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, 2019
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
 (405) 608-6007
73134
(Address of principal executive offices)
 (Registrant’s telephone number, including area code)
(Zip Code)
 
 
 
Title of each class of securities
Name of each exchange on which registered
Ticker Symbol
Common Stock, par value $0.01 per share
The Nasdaq Global Select Market
TUSK
______________________________

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 every Interactive Data File required to be submitted 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 such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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
 
o

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. ¨   

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 July 31, 2019, there were 45,004,795 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.
Flowback
The process of allowing fluids to flow from the well following a treatment, either in preparation for a subsequent phase of treatment or in preparation for cleanup and returning the well to production.
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
A term for the different manner by which resources are exploited as compared to the extraction of conventional resources. In unconventional drilling, the wellbore is generally drilled to specific objectives within narrow parameters, often across long, lateral intervals within narrow horizontal formations offering greater contact area with the producing formation. Typically, the well is then hydraulically fractured at multiple stages to optimize production.
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, 2018 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;
outcome of a government investigation relating to the contracts awarded to one of our subsidiaries by the Puerto Rico Electric Power Authority and any resulting litigation;
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, 2018 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,
 
 
2019
 
2018
CURRENT ASSETS
 
(in thousands)
Cash and cash equivalents
 
$
7,245

 
$
67,625

Accounts receivable, net
 
385,626

 
337,460

Receivables from related parties
 
37,400

 
11,164

Inventories
 
22,114

 
21,302

Prepaid expenses
 
10,196

 
11,317

Other current assets
 
699

 
688

Total current assets
 
463,280

 
449,556

 
 
 
 
 
Property, plant and equipment, net
 
408,408

 
436,699

Sand reserves
 
69,762

 
71,708

Operating lease right-of-use assets
 
52,184

 

Intangible assets, net - customer relationships
 
1,563

 
1,711

Intangible assets, net - trade names
 
5,625

 
6,045

Goodwill
 
101,245

 
101,245

Other non-current assets
 
6,843

 
6,127

Total assets
 
$
1,108,910

 
$
1,073,091

LIABILITIES AND EQUITY
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
Accounts payable
 
$
72,671

 
$
68,843

Payables to related parties
 
1,020

 
370

Accrued expenses and other current liabilities
 
42,658

 
59,652

Current operating lease liability
 
17,338

 

Income taxes payable
 
30,780

 
104,958

Total current liabilities
 
164,467

 
233,823

 
 
 
 
 
Long-term debt
 
82,036

 

Deferred income tax liabilities
 
56,580

 
79,309

Long-term operating lease liability
 
34,807

 

Asset retirement obligation
 
3,534

 
3,164

Other liabilities
 
4,270

 
2,743

Total liabilities
 
345,694

 
319,039

 
 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 19)
 

 

 
 
 
 

EQUITY
 
 
 

Equity:
 
 
 
 
Common stock, $0.01 par value, 200,000,000 shares authorized, 45,004,795 and 44,876,649 issued and outstanding at June 30, 2019 and December 31, 2018
 
450

 
449

Additional paid in capital
 
533,151

 
530,919

Retained earnings
 
232,990

 
226,765

Accumulated other comprehensive loss
 
(3,375
)
 
(4,081
)
Total equity
 
763,216

 
754,052

Total liabilities and equity
 
$
1,108,910

 
$
1,073,091

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,
 
2019
 
2018
 
2019
 
2018
REVENUE
(in thousands, except per share amounts)
Services revenue
$
115,760

 
$
455,545

 
$
308,861

 
$
864,204

Services revenue - related parties
36,837

 
40,611

 
80,910

 
89,699

Product revenue
18,362

 
27,708

 
30,671

 
52,748

Product revenue - related parties
10,861

 
9,730

 
23,516

 
21,192

Total revenue
181,820

 
533,594

 
443,958

 
1,027,843

 
 
 
 
 
 
 
 
COST AND EXPENSES
 
 
 
 
 
 
 
Services cost of revenue (exclusive of depreciation, depletion, amortization and accretion of $25,597, $51,280, $26,898 and $51,473, respectively, for the three and six months ended June 30, 2019 and three and six months ended June 30, 2018)
132,688

 
302,283

 
290,794

 
593,262

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, 2019 and three and six months ended June 30, 2018)
2,650

 
2,428

 
3,363

 
4,220

Product cost of revenue (exclusive of depreciation, depletion, amortization and accretion of $4,525, $7,395, $3,879 and $6,193, respectively, for the three and six months ended June 30, 2019 and three and six months ended June 30, 2018)
32,677

 
35,117

 
62,928

 
68,447

Selling, general and administrative (Note 12)
8,796

 
64,595

 
25,698

 
102,677

Selling, general and administrative - related parties (Note 12)
659

 
532

 
1,093

 
961

Depreciation, depletion, amortization and accretion
30,145

 
30,795

 
58,721

 
57,703

Impairment of long-lived assets

 
187

 

 
187

Total cost and expenses
207,615

 
435,937

 
442,597

 
827,457

Operating (loss) income
(25,795
)
 
97,657

 
1,361

 
200,386

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
Interest expense, net
(1,551
)
 
(959
)
 
(2,074
)
 
(2,196
)
Other, net
4,019

 
(486
)
 
28,576

 
(514
)
Total other income (expense)
2,468

 
(1,445
)
 
26,502

 
(2,710
)
(Loss) income before income taxes
(23,327
)
 
96,212

 
27,863

 
197,676

(Benefit) provision for income taxes
(12,438
)
 
53,512

 
10,419

 
99,430

Net (loss) income
$
(10,889
)
 
$
42,700

 
$
17,444

 
$
98,246

 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE (LOSS) INCOME
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax of $92, $182, $86 and $272, respectively, for the three and six months ended June 30, 2019 and three and six months ended June 30, 2018
350

 
(325
)
 
706

 
(786
)
Comprehensive (loss) income
$
(10,539
)
 
$
42,375

 
$
18,150

 
$
97,460

 
 
 
 
 
 
 
 
Net (loss) income per share (basic) (Note 15)
$
(0.24
)
 
$
0.95

 
$
0.39

 
$
2.20

Net (loss) income per share (diluted) (Note 15)
$
(0.24
)
 
$
0.95

 
$
0.39

 
$
2.18

Weighted average number of shares outstanding (basic) (Note 15)
45,003

 
44,737

 
44,966

 
44,700

Weighted average number of shares outstanding (diluted) (Note 15)
45,003

 
45,059

 
45,060

 
44,977

Dividends declared per share
$
0.125

 

 
$
0.25

 












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)

 
Three Months Ended June 30, 2019
 
 
 
 
 
Accumulated
 
 
 
 
 
Additional
Other
 
 
Common Stock
Retained
Paid-In
Comprehensive
 
 
Shares
Amount
Earnings
Capital
Loss
Total
 
(in thousands)
Balance at March 31, 2019
44,877

$
449

$
249,488

$
532,208

$
(3,725
)
$
778,420

Stock based compensation
128

1


943


944

Net loss


(10,889
)


(10,889
)
Cash dividends paid ($0.125 per share)


(5,609
)


(5,609
)
Other comprehensive income




350

350

Balance at June 30, 2019
45,005

$
450

$
232,990

$
533,151

$
(3,375
)
$
763,216

 
 
 
 
 
 
 
 
Three Months Ended June 30, 2018
 
 
 
 
 
Accumulated
 
 
 
 
 
Additional
Other
 
 
Common Stock
Retained
Paid-In
Comprehensive
 
 
Shares
Amount
Earnings
Capital
Loss
Total
 
(in thousands)
Balance at March 31, 2018
44,714

$
447

$
57,547

$
509,265

$
(3,122
)
$
564,137

Equity based compensation



17,487


17,487

Stock based compensation
39

1


1,669


1,670

Net income


42,700



42,700

Other comprehensive loss




(325
)
(325
)
Balance at June 30, 2018
44,753

$
448

$
100,247

$
528,421

$
(3,447
)
$
625,669

 
 
 
 
 
 
 
 
Six Months Ended June 30, 2019
 
 
 
 
 
Accumulated
 
 
 
 
 
Additional
Other
 
 
Common Stock
Retained
Paid-In
Comprehensive
 
 
Shares
Amount
Earnings
Capital
Loss
Total
 
(in thousands)
Balance at December 31, 2018
44,877

$
449

$
226,765

$
530,919

$
(4,081
)
$
754,052

Stock based compensation
128

1


2,232


2,233

Net income


17,444



17,444

Cash dividends paid ($0.25 per share)


(11,219
)


(11,219
)
Other comprehensive income




706

706

Balance at June 30, 2019
45,005

$
450

$
232,990

$
533,151

$
(3,375
)
$
763,216

 
 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
 
 
 
 
Accumulated
 
 
 
 
 
Additional
Other
 
 
Common Stock
Retained
Paid-In
Comprehensive
 
 
Shares
Amount
Earnings
Capital
Loss
Total
 
(in thousands)
Balance at December 31, 2017
44,589

$
446

$
2,001

$
508,010

$
(2,661
)
$
507,796

Equity based compensation



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,
 
2019
 
2018
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
17,444

 
$
98,246

Adjustments to reconcile net income to cash (used in) provided by operating activities:
 
 
 
Equity based compensation (Note 16)

 
17,487

Stock based compensation
2,233

 
2,916

Depreciation, depletion, accretion and amortization
58,721

 
57,703

Amortization of coil tubing strings
1,003

 
1,120

Amortization of debt origination costs
163

 
199

Bad debt expense
266

 
53,790

Loss (gain) on disposal of property and equipment
176

 
(128
)
Impairment of long-lived assets

 
187

Deferred income taxes
(22,911
)
 
(27,906
)
Other
(199
)
 

Changes in assets and liabilities, net of acquisitions of businesses:
 
 
 
Accounts receivable, net
(48,530
)
 
(122,908
)
Receivables from related parties
(26,236
)
 
3,114

Inventories
(1,815
)
 
4,156

Prepaid expenses and other assets
1,115

 
(1,195
)
Accounts payable
7,366

 
34,186

Payables to related parties
650

 
538

Accrued expenses and other liabilities
(17,129
)
 
10,193

Income taxes payable
(74,172
)
 
94,753

Net cash (used in) provided by operating activities
(101,855
)
 
226,451

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(30,085
)
 
(105,349
)
Purchases of property and equipment from related parties
(135
)
 
(3,436
)
Business acquisitions

 
(13,356
)
Contributions to equity investee
(680
)
 

Proceeds from disposal of property and equipment
2,465

 
898

Net cash used in investing activities
(28,435
)
 
(121,243
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Borrowings from lines of credit
108,000

 
52,000

Repayments of lines of credit
(25,964
)
 
(151,900
)
Principal payments on financing leases and equipment financing notes
(992
)
 
(145
)
Dividends paid
(11,219
)
 

Net cash provided by (used in) financing activities
69,825

 
(100,045
)
Effect of foreign exchange rate on cash
85

 
(98
)
Net change in cash and cash equivalents
(60,380
)
 
5,065

Cash and cash equivalents at beginning of period
67,625

 
5,637

Cash and cash equivalents at end of period
$
7,245

 
$
10,702

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
1,830

 
$
2,543

Cash paid for income taxes
$
116,442

 
$
32,584

Supplemental disclosure of non-cash transactions:
 
 
 
Purchases of property and equipment included in accounts payable and accrued expenses
$
2,339

 
$
20,897



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. ("Mammoth Inc." or the "Company"), 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 US territories. Mammoth Inc.'s infrastructure division provides construction, upgrade, maintenance and repair services to various public and private owned utilities. Its oilfield services division provides a diversified set of services to the exploration and production industry including pressure pumping and natural sand and proppant services as well as contract land and directional drilling, coil tubing, flowback, cementing, acidizing, equipment rental, crude oil hauling and remote accommodation services. 

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 Energy Services 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”) 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, 2019 and December 31, 2018, Wexford, Gulfport and Rhino beneficially owned the following shares of outstanding common stock of Mammoth Inc.:
 
 
At June 30, 2019
 
At December 31, 2018
 
 
Share Count
 
% Ownership
 
Share Count
 
% Ownership
Wexford
 
21,992,677

 
48.9
%
 
21,988,473

 
49.0
%
Gulfport
 
9,829,548

 
21.8
%
 
9,826,893

 
21.9
%
Rhino
 

 
%
 
104,100

 
0.2
%
Outstanding shares owned by related parties
 
31,822,225

 
70.7
%
 
31,919,466

 
71.1
%
Total outstanding
 
45,004,795

 
100.0
%
 
44,876,649

 
100.0
%

Operations

The Company's infrastructure services include electric utility contracting services focused on the construction, upgrade, maintenance and repair of transmission and distribution networks. The Company’s infrastructure services also provide storm repair and restoration services in response to natural disasters including hurricanes and ice or other storm-related damage. The Company's pressure pumping services include equipment and personnel used in connection with the

5

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

completion and early production of oil and natural gas wells as well as water transfer services. 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 also provides other services, including contract land and directional drilling, coil tubing, flowback, cementing, aciziding, equipment rentals, crude oil hauling and remote accommodations.

All of the Company’s operations are in North America. During the periods presented in this report, the Company provided its infrastructure services primarily in the northeast, southwest and midwest portions of the United States and in Puerto Rico. The Company’s infrastructure business 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. During the periods presented, the Company has operated 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'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.

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 entities (“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.
 
Accounts Receivable
Accounts receivable include amounts due from customers for services performed or goods sold. 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. Delinquency fees are recognized in other income when chargeable and collectability is reasonably assured.

During the periods presented, the Company provided infrastructure services in Puerto Rico under master services agreements entered into by Cobra Acquisitions LLC ("Cobra"), one of the Company's subsidiaries, with the Puerto Rico Electric Power Authority ("PREPA") to perform repairs to PREPA’s electrical grid as a result of Hurricane Maria. During the three and six months ended June 30, 2019, the Company charged interest on delinquent accounts receivable pursuant to the terms of its agreements with PREPA totaling $3.2 million and $29.0 million, respectively. These amounts are included in other, net on the unaudited condensed consolidated statement of comprehensive income.

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.

6

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

If it is determined that previously reserved amounts are collectible, the Company would decrease the allowance through a credit 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.

Following is a roll forward of the allowance for doubtful accounts for the year ended December 31, 2018 and the six months ended June 30, 2019 (in thousands):

Balance, January 1, 2018
 
$
21,737

Additions (reductions) charged to bad debt expense
 
(14,589
)
Deductions for uncollectible receivables written off
 
(1,950
)
Balance, December 31, 2018
 
5,198

Additions charged to bad debt expense
 
266

Deductions for uncollectible receivables written off
 
(155
)
Balance, June 30, 2019
 
$
5,309


At 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 $16.0 million. During 2018, the Company received payment from PREPA for the amount reserved at December 31, 2017. As a result, the Company reversed the 2017 additions to the allowance for doubtful accounts from PREPA during the year ended December 31, 2018.

Additionally, the Company has made specific reserves consistent with Company policy which resulted in additions to allowance for doubtful accounts totaling $0.3 million and $1.4 million, respectively, for the six months ended June 30, 2019 and year ended December 31, 2018. 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, 2019 and December 31, 2018 and percentages of total revenues derived for the three and six months ended June 30, 2019 and 2018:
 
REVENUES
 
ACCOUNTS RECEIVABLE
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
At June 30,
At December 31,
 
2019
2018
 
2019
2018
 
2019
2018
Customer A(a)
6
%
65
%
 
22
%
65
%
 
61
%
65
%
Customer B(b)
26
%
9
%
 
23
%
11
%
 
9
%
3
%
Customer C(c)
5
%
%
 
10
%
%
 
1
%
2
%
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. Accounts receivable for Customer A also includes receivables due for interest charged on delinquent accounts receivable.
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 and other businesses.
c.
Customer C is a third-party customer. Revenues and the related accounts receivable balances earned from Customer C were derived from the Company's pressure pumping services segment and equipment rental business.

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.


7

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

New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02 “Leases (Topic 842)” amending the current accounting for leases. Under the new provisions, all lessees will report a right of use asset and lease liability on the balance sheet for all leases with a term longer than one year, while maintaining substantially similar classifications for financing and operating leases. Lessor accounting remains substantially unchanged with the exception that no leases entered into after the effective date will be classified as leveraged leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within that fiscal year. The Company adopted this ASU effective January 1, 2019 utilizing the transition method permitted by ASU No. 2018-11 "Leases (Topic 842): Targeted Improvements", issued in August 2018, which permits an entity to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption with no adjustment made to the comparative periods presented in the consolidated financial statements. See Note 14 for the impact the adoption of this standard had on the Company's financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which amends current guidance on reporting credit losses on financial instruments. This ASU requires entities to reflect its current estimate of all expected credit losses. The guidance affects most financial assets, including trade accounts receivable. This ASU is effective for fiscal years beginning after December 31, 2019, with early adoption permitted. The Company is currently evaluating the impact this standard may have on its financial statements and related disclosures.

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. The Company adopted this ASU effective January 1, 2019 and estimates the fair value of its non-employee awards (see Note 16) was approximately $18.9 million as of this date.

3.
Revenues
The Company's primary revenue streams include infrastructure services, pressure pumping services, natural sand proppant services and other services, which includes contract land and directional drilling, coil tubing, pressure control, flowback, cementing, acidizing, equipment rentals, crude oil hauling and remote accommodations services. See Note 20 for the Company's revenue disaggregated by type.

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). Generally, the Company accounts for infrastructure services as a single performance obligation satisfied over time. In certain circumstances, the Company supplies materials that are utilized during the jobs as part of the agreement with the customer. The Company accounts for these infrastructure agreements as multiple performance obligations satisfied over time. Revenue is recognized over time as work progresses based on the days completed or as the contract is completed. Under certain customer contracts in our infrastructure services segment, the Company warranties equipment and labor performed for a specified period following substantial completion of the work. 

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 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, consumable supplies and personnel.

Pursuant to a contract with one of its customers, the Company has agreed to provide that customer with use of up to two pressure pumping fleets for the period covered by the contract. Under this agreement, performance obligations are

8

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

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.

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. As of June 30, 2019, the Company had deferred revenue totaling $1.1 million related to shortfall payments. This amount is included in accrued expenses and other current liabilities on the unaudited condensed consolidated balance sheet. 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 six months ended June 30, 2019 and 2018, the Company recognized revenue totaling $1.0 million and $0.3 million, respectively, 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.

Other Services
The Company also provides contract land and directional drilling, coil tubing, pressure control, flowback, cementing, 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 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.


9

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

Contract Balances
Following is a rollforward of the Company's contract liabilities (in thousands):
Balance, January 1, 2018
 
$
15,000

Deduction for recognition of revenue
 
(15,000
)
Increase for deferral of shortfall payments
 
4,246

Increase for deferral of customer prepayments
 
58

Balance, December 31, 2018
 
4,304

Deduction for recognition of revenue
 
(2,054
)
Increase for deferral of shortfall payments
 
153

Increase for deferral of customer prepayments
 
243

Deduction of shortfall payments due to contract renegotiations
 
(1,350
)
Balance, June 30, 2019
 
$
1,296


The Company did not have any contract assets as of June 30, 2019 or December 31, 2018.

Performance Obligations
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, 2019 and 2018. As of June 30, 2019, the Company had unsatisfied performance obligations totaling $114.8 million, which will be recognized over the next 2.4 years.

4.
Acquisitions

Acquisition of Air Rescue Systems and Brim Equipment Assets
On December 21, 2018, Cobra Aviation Services LLC ("Cobra Aviation"), a variable interest entity of the Company, completed a series of transactions that provided for an expansion of its aviation service business. These transactions include (i) the acquisition of all outstanding equity interests in Air Rescue Systems Corporation ("ARS"), (ii) the purchase of two commercial helicopters, spare parts, support equipment and aircraft documents from Brim Equipment Leasing, Inc. ("Brim Equipment") (the "Brim Equipment Assets") and (iii) the formation of a joint venture between Cobra Aviation and Wexford Partners Investment Co. LLC ("Wexford Investment"), a related party, under the name of Brim Acquisitions LLC ("Brim Acquisitions"), which acquired all outstanding equity interest in Brim Equipment. Cobra Aviation owns a 49% economic interest and Wexford Investment owns a 51% economic interest in Brim Acquisitions, and each member contributed its pro rata portion of Brim Acquisitions' initial capital of $2.0 million.

The acquisition of ARS qualifies under FASB ASC 805, Business Combinations, as a business combination. The purchase of the Brim Equipment Assets was negotiated and funded as part of the acquisition. Therefore, the purchase of the Brim Equipment Assets also qualifies as a business combination under ASC 805. Cobra Aviation is able to exercise significant influence over certain aspects of Brim Acquisitions' activities, but is a minority owner and does not have controlling financial interest. As a result, Cobra Aviation's investment in Brim Acquisitions is accounted for as an equity method investment under FASB ASC 323, Investments-Equity Method and Joint Ventures. See Note 8 for additional information on our investment in Brim Acquisitions.

Total consideration paid for ARS was $2.4 million in cash to the sellers plus $0.3 million in consideration to be paid upon completion of certain contractual obligations. Total consideration paid for the Brim Equipment Assets was $4.2 million. The Company used cash on hand to fund the acquisitions.


10

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

The following table summarizes the fair value of ARS and the Brim Equipment Assets as of December 21, 2018 (in thousands):
 
ARS
 
Brim Equipment Assets
Accounts receivable
$
146

 
$

Property, plant and equipment
1,702

 
1,990

Identifiable intangible assets - trade name(a)
120

 

Goodwill(b)
694

 
2,243

Other non-current assets
5

 

Total assets acquired
$
2,667

 
$
4,233

a.
Trade name was valued using a "Relief-from-Royalty" method and will be amortized over 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 assembled workforces and future profitability expected to arise from the acquired entity.

From the acquisition date through December 31, 2018 and for the six months ended June 30, 2019, ARS and the Brim Equipment Assets provided the following activity (in thousands):
 
2019
 
2018
 
ARS
 
Brim Equipment Assets
 
ARS
 
Brim Equipment Assets
Revenues
$
906

 
$
1,912

 
$

 
$

Net loss(a)
(238
)
 
(885
)
 
(25
)
 

a.    Includes depreciation expense of $0.1 million and $0.02 million, respectively, for ARS for the 2019 and 2018 and $0.2 million for the Brim Equipment Assets for 2019.

The following table presents unaudited pro forma information as if the ARS and the Brim Equipment Assets acquisitions had occurred as of January 1, 2018 (in thousands):
 
Six Months Ended June 30, 2018
 
ARS
 
Brim Equipment Assets
Revenues
$
1,473

 
$
1,971

Net income
141

 
1,059


The Company recognized $0.3 million of transaction related costs during the year ended December 31, 2018 related to these acquisitions.

Acquisition of WTL Oil LLC

On May 31, 2018, the Company completed its acquisition of WTL Oil LLC ("WTL") for total consideration of $6.1 million. 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):

11

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

 
 
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 December 31, 2018 and for the six months ended June 30, 2019, WTL provided the following activity (in thousands):
 
2019
 
2018
Revenues
$
6,210

 
$
7,511

Net loss(a)
(808
)
 
(149
)
a.    Includes depreciation and amortization expense of $1.1 million and $1.0 million, respectively, for the 2019 and 2018 periods.

The following table presents unaudited pro forma information as if the acquisition of WTL had occurred as of January 1, 2018 (in thousands):
 
Six Months Ended June 30, 2018
Revenues
$
3,354

Net income
90


The Company recognized $0.1 million of transaction related costs during the year ended December 31, 2018 related to this acquisition.

Acquisition of RTS Energy Services LLC

On June 15, 2018, the Company completed its acquisition of RTS Energy Services LLC ("RTS") for total consideration of $8.1 million. 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 December 31, 2018 and for the six months ended June 30, 2019, RTS provided the following activity (in thousands):

12

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

 
2019
 
2018
Revenues
$
2,286

 
$
6,682

Net loss(a)
(4,134
)
 
(3,210
)
a.    Includes depreciation expense of $1.1 million and $0.9 million, respectively, for the 2019 and 2018 periods.

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

Net loss
(848
)

The Company recognized $0.1 million of transaction related costs during the year ended December 31, 2018 related to this acquisition.

5.
Inventories
Inventories consist 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,
 
 
2019
 
2018
Supplies
 
$
16,912

 
$
12,571

Raw materials
 
344

 
199

Work in process
 
2,338

 
3,273

Finished goods
 
2,520

 
5,259

Total inventories
 
$
22,114

 
$
21,302



13

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
 
2019
 
2018
Assets held and used:
 
 
 
 
 
Pressure pumping equipment
3-5 years
 
$
214,588

 
$
208,968

Drilling rigs and related equipment
3-15 years
 
122,998

 
122,198

Machinery and equipment
7-20 years
 
196,691

 
173,867

Buildings
15-39 years
 
16,887

 
16,887

Vehicles, trucks and trailers
5-10 years
 
134,952

 
132,337

Coil tubing equipment
4-10 years
 
29,846

 
29,128

Land
N/A
 
13,687

 
14,235

Land improvements
15 years or life of lease
 
10,056

 
9,614

Rail improvements
10-20 years
 
13,806

 
13,806

Other property and equipment
3-12 years
 
14,065

 
13,614

 
 
 
767,576

 
734,654

Deposits on equipment and equipment in process of assembly(a)
 
 
8,860

 
16,865

 
 
 
776,436

 
751,519

Less: accumulated depreciation
 
 
390,168

 
337,514

Total assets held and used, net
 
 
386,268

 
414,005

 
 
 
 
 
 
Assets subject to operating leases:
 
 
 
 
 
Buildings
15-30 years
 
30,725

 
29,493

Helicopters
6 years
 
4,937

 
4,937

 
 
 
35,662

 
34,430

Less: accumulated depreciation
 
 
13,522

 
11,736

Total assets subject to operating leases, net
 
 
22,140

 
22,694

 
 
 
 
 
 
Total property, plant and equipment, net
 
 
$
408,408

 
$
436,699

 
 
 
 
 
 
a.
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.

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, 2019 and 2018, proceeds from the sale of equipment damaged or lost down-hole were a nominal amount and $0.6 million, respectively, and gains on sales of equipment damaged or lost down-hole were a nominal amount and $0.5 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,
 
2019
 
2018
 
2019
 
2018
Depreciation expense
$
28,099

 
$
27,058

 
$
56,165

 
$
51,456

Depletion expense
1,734

 
1,340

 
1,946

 
1,427

Amortization expense
284

 
2,382

 
568

 
4,790

Accretion expense
28

 
15

 
42

 
30

Depreciation, depletion, amortization and accretion
$
30,145

 
$
30,795

 
$
58,721

 
$
57,703



14

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,
 
 
2019
 
2018
Customer relationships
 
$
2,255

 
$
2,255

Trade names
 
9,063

 
9,063

Less: accumulated amortization - customer relationships
 
(692
)
 
(544
)
Less: accumulated amortization - trade names
 
(3,438
)
 
(3,018
)
Intangible assets, net
 
$
7,188

 
$
7,756


Amortization expense for intangible assets was $0.6 million and $4.8 million, respectively, for the six months ended June 30, 2019 and 2018. The original life of customer relationships ranges from 6 to 10 years with a remaining average useful life of 6.5 years. The original life of trade names ranges from 10 to 20 years with a remaining average useful life of 8.6 years.

Aggregated expected amortization expense for the future periods is expected to be as follows (in thousands):
 
 
Amount
Remainder of 2019
 
$
567

2020
 
1,135

2021
 
1,129

2022
 
1,108

2023
 
991

Thereafter
 
2,258

 
 
$
7,188


Goodwill was $101.2 million at both June 30, 2019 and December 31, 2018. Changes in the goodwill for the year ended December 31, 2018 and the six months ended June 30, 2019 are set forth below (in thousands):
Balance, January 1, 2018
 
$
99,811

Additions:
 
 
WTL
 
1,567

RTS
 
133

ARS
 
694

Brim Equipment Assets
 
2,243

Impairment
 
(3,203
)
Balance, December 31, 2018
 
101,245

Additions
 

Balance, June 30, 2019
 
$
101,245


During the year ended December 31, 2018, the Company moved Cementing's equipment from the Utica shale to the Permian basin. As a result, the Company recognized impairment on Cementing's intangible assets, including goodwill, non-contractual customer relationships and trade name of $3.2 million, $1.0 million and $0.2 million, respectively.

Cementing's goodwill was measured using an income approach, which provides an estimated fair value based on anticipated cash flows that are discounted using a weighted average cost of capital rate.


15

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

8.
Equity Method Investment
On December 21, 2018, Cobra Aviation and Wexford Investment, a related party, formed a joint venture under the name of Brim Acquisitions to acquire all outstanding equity interest in Brim Equipment for a total purchase price of approximately $1.4 million in cash to the sellers plus $0.6 million in consideration to be paid upon completion of certain contractual obligations. Cobra Aviation owns a 49% economic interest and Wexford Investment owns a 51% economic interest in Brim Acquisitions, and each member contributed its pro rata portion of Brim Acquisitions' initial capital of $2.0 million. Brim Acquisitions, through Brim Equipment, owns one commercial helicopter and leases five commercial helicopters for operations, which it uses to provide a variety of services, including short haul, aerial ignition, hoist operations, aerial photography, fire suppression, construction services, animal/capture/survey, search and rescue, airborne law enforcement, power line construction, precision long line operations, pipeline construction and survey, mineral and seismic exploration, and aerial seeding and fertilization.

The Company uses the equity method of accounting to account for its investment in Brim Acquisitions, which had a carrying value of approximately $1.8 million at June 30, 2019. The investment is included in other non-current assets on the unaudited condensed consolidated balance sheets. The Company recorded an equity method adjustment to its investment of $0.2 million for its share of Brim Acquisitions' income for the six months ended June 30, 2019, which is included in other, net on the unaudited condensed consolidated statements of comprehensive income. The Company made additional investments totaling $0.7 million during the six months ended June 30, 2019.

9.
Accrued Expenses and Other Current Liabilities
Accrued expense and other current liabilities included the following (in thousands):
 
 
June 30,
 
December 31,
 
 
2019
 
2018
Accrued compensation, benefits and related taxes
 
$
9,957

 
$
20,898

State and local taxes payable
 
17,057

 
18,687

Insurance reserves
 
4,413

 
4,678

Deferred revenue
 
1,296

 
4,304

Financed insurance premiums
 
4,565

 
6,761

Other
 
5,370

 
4,324

Total
 
$
42,658

 
$
59,652


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, 2019 and December 31, 2018, the applicable interest rate associated with financed insurance premiums was 3.45%.
10.
Debt
On October 19, 2018, Mammoth Inc. and certain of its direct and indirect subsidiaries, as borrowers, entered into an amended and restated revolving credit and security agreement with the lenders party thereto and PNC Bank, National Association, as a lender and as administrative agent for the lenders, which amended and restated the Company's prior revolving credit and security agreement dated as of November 25, 2014, as amended prior to October 19, 2018. The facility matures on October 19, 2023. Borrowings under this facility are secured by the assets of Mammoth Inc., inclusive of certain of the subsidiary companies. The maximum availability of the facility is subject to a borrowing base calculation prepared monthly.

Outstanding borrowings under this facility bear interest at a per annum rate elected by Mammoth Inc. that is equal to an alternate base rate or LIBOR, in each case plus the applicable margin. The applicable margin ranges from 1.00% to 1.50% per annum in the case of the alternate base rate, and from 2.00% to 2.50% per annum in the case of LIBOR. The applicable margin depends on the amount of excess availability under this facility.

At June 30, 2019, there were outstanding borrowings under the amended and restated revolving credit facility of $82.0 million and $93.5 million of available borrowing capacity, after giving effect to $8.7 million of outstanding letters of credit. At December 31, 2018, there were no outstanding borrowings under the amended and restated revolving credit

16

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

facility and $175.8 million of borrowing capacity under the facility, after giving effect to $8.4 million of outstanding letters of credit.

The Mammoth Inc. 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, 2019 and December 31, 2018, the Company was in compliance with the financial covenants under the facility.

11.
Variable Interest Entities

Dire Wolf Energy Services LLC ("Dire Wolf") and Predator Aviation LLC ("Predator Aviation"), wholly owned subsidiaries of the Company, are party to Voting Trust Agreements with TVPX Aircraft Solutions Inc. (the "Voting Trustee"). Under the Voting Trust Agreements, Dire Wolf transferred 100% of its membership interest in Cobra Aviation and Predator Aviation transferred 100% of its membership interest in Leopard Aviation LLC ("Leopard") to the respective Voting Trustees in exchange for Voting Trust Certificates. Dire Wolf and Predator Aviation retained the obligation to absorb all expected returns or losses of Cobra Aviation and Leopard. Prior to the transfer of the membership interest to the Voting Trustee, Cobra Aviation was a wholly owned subsidiary of Dire Wolf and Leopard was a wholly owned subsidiary of Predator Aviation. Cobra Aviation owns three helicopters and support equipment, 100% of the equity interest in ARS and 49% of the equity interest in Brim Acquisitions. Leopard owns one helicopter. Dire Wolf and Predator Aviation entered into the Voting Trust Agreements in order to meet certain registration requirements.

Dire Wolf's and Predator Aviation's voting rights are not proportional to their respective obligations to absorb expected returns or losses of Cobra Aviation and Leopard, respectively, and all of Cobra Aviation's and Leopard's activities are conducted on behalf of Dire Wolf and Predator Aviation, which have disproportionately fewer voting rights; therefore, Cobra Aviation and Leopard meet the criteria of a VIE. Cobra Aviation and Leopard's operational activities are directed by Dire Wolf's and Predator Aviation's officers and Dire Wolf and Predator Aviation have the option to terminate the Voting Trust Agreements at any time. Therefore, the Company, through Dire Wolf and Predator Aviation, is considered the primary beneficiary of the VIEs and consolidates Cobra Aviation and Leopard at June 30, 2019.

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,
 
2019
 
2018
 
2019
 
2018
Cash expenses:
 
 
 
 
 
 
 
Compensation and benefits
$
2,154

 
$
10,978

 
$
11,384

 
$
18,677

Professional services
2,934

 
2,981

 
6,723

 
5,568

Other(a)
3,381

 
3,935

 
6,626

 
5,542

Total cash SG&A expense
8,469

 
17,894

 
24,733

 
29,787

Non-cash expenses:
 
 
 
 
 
 
 
Bad debt provision(b)
262

 
28,263

 
266

 
53,790

Equity based compensation(c)

 
17,487

 

 
17,487

Stock based compensation
724

 
1,483

 
1,792

 
2,574

Total non-cash SG&A expense
986

 
47,233

 
2,058

 
73,851

Total SG&A expense
$
9,455

 
$
65,127

 
$
26,791

 
$
103,638

a.
Includes travel-related costs, IT expenses, rent, utilities and other general and administrative-related costs.
b.
$28.3 million and $53.6 million of the bad debt expense recognized during the three and six months ended June 30, 2018 was subsequently reversed during the third quarter of 2018.
c.
Represents compensation expense for non-employee awards, which were issued and are payable by certain affiliates of Wexford (the sponsor level). See Note 16 for additional detail.


17

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

13.
Income Taxes
The Company's effective tax rate was 37% and 50% for the six months ended June 30, 2019 and 2018, respectively. The effective tax rates for the six months ended June 30, 2019 and 2018 differ from the statutory rate of 21% primarily due to the mix of earnings between the United States and Puerto Rico. During the six months ended June 30, 2019, the Company recorded a benefit related to return to provision adjustments, which was partially offset by changes in the valuation allowance. The majority of the Company's earnings for the periods were derived from Puerto Rico, which has a higher statutory rate compared to the United States. The Company recorded income tax expense of $10.4 million and $99.4 million for the six months ended June 30, 2019 and 2018, respectively.

14.
Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which supersedes the requirements set forth in ASC 840, Leases. The Company adopted this standard effective January 1, 2019 utilizing the transition method which permits an entity to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption with no adjustment made to the comparative periods presented in the consolidated financial statements. Accordingly, the comparative information as of December 31, 2018 and for the three and six months ended June 30, 2018 has not been adjusted and continues to be reported under the previous lease standard. The new guidance requires lessees to report a right of use asset and lease liability on the balance sheet for all leases with a term longer than one year, while maintaining substantially similar classifications for financing and operating leases. Lessor accounting remains substantially unchanged with the exception that no leases entered into after the effective date will be classified as leveraged leases.

The Company elected the transition practical expedient package whereby an entity was not required to reassess (i) whether any expired or existing contracts are or contained leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. The adoption of ASC 842 resulted in the recognition of approximately $60.0 million of operating lease right-of-use assets and operating lease liabilities on our consolidated balance sheet as of January 1, 2019 and did not materially impact our consolidated statement of comprehensive income for the three and six months ended June 30, 2019.

Lessee Accounting

Beginning January 1, 2019, for all leases with a term in excess of 12 months, the Company recognized a lease liability equal to the present value of the lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For operating leases, lease expense for lease payments is recognized on a straight-line basis over the lease term, while finance leases include both an operating expense and an interest expense component. For all leases with a term of 12 months or less, the Company elected the practical expedient to not recognize lease assets and liabilities and recognizes lease expense for these short-term leases on a straight-line basis over the lease term.

The Company's operating leases are primarily for rail cars, real estate, equipment and vehicles and its finance leases are primarily for machinery and equipment. Generally, the Company does not include renewal or termination options in its assessment of the leases unless extension or termination for certain assets is deemed to be reasonably certain. The accounting for some of the Company's leases may require significant judgment, which includes determining whether a contract contains a lease, determining the incremental borrowing rates to utilize in the net present value calculation of lease payments for lease agreements which do not provide an implicit rate and assessing the likelihood of renewal or termination options. Lease agreements that contain a lease and non-lease component are generally accounted for as a single lease component. 

Lease expense consisted of the following for the three and six months ended June 30, 2019 (in thousands):

18

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

 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Operating lease expense
$
5,405

 
$
11,420

Short-term lease expense
148

 
362

Finance lease expense:
 
 
 
Amortization of right-of-use assets
288

 
486

Interest on lease liabilities
41

 
80

Total lease expense
$
5,882

 
$
12,348


Supplemental balance sheet information related to leases as of June 30, 2019 is as follows:
 
June 30, 2019
Operating leases:
 
Operating lease right-of-use assets
$
52,184

Current operating lease liability
17,338

Long-term operating lease liability
34,807

Finance leases:
 
Property and equipment, net
$
5,005

Accrued expenses and other current liabilities
1,856

Other liabilities
2,846


Other supplemental information related to leases for the three and six months ended June 30, 2019 is as follows (in thousands):
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows from operating leases
$
5,285

 
$
11,246

Operating cash flows from finance leases
394

 
80

Financing cash flows from finance leases
45

 
723

Right-of-use assets obtained in exchange for lease obligations:
 
 
 
Operating leases
$
981

 
$
1,936

Finance leases
1,592

 
1,592


 
June 30, 2019
Weighted-average remaining lease term:
 
Operating leases
3.7 years

Finance leases
3.4 years

Weighted-average discount rate:
 
Operating leases
4.5
%
Finance leases
4.5
%


19

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

Maturities of lease liabilities as of June 30, 2019 are as follows (in thousands):
 
Operating Leases
 
Finance Leases
Remainder of 2019
$
9,961

 
$
1,536

2020
17,556

 
1,091

2021
13,005

 
782

2022
9,093

 
748

2023
4,344

 
742

Thereafter
2,588

 
166

Total lease payments
56,547

 
5,065

Less: Present value discount
4,402

 
363

Present value of lease payments
$
52,145

 
$
4,702


As of December 31, 2018, future minimum payments under noncancellable operating leases were $66.2 million in the aggregate, which consisted of the following: $20.2 million in 2019, $16.6 million in 2020, $12.6 million in 2021, $9.3 million in 2022, $5.0 million in 2023 and $2.5 million thereafter.

As of June 30, 2019, the Company was party to one additional operating lease for rail cars that had not yet commenced. This agreement provides for fixed lease payments of $5.4 million to be paid over the five year lease term.

Lessor Accounting

The Company's agreements with its customers for contract land drilling services, aviation services and remote accommodation services contain an operating lease component under ASC 842 because (i) there are identified assets, (ii) the customer obtains substantially all of the economic benefits of the identified assets throughout the period of use and (iii) the customer directs the use of the identified assets throughout the period of use. The Company has elected to apply the practical expedient provided to lessors to combine the lease and non-lease components of a contract where the revenue recognition pattern is the same and where the lease component, when accounted for separately, would be considered an operating lease. The practical expedient also allows a lessor to account for the combined lease and non-lease components under ASC 606, Revenue from Contracts with Customers, when the non-lease component is the predominant element of the combined component. The Company's agreement for its contract land drilling services contain a service component in addition to a lease component. The Company has determined the service component is greater than the lease component and therefore, reports revenue for its contract land drilling services under ASC 606.
    
The Company's lease agreements are generally short-term in nature and lease revenue is recognized over time based on on a monthly, daily or hourly rate basis. The Company does not provide an option for the lessee to purchase the rented assets at the end of the lease and the lessees do not provide residual value guarantees on the rented assets. The Company recognized lease revenue of $1.1 million and $4.2 million, respectively, during the three and six months ended June 30, 2019, which is included in service revenue on the unaudited condensed consolidated statement of comprehensive income.


20

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

15.
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,
 
2019
 
2018
 
2019
 
2018
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Allocation of earnings (loss):
 
 
 
 
 
 
 
Net (loss) income
$
(10,889
)
 
$
42,700

 
$
17,444

 
$
98,246

Weighted average common shares outstanding
45,003

 
44,737

 
44,966

 
44,700

Basic (loss) earnings per share
$
(0.24
)
 
$
0.95

 
$
0.39

 
$
2.20

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Allocation of earnings (loss):
 
 
 
 
 
 
 
Net (loss) income
$
(10,889
)
 
$
42,700

 
$
17,444

 
$
98,246

Weighted average common shares, including dilutive effect(a)
45,003

 
45,059

 
45,060

 
44,977

Diluted (loss) earnings per share
$
(0.24
)
 
$
0.95

 
$
0.39

 
$
2.18

a.
No incremental shares of potentially dilutive restricted stock awards were included for the three months ended June 30, 2019 as their effect was antidilutive under the treasury stock method.

16.
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. Additionally, the selling stockholders granted the underwriters an option to purchase additional shares of the Company's common stock at the same purchase price. On July 30, 2018, in connection with the partial exercise of this option, MEH Sub sold an additional 266,026 shares of common stock to the underwriters. MEH Sub received the proceeds from this offering. As a result of the June 29, 2018 offering, 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 as the contribution member's unreturned capital balance is recovered from additional sales by MEH Sub of its shares of the Company's common stock or from dividend distributions, which is not considered 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.

The Company adopted ASU 2018-07 as of January 1, 2019. This ASU aligns the accounting for non-employee share-based compensation with the requirements for employee share-based compensation. The standard required non-employee awards to be measured at fair value as of the date of adoption. For the Company's Non-Employee Member awards, the unrecognized amount, which represents the fair value of the awards as of the date of adoption of ASU 2018-07 was $18.9 million.

21

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


17.
Stock Based Compensation

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

Restricted Stock Units

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

A summary of the status and changes of the unvested shares of restricted stock under the 2016 Plan is presented below.
 
 
Number of Unvested Restricted Shares
 
Weighted Average Grant-Date Fair Value
Unvested shares as of January 1, 2019
 
434,119

 
$
22.78

Granted
 
64,507

 
9.87

Vested
 
(141,479
)
 
24.88

Forfeited
 
(70,002
)
 
19.16

Unvested shares as of June 30, 2019
 
287,145

 
$
23.58


As of June 30, 2019, there was $3.3 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 1.0 year.

Included in cost of revenue and selling, general and administrative expenses is stock based compensation expense of $0.9 million and $1.7 million for the three months ended June 30, 2019 and 2018, respectively, and $2.2 million and $2.9 million for the six months ended June 30, 2019 and 2018, respectively.

18.
Related Party Transactions
Transactions between the subsidiaries of the Company, including Stingray Pressure Pumping LLC (“Pressure Pumping”), Muskie Proppant LLC (“Muskie”), Stingray Energy Services LLC (“SR Energy”), Stingray Cementing LLC (“Cementing”), Aquahawk Energy LLC (“Aquahawk”), Panther Drilling Systems LLC (“Panther Drilling”), Cobra Aviation, ARS, Cobra and Higher Power Electrical LLC (“Higher Power”) and the following companies are included in Related Party Transactions: Gulfport; Grizzly Oil Sands ULC (“Grizzly”); El Toro Resources LLC (“El Toro”); Everest Operations Management LLC (“Everest”); Elk City Yard LLC (“Elk City Yard”); Double Barrel Downhole Technologies LLC (“DBDHT”); Caliber Investment Group LLC (“Caliber”); Predator Drilling LLC (“Predator”); T&E Flow Services LLC (“T&E”); and Brim Equipment.


22

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

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,
 
 
2019
2018
 
2019
2018
 
2019
2018
Pressure Pumping and Gulfport
(a)
$
33,419

$
33,831

 
$
70,829

$
72,377

 
$
26,906

$
8,175

Muskie and Gulfport
(b)
10,861

9,730

 
23,516

21,192

 
6,024

1,193

SR Energy and Gulfport
(c)
2,733

4,626

 
8,040

11,579

 
3,722

1,658

Cementing and Gulfport
(d)

2,048

 

4,876

 


Aquahawk and Gulfport
(e)
98


 
822


 
133


Panther Drilling and El Toro
(f)
124


 
493

345

 
124

64

Cobra Aviation/ARS/Leopard and Brim Equipment
(g)
448


 
711


 
441


Other Relationships
 
15

106

 
15

522

 
50

74

 
 
$
47,698

$
50,341

 
$
104,426

$
110,891

 
$
37,400

$
11,164

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.
SR Energy provides rental services to Gulfport.
d.
Cementing performed well cementing services for Gulfport.
e.
Aquahawk provides water transfer services for Gulfport pursuant to a master service agreement.
f.
Panther provides directional drilling services for El Toro, an entity controlled by Wexford, pursuant to a master service agreement.
g.
Cobra Aviation, ARS and Leopard lease helicopters to Brim Equipment pursuant to aircraft lease and management agreements.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
At June 30,
At December 31,
 
 
2019
2018
 
2019
2018
 
2019
2018
 
 
COST OF REVENUE
 
COST OF REVENUE
 
ACCOUNTS PAYABLE
Cobra Aviation/ ARS/Leopard and Brim Equipment
(a)
$
2,650

$

 
$
3,363

$

 
$
788

$

Cobra and T&E
(b)

1,486

 

2,762

 


Higher Power and T&E
(b)

950

 

1,458

 


Other
 

(8
)
 


 

240

 
 
$
2,650

$
2,428

 
$
3,363

$
4,220

 
$
788

$
240

 
 
 
 
 
 
 
 
 
 
 
 
SELLING, GENERAL AND ADMINISTRATIVE COSTS
 
SELLING, GENERAL AND ADMINISTRATIVE COSTS
 
 
 
The Company and Wexford
(c)
$
206

$
290

 
$
442

$
473

 
$
42

$
100

The Company and Caliber
(d)
258

145

 
388

346

 
64

3

Cobra Aviation/ ARS/Leopard and Brim Equipment