includes depreciation and amortization expense of $2.8 million and $1.0 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):
 
Six Months Ended June 30, 2017
Revenues
$
18,333

Net loss
(1,612
)

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.

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):
 
 
June 30,
 
December 31,
 
 
2018
 
2017
Supplies
 
$
7,264

 
$
9,437

Raw materials
 
321

 
219

Work in process
 
1,326

 
2,370

Finished goods
 
3,806

 
5,788

Total inventory
 
$
12,717

 
$
17,814



16

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):
 
 
 
June 30,
 
December 31,
 
Useful Life
 
2018
 
2017
Pressure pumping equipment
3-5 years
 
$
199,333

 
$
190,211

Drilling rigs and related equipment
3-15 years
 
137,075

 
132,260

Machinery and equipment(a)
7-20 years
 
140,308

 
97,569

Buildings
15-39 years
 
47,593

 
45,992

Vehicles, trucks and trailers(b)
5-10 years
 
91,680

 
54,055

Coil tubing equipment
4-10 years
 
28,068

 
28,053

Land
N/A
 
14,183

 
11,317

Land improvements
15 years or life of lease
 
9,614

 
9,614

Rail improvements
10-20 years
 
13,101

 
5,540

Other property and equipment
3-12 years
 
15,006

 
12,687

 
 
 
695,961

 
587,298

Deposits on equipment and equipment in process of assembly
 
 
33,349

 
20,348

 
 
 
729,310

 
607,646

Less: accumulated depreciation(c)
 
 
305,995

 
256,629

Property, plant and equipment, net
 
 
$
423,315

 
$
351,017

a.
Included in machinery and equipment are assets under capital leases totaling $1.8 million and $1.8 million, respectively, at June 30, 2018 and December 31, 2017.
b.
Included in vehicles, trucks and trailers are assets under capital leases totaling $3.8 million and $1.0 million, respectively, at June 30, 2018 and December 31, 2017.
c.
Accumulated depreciation for assets under capital leases totaled $0.9 million and $0.8 million, respectively, at June 30, 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 six months ended June 30, 2018 and 2017, proceeds from the sale of equipment damaged or lost down-hole were $0.6 million and $0.3 million, respectively, and gains on sales of equipment damaged or lost down-hole were $0.5 million and $0.2 million, respectively.

A summary of depreciation, depletion, amortization and accretion expense is below (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Depreciation expense(a)
$
27,058

 
$
17,229

 
$
51,456

 
$
32,196

Depletion expense
1,340

 
382

 
1,427

 
384

Amortization expense
2,382

 
2,268

 
4,790

 
4,536

Accretion expense
15

 
14

 
30

 
14

Depreciation, depletion, amortization and accretion
$
30,795

 
$
19,893

 
$
57,703

 
$
37,130

a.
Includes depreciation expense for assets under capital leases totaling $0.4 million and $0.2 million, respectively, for the six months ended June 30, 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.

17

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):
 
 
June 30,
 
December 31,
 
 
2018
 
2017
Customer relationships
 
$
36,725

 
$
35,795

Trade names
 
9,443

 
8,793

Less: accumulated amortization - customer relationships
 
(30,521
)
 
(26,172
)
Less: accumulated amortization - trade names
 
(2,717
)
 
(2,277
)
Intangible assets, net
 
$
12,930

 
$
16,139


Amortization expense for intangible assets was $4.8 million and $4.5 million, respectively, for the six months ended June 30, 2018 and 2017. The original life of customer relationships ranges from 4 to 10 years with a remaining average useful life of 3.9 years. The original life of trade names ranges from 10 to 20 years with a remaining average useful life of 9.1 years.

Aggregated expected amortization expense for the future periods is expected to be as follows (in thousands):
 
 
Amount
Remainder of 2018
 
$
3,969

2019
 
1,293

2020
 
1,293

2021
 
1,288

2022
 
1,266

Thereafter
 
3,821

 
 
$
12,930


Goodwill was $101.5 million and $99.8 million, respectively, at June 30, 2018 and December 31, 2017. Changes in the goodwill for the year ended December 31, 2017 and the six months ended June 30, 2018 are set forth below (in thousands):
Balance, January 1, 2017
 
$
88,727

Additions - 2017 Stingray Acquisition (Note 4)
 
10,193

Additions - Higher Power Acquisition (Note 4)
 
643

Additions - 5 Star Acquisition (Note 4)
 
248

Balance, December 31, 2017
 
99,811

Additions - WTL Acquisition (Note 4)
 
1,567

Additions - RTS Acquisition (Note 4)
 
133

Balance, June 30, 2018
 
$
101,511



18

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):
 
 
June 30,
 
December 31,
 
 
2018
 
2017
Deferred revenue
 
15,100

 
15,210

Accrued compensation, benefits and related taxes
 
19,917

 
11,552

Financed insurance premiums
 
1,638

 
4,876

Insurance reserves
 
4,183

 
2,942

State and local taxes payable
 
8,205

 
2,126

Other
 
5,658

 
4,189

Total
 
$
54,701

 
$
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 June 30, 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, 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.

At June 30, 2018, there were no outstanding borrowings under the credit facility and $162.7 million of available borrowing capacity, 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 June 30, 2018 and December 31, 2017, the Company was in compliance with the financial 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.


19

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

10.
Other Liabilities

Other liabilities included the following (in thousands):
    
 
 
June 30,
 
December 31,
 
 
2018
 
2017
Capital lease obligations
 
$
4,253

 
$
2,015

Equipment financing arrangement
 
1,436

 
1,605

Other
 
250

 
500

Total
 
5,939

 
4,120

Less: Current portion of capital lease and equipment financing obligations included in accrued expenses and other current liabilities
 
(1,839
)
 
(831
)
Total Other Liabilities
 
$
4,100

 
$
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 June 30, 2018 and December 31, 2017 was 14.2% 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 June 30, 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 June 30, 2018 are as follows (in thousands):

2018
$
890

2019
2,593

2020
1,696

2021
664

2022
360

Total future minimum payments
6,203

Less interest payments
(514
)
Present value of future minimum payments
$
5,689


11.
Variable Interest Entity

On April 6, 2018, Dire Wolf Energy Services LLC ("Dire Wolf"), a wholly owned subsidiary of the Company, entered into a Voting Trust Agreement with TVPX Aircraft Solutions Inc. (the "Voting Trustee"). Under the Voting Trust Agreement, Dire Wolf transferred 100% of its membership interest in Cobra Aviation Services LLC ("Cobra Aviation") to the Voting Trustee in exchange for Voting Trust Certificates. Dire Wolf retained the obligation to absorb all expected returns or losses of Cobra Aviation. Prior to the transfer of membership interest to the Voting Trustee, Cobra Aviation was a wholly owned subsidiary of Dire Wolf. Cobra Aviation owns and operates a helicopter primarily for services provided to Cobra Acquisitions, a wholly owned subsidiary of the Company. Dire Wolf entered into the Voting Trust Agreement in order to meet certain registration requirements.

Dire Wolf's voting rights are not proportional to its obligation to absorb expected returns or losses of Cobra Aviation and all of Cobra Aviation's activities are conducted on behalf of Dire Wolf, which has disproportionately fewer voting rights; therefore, Cobra Aviation meets the criteria of a VIE. Cobra Aviation's operational activities are directed by Dire Wolf's officers and Dire Wolf has the option to terminate the Voting Trust Agreement at any time. Therefore, the Company, through Dire Wolf, is considered the primary beneficiary of the VIE and consolidates Cobra Aviation at June 30, 2018.


20

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

12.
Selling, General and Administrative Expense

Selling, general and administrative ("SG&A") expense includes of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Cash expenses:
 
 
 
 
 
 
 
Compensation and benefits
$
10,978

 
$
2,966

 
$
18,677

 
$
5,381

Professional services
2,981

 
1,652

 
5,568

 
3,581

Other(a)
3,935

 
2,015

 
5,542

 
3,880

Total cash SG&A expense
17,894

 
6,633

 
29,787

 
12,842

Non-cash expenses:
 
 
 
 
 
 
 
Bad debt provision
28,263

 
17

 
53,790

 
(25
)
Equity based compensation(b)
17,487

 

 
17,487

 

Stock based compensation
1,483

 
1,050

 
2,574

 
1,620

Total non-cash SG&A expense
47,233

 
1,067

 
73,851

 
1,595

Total SG&A expense
$
65,127

 
$
7,700

 
$
103,638

 
$
14,437

a.
Includes travel-related costs, IT expenses, rent, utilities and other general and administrative-related costs.
b.
Represents compensation expense for non-employee awards, which were issued and are payable by certain affiliates of Wexford (the sponsor level). See Note 15 for additional detail.
13.
Income Taxes
The components of income tax expense (benefit) attributable to the Company for the three and six months ended June 30, 2018 and 2017, are as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Foreign current income tax expense
$
67,665

 
$
21

 
$
125,712

 
$
606

Foreign deferred income tax benefit
(15,266
)
 
(14
)
 
(25,386
)
 
(20
)
U.S. current income tax expense
1,636



 
1,624

 

U.S. deferred income tax benefit
(523
)

(2,811
)
 
(2,520
)
 
(6,496
)
Total
$
53,512

 
$
(2,804
)
 
$
99,430

 
$
(5,910
)

The Company's effective tax rate was 50% and 37%, respectively, for the six months ended June 30, 2018 and 2017. The increase in the effective tax rate is primarily due to the equity based compensation expense recognized during the six months ended June 30, 2018 as well as a higher tax rate in Puerto Rico, where most of our income was generated during the six months ended June 30, 2018, compared to the United States tax rate. No income was generated in Puerto Rico during the six months ended June 30, 2017. Additionally, the Company's effective tax rate can fluctuate as a result of, among other things, discrete items, 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 is required. During the six months ended June 30, 2018, the Company recorded a change in valuation allowance of $9.2 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 six months ended June 30, 2018. The Company expects to complete its detailed analysis of the effects of the Tax Act no later than the fourth quarter of 2018.


21

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

14.
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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Allocation of earnings:
 
 
 
 
 
 
 
Net income (loss)
$
42,700

 
$
(1,170
)
 
$
98,246

 
$
(6,151
)
Weighted average common shares outstanding
44,737

 
39,500

 
44,700

 
38,506

Basic earnings (loss) per share
$
0.95

 
$
(0.03
)
 
$
2.20

 
$
(0.16
)
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Allocation of earnings (loss):
 
 
 
 
 
 
 
Net income (loss)
$
42,700

 
$
(1,170
)
 
$
98,246

 
$
(6,151
)
Weighted average common shares, including dilutive effect (a)
45,059

 
39,500

 
44,977

 
38,506

Diluted earnings (loss) per share
$
0.95

 
$
(0.03
)
 
$
2.18

 
$
(0.16
)
a. 
No incremental shares of potentially dilutive restricted stock awards were included for the three and six months ended June 30, 2017 as their effect was antidulitive under the treasury stock method.

15.
Equity Based Compensation
Upon formation of certain operating entities by Wexford, Gulfport and Rhino, specified members of management (the “Specified Members”) and certain non-employee members (the “Non-Employee Members”) were granted the right to receive distributions from the operating entities after the contribution member’s unreturned capital balance was recovered (referred to as “Payout” provision).

On November 24, 2014, the awards were modified in conjunction with the contribution of the operating entities to Mammoth. These awards were not granted in limited or general partner units. The awards are for interests in the distributable earnings of the members of MEH Sub, Mammoth’s majority equity holder.

On the IPO closing date, the unreturned capital balance of Mammoth's majority equity holder 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.

On June 29, 2018, as part of an underwritten secondary public offering, MEH Sub sold 2,764,400 shares of the Company’s common stock at a purchase price to MEH Sub of $38.01 per share. MEH Sub received the proceeds from this offering. As a result, a portion of the Non-Employee Member awards reached Payout. During the three months ended June 30, 2018, the Company recognized equity compensation expense totaling $17.5 million related to these non-employee awards. These awards are at the sponsor level and this transaction had no dilutive impact or cash impact to the Company.

Payout for the remaining awards is expected to occur following additional sales by MEH Sub of its shares of the Company's common stock, which is considered not probable until the event occurs. 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-Employee Member awards, the unrecognized amount, which represents the fair value of the awards as of June 30, 2018 was $43.1 million.

16.
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.


22

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

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
 
93,556

 
26.83

Vested
 
(149,098
)
 
21.29

Forfeited
 

 

Unvested shares as of June 30, 2018
 
585,090

 
$
21.07


As of June 30, 2018, there was $9.2 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 1.8 years.

Included in cost of revenue and selling, general and administrative expenses is stock based compensation expense of $1.7 million and $1.1 million, respectively, for the three months ended June 30, 2018 and 2017 and $2.9 million and $1.6 million, respectively, for the six months ended June 30, 2018 and 2017.

17.
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 June 30,
 
Six Months Ended June 30,
 
At June 30,
At December 31,
 
 
2018
2017
 
2018
2017
 
2018
2017
Pressure Pumping and Gulfport
(a)
$
33,831

$
41,100

 
$
72,377

$
72,845

 
$
20,127

$
25,054

Muskie and Gulfport
(b)
9,730

13,605

 
21,192

25,145

 
4,428

1,947

Panther Drilling and Gulfport
(c)

952

 
56

1,994

 
12

872

Cementing and Gulfport
(d)
2,048

903

 
4,876

903

 
1,739

2,255

SR Energy and Gulfport
(e)
4,626

1,565

 
11,579

1,565

 
4,292

3,348

Panther Drilling and El Toro
(f)


 
345


 


Redback Energy and El Toro
(g)
92

34

 
92

158

 


Coil Tubing and El Toro
(h)


 
360


 
(2
)

Bison Drilling and Predator
(i)


 


 

234

Other Relationships
 
14

49

 
14

100

 
78

78

 
 
$
50,341

$
58,208

 
$
110,891

$
102,710

 
$
30,674

$
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.
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.
Panther 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.

23

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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
At June 30,
At December 31,
 
 
2018
2017
 
2018
2017
 
2018