Mammoth Energy Services Inc.
MAMMOTH ENERGY SERVICES, INC. (Form: 10-Q, Received: 11/14/2017 06:13:56)



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 SEPTEMBER 30, 2017
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                     

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

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

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

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

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

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

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

As of November 7, 2017 , there were 44,502,223 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 TERMS
The following is a glossary of certain oil and natural gas industry terms used in this report:
Blowout
An uncontrolled flow of reservoir fluids into the wellbore, and sometimes catastrophically to the surface. A blowout may consist of salt water, oil, natural gas or a mixture of these. Blowouts can occur in all types of exploration and production operations, not just during drilling operations. If reservoir fluids flow into another formation and do not flow to the surface, the result is called an underground blowout. If the well experiencing a blowout has significant open-hole intervals, it is possible that the well will bridge over (or seal itself with rock fragments from collapsing formations) down-hole and intervention efforts will be averted.
Bottomhole assembly
The lower portion of the drillstring, consisting of (from the bottom up in a vertical well) the bit, bit sub, a mud motor (in certain cases), stabilizers, drill collar, heavy-weight drillpipe, jarring devices (“jars”) and crossovers for various threadforms. The bottomhole assembly must provide force for the bit to break the rock (weight on bit), survive a hostile mechanical environment and provide the driller with directional control of the well. Oftentimes the assembly includes a mud motor, directional drilling and measuring equipment, measurements-while-drilling tools, logging-while-drilling tools and other specialized devices.
Cementing
To prepare and pump cement into place in a wellbore.
Coiled tubing
A long, continuous length of pipe wound on a spool. The pipe is straightened prior to pushing into a wellbore and rewound to coil the pipe back onto the transport and storage spool. Depending on the pipe diameter (1 in. to 4 1/2 in.) and the spool size, coiled tubing can range from 2,000 ft. to 23,000 ft. (610 m to 7,010 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, 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.
Drilling rig
The machine used to drill a wellbore.
Drillpipe or Drill pipe
Tubular steel conduit fitted with special threaded ends called tool joints. The drillpipe connects the rig surface equipment with the bottomhole assembly and the bit, both to pump drilling fluid to the bit and to be able to raise, lower and rotate the bottomhole assembly and bit.
Drillstring or Drill string
The combination of the drillpipe, the bottomhole assembly and any other tools used to make the drill bit turn at the bottom of the wellbore.
Horizontal drilling
A subset of the more general term “directional drilling,” used where the departure of the wellbore from vertical exceeds about 80 degrees. Note that some horizontal wells are designed such that after reaching true 90-degree horizontal, the wellbore may actually start drilling upward. In such cases, the angle past 90 degrees is continued, as in 95 degrees, rather than reporting it as deviation from vertical, which would then be 85 degrees. Because a horizontal well typically penetrates a greater length of the reservoir, it can offer significant production improvement over a vertical well.
Hydraulic fracturing
A stimulation treatment routinely performed on oil and gas wells in low permeability reservoirs. Specially engineered fluids are pumped at high pressure and rate into the reservoir interval to be treated, causing a vertical fracture to open. The wings of the fracture extend away from the wellbore in opposing directions according to the natural stresses within the formation. Proppant, such as grains of sand of a particular size, is mixed with the treatment fluid to keep the fracture open when the treatment is complete. Hydraulic fracturing creates high-conductivity communication with a large area of formation and bypasses any damage that may exist in the near-wellbore area.
Hydrocarbon
A naturally occurring organic compound comprising hydrogen and carbon. Hydrocarbons can be as simple as methane, but many are highly complex molecules, and can occur as gases, liquids or solids. Petroleum is a complex mixture of hydrocarbons. The most common hydrocarbons are natural gas, oil and coal.
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.

i


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.
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 drillpipe, drill collars, pup joints, casing, production tubing and pipeline.
Unconventional resource
An umbrella term for oil and natural gas that is produced by means that do not meet the criteria for conventional production. What has qualified as “unconventional” at any particular time is a complex function of resource characteristics, the available exploration and production technologies, the economic environment, and the scale, frequency and duration of production from the resource. Perceptions of these factors inevitably change over time and often differ among users of the term. At present, the term is used in reference to oil and gas resources whose porosity, permeability, fluid trapping mechanism, or other characteristics differ from conventional sandstone and carbonate reservoirs. Coalbed methane, gas hydrates, shale gas, fractured reservoirs and tight gas sands are considered unconventional resources.
Wellbore
The physical conduit from surface into the hydrocarbon reservoir.
Well stimulation
A treatment performed to restore or enhance the productivity of a well. Stimulation treatments fall into two main groups, hydraulic fracturing treatments and matrix treatments. Fracturing treatments are performed above the fracture pressure of the reservoir formation and create a highly conductive flow path between the reservoir and the wellbore. Matrix treatments are performed below the reservoir fracture pressure and generally are designed to restore the natural permeability of the reservoir following damage to the near wellbore area. Stimulation in shale gas reservoirs typically takes the form of hydraulic fracturing treatments.
Wireline
A general term used to describe well-intervention operations conducted using single-strand or multi-strand wire or cable for intervention in oil or gas wells. Although applied inconsistently, the term commonly is used in association with electric logging and cables incorporating electrical conductors.
Workover
The process of performing major maintenance or remedial treatments on an oil or gas well. In many cases, workover implies the removal and replacement of the production tubing string after the well has been killed and a workover rig has been placed on location. Through-tubing workover operations, using coiled tubing, snubbing or slickline equipment, are routinely conducted to complete treatments or well service activities that avoid a full workover where the tubing is removed. This operation saves considerable time and expense.


ii


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, 2016 could affect our actual results and cause our actual results to differ materially from expectations, estimates or assumptions expressed, forecasted or implied in such forward-looking statements.

Forward-looking statements may include statements about our:

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

All of these types of statements, other than statements of historical fact included in this report, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” "will," “could,” “should,” “expect,” “plan,” “project,” “budget,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “seek,” “objective” or “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. 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.


iii

MAMMOTH ENERGY SERVICES, INC.



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MAMMOTH ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
ASSETS
 
September 30,
 
December 31,
CURRENT ASSETS
 
2017
 
2016 (a)
Cash and cash equivalents
 
$
14,278,328

 
$
29,238,618

Accounts receivable, net
 
65,490,189

 
21,169,579

Receivables from related parties
 
44,772,661

 
27,589,283

Inventories
 
12,164,225

 
6,124,201

Prepaid expenses
 
2,753,800

 
4,425,872

Other current assets
 
335,513

 
391,599

Total current assets
 
139,794,716

 
88,939,152

 
 
 
 
 
Property, plant and equipment, net
 
347,317,716

 
242,119,663

Sand reserves
 
75,210,457

 
55,367,295

Intangible assets, net - customer relationships
 
11,770,375

 
15,949,772

Intangible assets, net - trade names
 
6,722,197

 
5,617,057

Goodwill
 
99,810,819

 
88,726,875

Other non-current assets
 
4,509,500

 
5,642,661

Total assets
 
$
685,135,780

 
$
502,362,475

LIABILITIES AND EQUITY
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
Accounts payable
 
$
70,229,349

 
$
20,469,542

Payables to related parties
 
211,352

 
203,209

Accrued expenses and other current liabilities
 
21,556,542

 
8,546,198

Income taxes payable
 

 
28,156

Total current liabilities
 
91,997,243

 
29,247,105

 
 
 
 
 
Long-term debt
 
94,000,000

 

Deferred income taxes
 
51,086,739

 
47,670,789

Asset retirement obligation
 
2,031,119

 
259,804

Other liabilities
 
4,755,414

 
2,404,422

Total liabilities
 
243,870,515

 
79,582,120

 
 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 14)
 

 

 
 
 
 

EQUITY
 
 
 

Equity:
 
 
 
 
Common stock, $0.01 par value, 200,000,000 shares authorized, 44,502,223 and
 
445,022

 
375,000

37,500,000 issued and outstanding at September 30, 2017 and December 31, 2016, respectively.
 
 
 
 
Additional paid in capital
 
506,274,038

 
400,205,921

Member's equity
 

 
81,738,675

Accumulated deficit
 
(63,274,499
)
 
(56,322,878
)
Accumulated other comprehensive loss
 
(2,179,296
)
 
(3,216,363
)
Total equity
 
441,265,265

 
422,780,355

Total liabilities and equity
 
$
685,135,780

 
$
502,362,475

(a) Financial information has been recast to include the financial position and results attributable to Sturgeon Acquisitions LLC ("Sturgeon"). See Note 3.


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

1

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


 
Three Months Ended

Nine Months Ended
 
September 30,

September 30,
REVENUE
2017
 
2016 (a)
 
2017 (b)
 
2016 (a)
Services revenue
$
63,112,621

 
$
19,077,680

 
$
119,863,654

 
$
65,964,774

Services revenue - related parties
56,860,754

 
36,028,399

 
134,425,170

 
76,679,011

Product revenue
15,276,279

 
1,675,230

 
29,043,367

 
4,651,673

Product revenue - related parties
14,055,246

 
6,557,237

 
39,200,789

 
17,788,581

Total revenue
149,304,900

 
63,338,546

 
322,532,980

 
165,084,039

 
 
 
 
 
 
 
 
COST AND EXPENSES
 
 
 
 
 
 
 
Services cost of revenue (1)
89,345,946

 
35,850,660

 
191,910,453

 
102,113,120

Services cost of revenue - related parties
8,899

 
587,087

 
701,008

 
787,079

Product cost of revenue (2)
25,177,849

 
6,429,040

 
57,759,173

 
22,861,407

Selling, general and administrative
7,667,419

 
3,063,445

 
21,473,039

 
11,558,114

Selling, general and administrative - related parties
355,242

 
131,162

 
986,126

 
456,505

Depreciation, depletion, accretion and amortization
27,223,733

 
17,921,471

 
64,354,383

 
54,483,158

Impairment of long-lived assets

 

 

 
1,870,885

Total cost and expenses
149,779,088

 
63,982,865

 
337,184,182

 
194,130,268

Operating loss
(474,188
)
 
(644,319
)
 
(14,651,202
)
 
(29,046,229
)
 
 
 
 
 
 
 
 
OTHER (EXPENSE) INCOME
 
 
 
 
 
 
 
Interest expense
(1,420,067
)
 
(1,024,514
)
 
(2,928,859
)
 
(3,332,901
)
Bargain purchase gain, net of tax

 

 
4,011,512

 

Other, net
(319,252
)
 
(253,832
)
 
(705,894
)
 
371,894

Total other (expense) income
(1,739,319
)
 
(1,278,346
)
 
376,759

 
(2,961,007
)
Loss before income taxes
(2,213,507
)
 
(1,922,665
)
 
(14,274,443
)
 
(32,007,236
)
(Benefit) provision for income taxes
(1,412,680
)
 
1,055,961

 
(7,322,822
)
 
2,739,696

Net loss
$
(800,827
)
 
$
(2,978,626
)
 
$
(6,951,621
)
 
$
(34,746,932
)
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Foreign currency translation adjustment (3)
627,515

 
(386,265
)
 
1,037,067

 
1,583,593

Comprehensive loss
$
(173,312
)
 
$
(3,364,891
)
 
$
(5,914,554
)
 
$
(33,163,339
)
 
 
 
 
 
 
 
 
Net loss per share (basic and diluted) (Note 10)
$
(0.02
)
 
$
(0.10
)
 
$
(0.17
)
 
$
(1.16
)
Weighted average number of shares outstanding (Note 10)
44,501,885

 
30,000,000

 
40,526,276

 
30,000,000

 
 
 
 
 
 
 
 
Pro Forma C Corporation Data:
 
 
 
 
 
 
 
Net loss, as reported


 
(2,978,626
)
 


 
(34,746,932
)
Pro forma benefit for income taxes


 
(3,896,035
)
 


 
(9,701,517
)
Pro forma net loss


 
917,409

 


 
(25,045,415
)
Basic and Diluted (Note 10)


 
$
0.02

 


 
$
(0.58
)
Weighted average pro forma shares outstanding—basic and diluted (Note 10)


 
43,107,452

 


 
43,107,452

 
 
 
 
 
 
 
 
(1) Exclusive of depreciation and amortization
24,152,840

 
16,115,125

 
57,641,729

 
49,658,528

(2) Exclusive of depreciation and amortization
3,033,092

 
1,783,439

 
6,599,251

 
4,729,620

(3) Net of tax
357,594

 

 
811,906

 

(a) Financial information has been recast to include the financial position and results attributable to Sturgeon. See Note 3.
(b) Financial information includes the financial position and results attributable to Sturgeon for the entire period presented. See Note 3.





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)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Common Stock
Common
Members'
Accumulated
Paid-In
 
 
 
Shares
Amount
Partners
Equity
Deficit
Capital
AOCL
Total
Balance at January 1, 2016 (a)

$

$
329,090,230

$
90,783,508

$

$

$
(5,926,968
)
$
413,946,770

Net loss prior to LLC conversion


(32,085,117
)




(32,085,117
)
Equity based compensation


(18,683
)




(18,683
)
LLC Conversion (Note 1)


(296,986,430
)


296,986,430



Issuance of common stock at public offering, net of offering costs
37,500,000

375,000




102,699,661


103,074,661

Stock-based compensation





519,830


519,830

Net loss



(4,044,833
)



(4,044,833
)
Distributions



(5,000,000
)



(5,000,000
)
Net loss subsequent to LLC conversion




(56,322,878
)


(56,322,878
)
Other comprehensive income






2,710,605

2,710,605

Balance at December 31, 2016 (a)
37,500,000

375,000


81,738,675

(56,322,878
)
400,205,921

(3,216,363
)
422,780,355

Net loss




(6,951,621
)


(6,951,621
)
Stingray acquisition
1,392,548

13,925




25,748,213


25,762,138

Sturgeon acquisition
5,607,452

56,075


(81,738,675
)

77,671,715


(4,010,885
)
Equity based compensation
2,223

22




2,648,189


2,648,211

Other comprehensive income






1,037,067

1,037,067

Balance at September 30, 2017
44,502,223

$
445,022

$

$

$
(63,274,499
)
$
506,274,038

$
(2,179,296
)
$
441,265,265





























(a) Financial information has been recast to include the financial position and results attributable to Sturgeon. See Note 3.

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)


 
Nine Months Ended
 
September 30,
Cash flows from operating activities
2017 (a)
 
2016 (b)
Net loss
$
(6,951,621
)
 
$
(34,746,932
)
Adjustments to reconcile net loss to cash provided by operating activities:
 
 
 
Equity based compensation
2,648,211

 
(18,683
)
Depreciation, depletion, accretion and amortization
64,354,383

 
54,483,158

Amortization of coil tubing strings
2,144,231

 
1,386,856

Amortization of debt origination costs
299,104

 
452,343

Bad debt expense
117,426

 
1,779,870

(Gain) loss on disposal of property and equipment
125,653

 
(426,917
)
Gain on bargain purchase
(4,011,512
)
 

Impairment of long-lived assets

 
1,870,885

Deferred income taxes
(8,151,410
)
 
(18,906
)
Changes in assets and liabilities, net of acquisitions of businesses:
 
 
 
Accounts receivable, net
(37,439,781
)
 
(2,139,172
)
Receivables from related parties
(12,080,870
)
 
167,964

Inventories
(7,878,174
)
 
(119,260
)
Prepaid expenses and other assets
2,643,797

 
59,940

Accounts payable
30,444,904

 
2,099,991

Payables to related parties
7,934

 
(394,292
)
Accrued expenses and other liabilities
14,392,715

 
(1,292,176
)
Income taxes payable
(28,156
)
 
(4,052
)
Net cash provided by operating activities
40,636,834

 
23,140,617

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(102,273,490
)
 
(4,108,047
)
Business acquisitions
(42,008,187
)
 

Proceeds from disposal of property and equipment
782,432

 
3,399,705

Business combination cash acquired (Note 3)
2,671,558

 

Net cash used in investing activities
(140,827,687
)
 
(708,342
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Borrowings from lines of credit
118,850,000

 
22,776,411

Repayments of lines of credit
(24,850,000
)
 
(45,776,411
)
Repayment of Stingray acquisition long-term debt
(8,851,063
)
 

Net cash provided by (used in) financing activities
85,148,937

 
(23,000,000
)
Effect of foreign exchange rate on cash
81,626

 
186,967

Net decrease in cash and cash equivalents
(14,960,290
)
 
(380,758
)
Cash and cash equivalents at beginning of period
29,238,618

 
4,038,899

Cash and cash equivalents at end of period
$
14,278,328

 
$
3,658,141

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
2,300,250

 
$
2,972,072

Cash paid for income taxes
$
840,421

 
$
2,755,562

Supplemental disclosure of non-cash transactions:
 
 
 
Purchases of property and equipment included in trade accounts payable
$
13,647,557

 
$
1,832,892

Acquisition of Sturgeon, Stingray Cementing LLC and Stingray Energy Services LLC (Note 3)
$
23,090,580

 
$

(a) Financial information includes the financial position and results attributable to Sturgeon for the entire period presented. See Note 3.
(b) Financial information has been recast to include the financial position and results attributable to Sturgeon. See Note 3.



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 Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements were prepared in accordance with the rules and regulations of the Securities and Exchange Commission, and reflect 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. These condensed consolidated interim 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 2016 annual consolidated financial statements of Mammoth Energy Services, Inc. (the "Company," "Mammoth Inc." or "Mammoth" ) in the Company's Annual Report on Form 10-K filed on February 24, 2017.

Mammoth, together with its subsidiaries, is an integrated, growth-oriented energy services company serving companies engaged in the exploration and development of North American onshore unconventional oil and natural gas reserves and energy infrastructure. The Company was incorporated in Delaware in June 2016 as a wholly-owned subsidiary of Mammoth Energy Partners LP, a Delaware limited partnership (the "Partnership" or the "Predecessor"). The Partnership was originally formed by Wexford Capital LP (“Wexford”) in February 2014 as a holding company under the name Redback Inc. and was converted to a Delaware limited partnership in August 2014. On November 24, 2014, Gulfport Energy Corporation (“Gulfport”), Rhino Resource Partners LP (“Rhino”) and Mammoth Energy Holdings LLC (“Mammoth Holdings”), an entity controlled by Wexford, 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.

The following companies (the "Operating Entities”) are included in these condensed consolidated financial statements: Bison Drilling and Field Services, LLC (“Bison Drilling”), formed November 15, 2010; Bison Trucking LLC (“Bison Trucking”), formed August 9, 2013; White Wing Tubular Services LLC (“White Wing”), formed July 29, 2014; Barracuda Logistics LLC (“Barracuda”), formed October 24, 2014; Mr. Inspections LLC (“MRI”), formed January 25, 2015; Panther Drilling Systems LLC (“Panther”), formed December 11, 2012; Redback Energy Services, LLC (“Energy Services”), formed October 6, 2011; Redback Coil Tubing, LLC (“Coil Tubing”), formed May 15, 2012; Redback Pump Down Services LLC (“Pump Down”), formed January 16, 2015; Muskie Proppant LLC (“Muskie”), formed September 14, 2011; Stingray Pressure Pumping LLC (“Pressure Pumping”), formed March 20, 2012; Stingray Logistics LLC (“Logistics”), formed November 19, 2012; and Great White Sand Tiger Lodging Ltd. (“Lodging”), formed October 1, 2007, Silverback Energy Services LLC ("Silverback"), formed June 8, 2016; Mammoth Equipment Leasing LLC, formed on November 14, 2016; Cobra Acquisitions LLC ("Cobra Acquisitions"), formed January 9, 2017; Cobra Energy LLC ("Cobra"), formed January 24, 2017; Piranha Proppant LLC ("Piranha"), formed March 28, 2017; Mako Acquisitions LLC, (“Mako”) formed on March 28, 2017; Higher Power Electrical LLC ("Higher Power"), acquired April 21, 2017; Stingray Energy Services LLC ("SR Energy"), acquired June 5, 2017; Stingray Cementing LLC ("Cementing"), acquired June 5, 2017; Sturgeon Acquisitions LLC (“Sturgeon”), acquired June 5, 2017; Taylor Frac, LLC (“Taylor Frac”), acquired June 5, 2017; Taylor Real Estate Investments, LLC (“Taylor RE”), acquired June 5, 2017; South River Road, LLC (“South River”), acquired June 5, 2017; and 5 Star Electric, LLC ("5 Star"), acquired July 1, 2017.

The contribution to the Partnership on November 24, 2014 of all Operating Entities, except Pressure Pumping, Logistics and entities created or acquired after the date of such contribution to the Partnership, was treated as a combination of entities under common control. On November 24, 2014, the Partnership also acquired Pressure Pumping and Logistics (collectively, the “Stingray Entities”) in exchange for 10 million limited partner units. Prior to the contribution, the Partnership did not conduct any material business operations other than certain activities related to the preparation of the registration statement for a proposed initial public offering.

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.

5

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


Net proceeds to Mammoth Inc. from its sale of  7,500,000  shares of common stock were approximately  $103.1 million . On the closing date of the IPO, Mammoth Inc. repaid all outstanding borrowings under its revolving credit facility and the remaining net proceeds for general corporate purposes, which included the acquisition of additional equipment and complementary businesses that enhanced its existing service offerings, broadened its service offerings and expanded its customer relationships.

On March 27, 2017, the Company entered into a definitive asset purchase agreement, as amended as of May 24, 2017 (the “Purchase Agreement”), with Chieftain Sand and Proppant, LLC and Chieftain Sand and Proppant Barron, LLC, unrelated third party sellers (the “Chieftain Sellers”), following Mammoth’s successful bid in a bankruptcy court auction for substantially all of the assets of the Sellers (the “Chieftain Acquisition”). The Chieftain Acquisition closed on May 26, 2017 for the purchase price of $36.3 million , including closing adjustments. Mammoth funded the purchase price for the Chieftain Acquisition with cash on hand and borrowings under its revolving credit facility. Refer to Note 3 - Acquisitions for additional disclosure regarding the Chieftain Acquisition.

On June 5, 2017, the Company completed the acquisition of (1) Sturgeon, a Delaware limited liability company, which included the acquisition of Sturgeon's wholly-owned subsidiaries Taylor Frac, a Wisconsin limited liability company, Taylor RE, a Wisconsin limited liability company, and South River, a Wisconsin limited liability company, (2) SR Energy, a Delaware limited liability company; and (3) Cementing, a Delaware limited liability company (together with SR Energy, the “Stingray Acquisition”) in exchange for the issuance by Mammoth of an aggregate of 7,000,000 shares of its common stock.

Prior to its acquisition of Sturgeon, the Company and Sturgeon were under common control and it is required under accounting principles generally accepted in the Unites States of America ("GAAP") to account for this common control acquisition in a manner similar to the pooling of interest method of accounting. Therefore, the Company's historical financial information for all periods included in the accompanying financial statements has been recast to combine Sturgeon LLC with the Company as if the acquisition had been effective since the date Sturgeon commenced operations. Refer to Note 3 - Acquisitions for additional disclosure regarding the acquisition of Sturgeon LLC.

At September 30, 2017 and December 31, 2016 , Mammoth Holdings, or its affiliates, Gulfport and Rhino owned the following share of outstanding common stock of Mammoth Inc.:
 
 
At September 30, 2017
 
At December 31, 2016
 
 
Share Count
 
% Ownership
 
Share Count
 
% Ownership
Mammoth Holdings
 
25,009,319

 
56.2
%
 
20,443,903

 
54.5
%
Gulfport
 
11,171,887

 
25.1
%
 
9,073,750

 
24.2
%
Rhino
 
568,794

 
1.3
%
 
232,347

 
0.6
%
Outstanding shares owned by related parties
 
36,750,000

 
82.6
%
 
29,750,000

 
79.3
%
Total outstanding
 
44,502,223

 
100.0
%
 
37,500,000

 
100.0
%

Operations

The Company's pressure pumping services include equipment and personnel used in connection with the completion and early production of oil and natural gas wells, well services include coil tubing units used to enhance the flow of oil or natural gas and natural sand proppant services include the distribution and production of natural sand proppant that is used primarily for hydraulic fracturing in the oil and gas industry. The Company's contract land and directional drilling services provides drilling rigs and directional tools for both vertical and horizontal drilling of oil and natural gas wells. The Company also provides other energy services, which have historically consisted of remote accommodations for people working in the oil sands located in Northern Alberta, Canada, but now include energy infrastructure services.

All of the Company’s operations are in North America. The Company operates in the Permian Basin, the Utica Shale, the Eagle Ford Shale, the Marcellus Shale, the Granite Wash, the Cana-Woodford Shale, the Cleveland Sand and the oil sands located in Northern Alberta, Canada. The Company's 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

6

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

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.
Summary of Significant Accounting Policies

(a) Principles of Consolidation
The condensed consolidated financial statements are prepared in accordance with GAAP. All material intercompany accounts and transactions between the entities within the Company have been eliminated.

(b) Use of Estimates     
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include but are not limited to the Company's sand reserves and their impact on calculating the depletion expense, the allowance for doubtful accounts, asset retirement obligation, reserves for self-insurance, depreciation and amortization of property and equipment, business combination valuations, amortization of intangible assets, and future cash flows and fair values used to assess recoverability and impairment of long-lived assets, including goodwill.

(c) Cash and Cash Equivalents
All highly liquid investments with an original maturity of three months or less are considered cash equivalents. The Company maintains its cash accounts in financial institutions that are insured by the Federal Deposit Insurance Corporation, with the exception of cash held by Lodging in a Canadian financial institution. At  September 30, 2017 , the Company had  $3.0 million , in Canadian dollars, of cash in Canadian accounts. Cash balances from time to time may exceed the insured amounts; however the Company has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risks on such accounts.
 
(d) Accounts Receivable
Accounts receivable include amounts due from customers for services performed and are recorded as the work progresses. The Company grants credit to customers in the ordinary course of business and generally does not require collateral. Most areas in which the Company operates provide for a mechanic’s lien against the property on which the service is performed if the lien is filed within the statutorily specified time frame. Customer balances are generally considered delinquent if unpaid by the 30th day following the invoice date and credit privileges may be revoked if balances remain unpaid.

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

Following is a roll forward of the allowance for doubtful accounts for the year ended December 31, 2016 and the nine months ended September 30, 2017 :

Balance, January 1, 2016
 
$
4,011,882

Additions charged to expense
 
1,968,001

Deductions for uncollectible receivables written off
 
(602,967
)
Balance, December 31, 2016
 
5,376,916

Additions charged to expense
 
117,426

Additions other
 
178,871

Balance, September 30, 2017
 
$
5,673,213



7

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

As discussed in Note 1, prolonged declines in pricing can impact the overall health of the oil and natural gas industry. The year ended December 31, 2016 contained such pricing conditions which may lead to enhanced risk of uncollectiblity on certain receivables. As such, the Company monitored its previously established reserves and adjusted upward. The Company will continue to pursue collection until such time as final determination is made consistent with Company policy.

(e) Inventory
Inventory consists of raw sand and processed sand available for sale, chemicals and other products sold as a bi-product of completion and production operations, and supplies used in performing services. Inventory is stated at the lower of cost or market (net realizable value) on an average cost basis. The Company assesses the valuation of its inventories based upon specific usage and future utility.

Inventory manufactured at the Company’s sand production facilities includes direct excavation costs, processing costs and overhead allocation. Stockpile tonnages are calculated by measuring the number of tons added and removed from the stockpile. Tonnages are verified periodically by an independent surveyor. Costs are calculated on a per ton basis and are applied to the stockpiles based on the number of tons in the stockpile. Inventory transported for sale at the Company’s terminal facility includes the cost of purchased or manufactured sand, plus transportation related charges.

Coil tubing strings of various widths, diameters and lengths are included in inventory. The strings are used in providing specialized services to customers who are primarily operators of oil or gas wells and are used at various rates based on factors such as well conditions (i.e. pressure and friction), vertical and horizontal length of the well, running speed of the string in the well, and total running feet accumulated to the string. The Company obtains usage information from data acquisition software and other established assessment methods and attempts to amortize the strings over their estimated useful life. In no event will a string be amortized over a period longer than 12 months . Amortization of coil strings is included in services cost of revenue in the Condensed Consolidated Statements of Comprehensive Loss and totaled $2,144,231 and $1,386,856 for the nine months ended September 30, 2017 and 2016 , respectively.

(f) Prepaid Expenses
Prepaid expenses primarily consist of insurance costs. Insurance costs are expensed over the periods that these costs benefit.

(g) Property and Equipment
Property and equipment, including renewals and betterments, are capitalized and stated at cost, while maintenance and repairs that do not increase the capacity, improve the efficiency or safety, or improve or extend the useful life are charged to operations as incurred. Disposals are removed at cost, less accumulated depreciation, and any resulting gain or loss is recorded in other, net. Depreciation is calculated using the straight-line method over the shorter of the estimated useful life, or the remaining lease term, as applicable. Depreciation does not begin until property and equipment is placed in service. Once placed in service, depreciation on property and equipment continues while being repaired, refurbished, or between periods of deployment. Sand reserves are depleted using the units-of-production method over the estimated sand reserves. 

(h) Sand reserves
Sand reserve costs include engineering, mineralogical studies and other related costs to develop the mine, the removal of overburden to initially expose the mineral and building access ways. Exploration costs are expensed as incurred and classified as product cost of revenue. Capitalization of mine development project costs begins once the deposit is classified as proven and probable reserves. Drilling and related costs are capitalized for deposits where proven and probable reserves exist and the activities are directed at obtaining additional information on the deposit or converting non-reserve minerals to proven and probable reserves and the benefit is to be realized over a period greater than one year. Mining property and development costs are amortized using the units-of-production method on estimated measured tons in in-place reserves. The impact of revisions to reserve estimates is recognized on a prospective basis.

(i) Long-Lived Assets
The Company reviews long-lived assets for recoverability in accordance with the provisions of Financial Accounting Standards Board ("FASB") Accounting Standard Codification (“ASC”) Topic 360, Impairment or Disposal of Long-Lived Assets, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. These evaluations for impairment are significantly impacted by estimates of revenues, costs and expenses, and other factors. If

8

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

long-lived assets are considered to be impaired, the impairment to be recognized is measured by the amount in which the carrying amount of the assets exceeds the fair value of the assets. For the nine months ended September 30, 2017 and 2016 , the Company recognized an impairment loss of $0 and $1,870,885 , respectively, on various fixed assets included in property, plant and equipment, net in the Condensed Consolidated Balance Sheets.

(j) Goodwill
Goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The impairment test is a two-step process. First, the fair value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists. If impairment is indicated, then the implied value of the reporting unit’s goodwill is determined by allocating the unit’s fair value to its assets and liabilities as if the reporting unit had been acquired in a business combination. The fair value of the reporting unit is determined using the discounted cash flow approach, excluding interest. The impairment for goodwill is measured as the excess of its carrying value over its implied value. Goodwill was tested for impairment as of December 31, 2016. For the  nine  months ended  September 30, 2017  and 2016,  no  impairment losses were recognized.

(k) Other Non-Current Assets
Other non-current assets primarily consist of deferred financing costs on the credit facility (See Note 8) and sales tax receivables.

(l) Asset Retirement Obligation
Mine reclamation costs, future remediation costs for inactive mines or other contractual site remediation costs are accrued based on management’s best estimate at the end of each period of the costs expected to be incurred at a site. Such cost estimates include, where applicable, ongoing care, maintenance and monitoring costs. Changes in estimates at inactive mines are reflected in earnings in the period an estimate is revised. The nine  months ended  September 30, 2017 included recognition of $1,732,081 in asset retirement obligations as a result of the Chieftain acquisition (Note 3).

(m) Business Combinations
The Company accounts for its business acquisitions under the acquisition method of accounting as indicated in FASB ASC No. 805, “ Business Combinations ”, which requires the acquiring entity in a business combination to recognize the fair value of all assets acquired, liabilities assumed and any noncontrolling interest in the acquiree and establishes the acquisition date as the fair value measurement point. Accordingly, the Company recognizes assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities and noncontrolling interest in the acquiree, based on fair value estimates as of the date of acquisition. In accordance with FASB ASC No. 805, the Company recognizes and measures goodwill, if any, as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired.

When the Company acquires a business from an entity under common control, whereby the companies are ultimately controlled by the same party or parties both before and after the transaction, it is treated for accounting purposes in a manner similar to the pooling of interest method of accounting. The assets and liabilities are recorded at the transferring entity’s historical cost instead of reflecting the fair market value of assets and liabilities.

(n) Amortizable Intangible Assets
Intangible assets subject to amortization include customer relationships and trade names. Customer relationships are amortized based on an estimated attrition factor and trade names are amortized over their estimated useful lives. For the  nine months ended September 30, 2017 and 2016 no  impairment losses were recognized.

(o) Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents, trade receivables, long-term debt, trade payables and amounts receivable or payable to related parties. The carrying amount of cash and cash equivalents, trade receivables, trade payables and receivables from related parties 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.

(p) Revenue Recognition
The Company generates revenue from multiple sources within its operating segments. In all cases, revenue is recognized when services are performed, collection of the receivable is probable, persuasive evidence of an arrangement exists, and the price is fixed and determinable. Services are sold without warranty or right of return. Taxes assessed on revenue transactions are presented on a net basis and are not included in revenue.

9

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


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, and revenue is recognized as the work progresses. Jobs for these services are typically short-term in nature and range from a few hours to multiple days. Revenue is recognized upon the completion of each day’s work based upon a completed field ticket, which includes the charges for the services performed, mobilization of the equipment to the location, and personnel. Additional revenue is generated through labor charges and the sale of consumable supplies that are incidental to the service being performed. The labor charges and the use of consumable supplies are reflected on the completed field tickets.

Natural sand proppant revenues are recognized when legal title passes to the customer, which may occur at the production facility, rail origin or at the destination terminal. At that point, delivery has occurred, evidence of a contractual arrangement exists, the price is fixed and determinable, and collectability is reasonably assured. Amounts received from customers in advance of sand deliveries are recorded as deferred revenue. Customers have the ability to make up contractual short falls by achieving higher-than-contracted volumes over the shortfall window. Contractual shortfall revenue is deemed not probable until the end of the measurement period.

Well 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, and revenue is recognized as the work progresses. Jobs for these services are typically short-term in nature and range from a few hours to multiple days. Our equipment rental services are recognized upon completion of each day's work based on a completed field ticket. 

Contract drilling services are provided under daywork or footage contracts, and revenue is recognized as the work progresses based on the days completed or the feet drilled, as applicable. Mobilization revenue and costs for daywork and footage contracts are recognized over the days of actual drilling.

Directional drilling services are provided on a day rate or hourly basis, and revenue is recognized as work progresses. Proceeds from customers for the cost of equipment that is damaged or lost down-hole are reflected as service revenues as this is deemed to be perfunctory or inconsequential to the underlying service being performed.

Revenue from remote accommodation services is recognized when rooms are occupied and services have been rendered. Advance deposits on rooms and special events are deferred until services are provided to the customer. For the  nine months ended September 30, 2017 , the Company recognized and collected  $918,963  in business interruption insurance proceeds which is included in service revenue in the accompanying Condensed Consolidated Statements of Comprehensive Loss. The proceeds resulted from loss of revenue relating to wildfires that forced evacuation of personnel.

Revenue from energy infrastructure services, a component of the Company's other energy services segment, is recognized as the work progresses based on the days completed or as the contract is completed. These services may be 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), and the final terms and prices of these contracts are frequently negotiated with the customer. Under unit-based contracts, the utilization of an output-based measurement is appropriate for revenue recognition. Under our cost-plus/hourly and time and materials type contracts, the Company recognizes revenue on an input basis, as labor hours are incurred and services are performed.

The timing of revenue recognition may differ from contract billing or payment schedules, resulting in revenues that have been earned but not billed (“unbilled revenue”). The Company had $7,435,694 and $2,744,986 of unbilled revenue included in accounts receivable, net in the Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016 , respectively. The Company had $14,777,586 and $10,505,240 of unbilled revenue included in receivables from related parties in the Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016 , respectively.

(q) Earnings per Share
Earnings per share is computed by dividing net loss by the weighted average number of outstanding shares. See Note 10.

(r) Unaudited Pro Forma Loss per Share
The Company’s pro forma basic loss per share amounts have been computed based on the weighted-average number of shares of common stock outstanding for the period, as if the common stock issued in the October 12, 2016 contribution and the IPO was outstanding for the nine months ended September 30, 2016 . Diluted earnings per share reflects the

10

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

potential dilution, using the treasury stock method. During periods in which the Company realizes a net loss, restricted stock awards would be anti-dilutive to net loss per share and conversion into common stock is assumed not to occur. See Note 10.

(s) Equity-based Compensation
The Company records equity-based payments at fair value on the date of grant, and expenses the value of these equity-based payments in compensation expense over the applicable vesting periods. See Note 11.

(t) Stock-based Compensation
The Company's stock-based compensation program consists of restricted stock units granted to employees and restricted stock units granted to non-employee directors under the Mammoth Energy Services, Inc. 2016 Incentive Plan (the "2016 Plan"). The Company recognizes in its financial statements the cost of employee services received in exchange for restricted stock based on the fair value of the equity instruments as of the grant date. In general, this value is amortized over the vesting period; for grants with a non-substantive service condition, this value is recognized immediately. Amounts are recognized in selling, general and administrative expenses. See Note 12. 

(u) Income Taxes
On October 12, 2016, immediately prior to the IPO of Mammoth Inc., the Partnership converted into Mammoth LLC a limited liability company. All equity interests in Mammoth LLC were contributed to Mammoth Inc. and Mammoth LLC became a wholly owned subsidiary of Mammoth Inc. Mammoth Inc. is a C corporation under the Internal Revenue Code and is subject to income tax. Historically, each of Mammoth LLC and the Operating Entities other than Lodging were treated as a partnership for federal income tax purposes. As a result, essentially all taxable earnings and losses were passed through to its members, and Mammoth LLC did not pay any federal income taxes at the entity level. Mammoth Inc. owns the member interests in several single member limited liability companies. These LLCs are subject to taxation in Texas where the Company does business; therefore, the Company may provide for income taxes attributable to that state on a current basis. The income tax provision for the period before the IPO has been prepared on a separate return basis for Mammoth LLC and all of its subsidiaries that were treated as a partnership for federal income tax purposes.

Subsequent to the IPO, the Company's operations are included in a consolidated federal income tax return and other state returns. Accordingly, the Company has recognized deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases for all its subsidiaries as if each entity were a corporation, regardless of its actual characterization for U.S. federal income tax purposes. The Company's effective tax rate was  37.1%  for the nine months ended September 30, 2017. The Company's effective tax rate can fluctuate as a result of the impact of state income taxes, permanent differences and changes in pre-tax income.

Under FASB ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities as a result of a change in tax rate is recognized in the period that includes the statutory enactment date. A valuation allowance for deferred tax assets is recognized when it is more likely than not that the benefit of deferred tax assets will not be realized.

The Company has included a pro forma provision for income taxes assuming it had been taxed as a C corporation in all periods prior to the conversion and contribution as part of its earnings per share calculation in Note 10. The unaudited pro forma data are presented for informational purposes only, and do not purport to project the Company's results of operations for any future period or its financial position as of any future date.

Lodging is subject to foreign income taxes, and such taxes are provided in the financial statements pursuant to FASB ASC 740, Income Taxes.

The Company evaluates tax positions taken or expected to be taken in preparation of its tax returns and disallows the recognition of tax positions that do not meet a “more likely than not” threshold of being sustained upon examination by the taxing authorities. During the nine months ended September 30, 2017 and 2016 , no uncertain tax positions existed. Penalties and interest, if any, are recognized in general and administrative expense. The Company's 2016 , 2015 , 2014 and 2013 income tax returns remain open to examination by the applicable taxing authorities.


11

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

(v) Foreign Currency Translation
For foreign operations, assets and liabilities are translated at the period-end exchange rate, and income statement items are translated at the average exchange rate for the period. Resulting translation adjustments are recorded within accumulated other comprehensive loss. Assets and liabilities denominated in foreign currencies, if any, are re-measured at the balance sheet date. Transaction gains or losses are included as a component of current period earnings.

(w) Environmental Matters
The Company is subject to various federal, state and local laws and regulations relating to the protection of the environment. Management has established procedures for the ongoing evaluation of the Company’s operations, to identify potential environmental exposures and to comply with regulatory policies and procedures. Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future revenue generation are expensed as incurred. Liabilities are recorded when environmental costs are probable, and the costs can be reasonably estimated. The Company maintains insurance which may cover in whole or in part certain environmental expenditures. As of September 30, 2017 and December 31, 2016 , there were no probable environmental matters.

(x) Comprehensive Loss
Comprehensive loss consists of net loss and other comprehensive loss. Other comprehensive income (loss) included certain changes in equity that are excluded from net loss. Specifically, cumulative foreign currency translation adjustments are included in accumulated other comprehensive loss.

(y) 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. The Company’s accounts receivable have a concentration in the oil and gas industry and the customer base consists primarily of independent oil and natural gas producers. At  September 30, 2017 , one third-party customer accounted for 11% of the Company's trade accounts receivable and receivables from related parties balance combined. At September 30, 2017 and December 31, 2016 , related party customers accounted for 41% and 57% , respectively, of the Company's trade accounts receivable and receivables from related parties balance combined. During the nine months ended September 30, 2017 and 2016 , one related party customer accounted for 54% and 56% , respectively, of the Company's total revenue. One third-party customers accounted for greater than 10% of the Company's total revenue for nine months ended September 30, 2016 , at 12% . No third-party customer accounted for greater than 10% for the nine months ended September 30, 2017.

(z) New Accounting Pronouncements
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which changes inventory measured using any method other than last-in, first-out (LIFO) or the retail inventory method (for example, inventory measured using first-in, first-out (FIFO) or average cost) at the lower of cost and net realizable value. ASU 2015-11 is effective for annual and interim reporting periods beginning after December 15, 2016, with early adoption permitted. On January 1, 2017, the Company adopted the ASU and it did not impact our condensed consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 supersedes existing revenue recognition requirements in GAAP and requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Additionally, it requires expanded disclosures regarding the nature, amount, timing and certainty of revenue and cash flows from contracts with customers. The ASU was effective for annual and interim reporting periods beginning after December 15, 2016, using either a full or a modified retrospective application approach; however, in July 2015 the FASB decided to defer the effective date by one year (until 2018) by issuing ASU No. 2015-14, "Revenue From Contracts with Customers: Deferral of the Effective Date." The Company expects to adopt this new revenue guidance in the first quarter of 2018. The Company's review has indicated that the pressure pumping services and natural sand proppant segments contain contracts which could lead to changes in the timing of revenue recognition. Although the Company has not completed its review, the Company has made initial assessments of the impact on revenue and expenses. Based on these assessments, the Company currently does not expect a material impact to the Company’s results of operations, financial position and cash flows as a result of this guidance. The Company expects to complete its review of all remaining customer contracts and will make a final assessment in the fourth quarter of 2017. The Company's services are primarily short-term in nature, and it does not expect that the new revenue recognition standard will have a material impact on its financial statements upon adoption. The Company will

12

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

adopt the new standard utilizing the modified retrospective method that will result in a cumulative effect adjustment as of January 1, 2018.

In February 2016, the FASB issued ASU No, 2016-2 “Leases” amending the current accounting for leases. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less.  All other leases will fall into one of two categories: (i) a financing lease or (ii) an operating lease. Lessor accounting remains substantially unchanged with the exception that no leases entered into after the effective date will be classified as leveraged leases. For sale leaseback transactions, a sale will only be recognized if the criteria in the new revenue recognition standard are met. ASU 2016-2 is effective for fiscal years beginning after December 15, 2018, and interim periods within that fiscal year. Early adoption is permitted. Since a portion of the Company’s revenue may be subject to this new leasing guidance, it is evaluating the possibility of adopting this updated leasing guidance at the same time its adopts the new revenue guidance discussed above, utilizing the retrospective method of adoption. This new leasing guidance will also impact the Company in situations where it is the lessee, and in certain circumstances it will have a right-of-use asset and lease liability on its consolidated financial statements. The Company is currently evaluating the effect the new guidance will have on the Company's consolidated financial statements and results of operations.

3.
Acquisitions

(a) Description of Stingray Acquisition

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

The 2017 Stingray Acquisition closed on June 5, 2017. Pursuant to the Stingray Contribution Agreements, Mammoth issued 1,392,548 shares of its common stock, par value $0.01 per share, for all outstanding equity interests in SR Energy and Cementing. Based upon a closing price of Mammoth's common stock of  $18.50  per share on June 5, 2017, the total purchase price was $25,762,138 .

At the acquisition date, the components of the consideration transferred were as follows:
Consideration attributable to Cementing  (1)
 
$
12,975,123

Consideration attributable to SR Energy  (1)
 
12,787,015

Total consideration transferred
 
$
25,762,138

(1) See Summary of acquired assets and liabilities below




13

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

 
 
SR Energy
Cementing
 
Total
Cash and cash equivalents
 
$
1,611,791

$
1,059,767

 
$
2,671,558

Accounts receivable, net
 
3,912,322

495,222

 
4,407,544

Receivables from related parties
 
3,683,892

1,418,616

 
5,102,508

Inventories
 

306,081

 
306,081

Prepaid expenses
 
35,322

31,980

 
67,302

Property, plant and equipment (1)
 
13,060,850

7,458,942

 
20,519,792

Identifiable intangible assets - customer relationships (2)
 

1,140,000

 
1,140,000

Identifiable intangible assets - trade names (2)
 
550,000

270,000

 
820,000

Goodwill (3)
 
3,928,508

6,263,978

 
10,192,486

Other assets
 
6,532


 
6,532

Total assets acquired
 
$
26,789,217

$
18,444,586

 
$
45,233,803

 
 
 
 
 
 
Accounts payable and accrued liabilities
 
$
5,889,523

$
2,063,443

 
$
7,952,966

Long-term debt  (4)
 
5,073,854

2,000,000

 
7,073,854

Deferred tax liability
 
3,038,825

1,406,020

 
4,444,845

Total liabilities assumed
 
$
14,002,202

$
5,469,463

 
$
19,471,665

Net assets acquired
 
$
12,787,015

$
12,975,123

 
$
25,762,138

(1)  
Property, plant and equipment fair value measurements were prepared by utilizing a combined fair market value and cost approach. The market approach relies on comparability of assets using market data information. The cost approach places emphasis on the physical components and characteristics of the asset. It places reliance on estimated replacement cost, depreciation and economic obsolescence.
(2)  
Identifiable intangible assets were measured using a combination of income approaches. Trade names were valued using a "Relief-from-Royalty" method. Non-contractual customer relationships were valued using a "Multi-period excess earnings" method. Identifiable intangible assets will be amortized over 5 - 10 years.
(3)  
Goodwill was the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill recorded in connection with the acquisition is attributable to assembled workforces and future profitability based on the synergies expected to arise from the acquired entities.
(4)  
Long-term debt assumed was paid off subsequent the acquisition.
Since the acquisition date, the businesses acquired have provided the following activity:
 
 
2017
 
 
SR Energy
Cementing
Revenues
 
$
7,538,735

$
4,121,051

Net loss (a)
 
(1,284,347
)
(1,885,743
)
a. Includes $1,961,179 and $2,370,569 in depreciation and amortization for SR Energy and Cementing, respectively.
The following table presents unaudited pro forma information as if the acquisition of SR Energy and Cementing had occurred on January 1, 2016:
 
 
Nine Months Ended September 30, 2017
Year Ended December 31, 2016
Revenues
 
$
27,481,890

$
23,659,445

Net loss
 
(2,550,270
)
(8,171,257
)
The historical financial information was adjusted to give effect to the pro forma events that were directly attributable to the 2017 Stingray Acquisition. For the nine months ended September 30, 2017 , there were $0.2 million transaction related costs expensed. The unaudited pro forma consolidated results are not necessarily indicative of what the consolidated results of operations actually would have been had the 2017 Stingray Acquisition been completed on January 1, 2017. In addition, the unaudited pro forma consolidated results do not purport to project the future results of operations of the Company.

14

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

(b) Description of Chieftain Acquisition

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

On the acquisition date, the $36,320,187 in cash consideration consisted of the following components:
 
 
Total
Property, plant and equipment (1)
 
$
23,372,800

Sand reserves (2)
 
20,910,000

Total assets acquired
 
$
44,282,800

 
 
 
Asset retirement obligation
 
1,732,081

Total liabilities assumed
 
$
1,732,081

Total allocation of purchase price
 
$
42,550,719

Bargain purchase price (3, 4)
 
(6,230,532
)
Total purchase price
 
$
36,320,187

(1)  
Property, plant and equipment fair value measurements were prepared by utilizing a combined fair market value and cost approach. The market approach relies on comparability of assets using market data information. The cost approach places emphasis on the physical components and characteristics of the asset. It places reliance on estimated replacement cost, depreciation and economic obsolescence.
(2)  
The fair value of the sand reserves was determined based on the excess cash flow method, a form of the income approach. The method provides a value based on the estimated remaining life of sand reserves, projected financial information and industry projections.
(3)  
Amount reflected in Condensed Consolidated Statements of Comprehensive Loss reflected net of income taxes of $2,219,020 .
(4)  
The fair value of the business was determined based on the excess cash flow method, a form of the income approach.
Since the acquisition date, the Chieftain Assets have provided the following activity:
 
 
2017
 
 
Piranha
Revenues
 
$
3,131,408

Net loss (a)
 
(5,354,907
)
a. Includes $1,617,531 in depreciation and amortization
The following table presents unaudited pro forma information as if the acquisition of the Chieftain Assets had occurred as of January 1, 2016:
 
 
Nine Months Ended September 30, 2017
Year Ended December 31, 2016
Revenues
 
$
4,230,359

$
7,690,032

Net (loss) income
 
(2,458,402
)
34,127,344


The Company's historical financial information was adjusted to give pro forma effect to the events that were directly attributable to the Chieftain Acquisition. For the nine months ended September 30, 2017 , $0.8 million of transaction related costs was expensed.





15

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

(c) Description of Sturgeon Acquisition

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

The acquisition of Sturgeon closed on June 5, 2017. Pursuant to the Sturgeon Contribution Agreement, Mammoth issued 5,607,452 shares of its common stock, par value $0.01 per share, for all outstanding equity interests in Sturgeon. Based upon a closing price of Mammoth's common stock of  $18.50  per share on June 5, 2017, the total purchase price was $103,737,862 .

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

For the nine months ended September 30, 2017 , $1.3 million of transaction related costs was expensed.

The following table summarizes the carrying value of Sturgeon as of September 13, 2014, the date at which Sturgeon commenced operations with the acquisition of the Sturgeon subsidiaries:
 
 
Sturgeon
Cash and cash equivalents
 
$
705,638

Accounts receivable
 
7,587,298

Inventories
 
2,221,073

Other current assets
 
555,939

Property, plant and equipment
 
20,424,087

Sand reserves
 
57,420,000

Goodwill
 
2,683,727

Total assets acquired
 
$
91,597,762

 
 
 
Accounts payable and accrued liabilities
 
$
2,878,072

Total liabilities assumed
 
$
2,878,072

Net assets acquired
 
$
88,719,690

 
 
 
Allocation of purchase price
 
 
Carrying value of sponsor's non-controlling interest prior to Sturgeon contribution
 
$
81,738,675

Deferred tax liability assumed
 
(4,010,885
)
Members' equity conveyed
 
$
77,727,790


(d) Acquisition of Higher Power

On April 21, 2017, the Company completed its acquisition of Higher Power for total consideration of  $3,250,000  in cash to the sellers plus up to $750,000 in contingent consideration to be paid in equal annual installments over the next three years subject to contractual conditions. As of September 30, 2017, $250,000 and $500,000 of the contingent consideration are reflected in the accrued expenses and other current liabilities and other liabilities, respectively. Mammoth funded the

16

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

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

For the nine months ended September 30, 2017 , there was $0.1 million of transaction related costs expensed.

The following table summarizes the fair value of Higher Power as of April 21, 2017:
 
 
Higher Power
Property, plant and equipment
 
$
1,743,600

Identifiable intangible assets - customer relationships
 
1,613,000

Goodwill (1)
 
643,400

Total assets acquired
 
$
4,000,000

 
 
 
Long-term debt and other liabilities
 
$
750,000

Total liabilities assumed
 
$
750,000

Net assets acquired
 
$
3,250,000

(1)  
Goodwill was the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill recorded in connection with the acquisition is attributable to assembled workforces and future profitability expected to arise from the acquired entity.
From its acquisition date through September 30, 2017 , Higher Power has provided the following activity:
 
 
2017
 
 
Higher Power
Revenues
 
$
8,846,930

Net loss  (a)
 
(112,367
)
a. Includes $1,052,020 in depreciation and amortization
The following table presents unaudited pro forma information as if the acquisition of Higher Power had occurred as of January 1, 2016:
 
 
Nine Months Ended September 30, 2017
Year Ended December 31, 2016
Revenues
 
$
11,618,913

$
10,038,825

Net loss
 
(236,055
)
(1,189,496
)

(e) Acquisition of 5 Star

On July 1, 2017, the Company completed its acquisition of 5 Star for total consideration of  $2,438,000  in cash to the sellers. Mammoth funded the purchase price for 5 Star with cash on hand and borrowings under its credit facility. The acquisition of 5 Star added to the infrastructure component of the Company's other energy services segment.

For the nine months ended September 30, 2017 , there was $0.1 million of transaction related costs expensed.

The following table summarizes the fair value of 5 Star as of July 1, 2017:

17

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

 
 
5 Star
Accounts receivable
 
$
2,440,440

Property, plant and equipment
 
1,862,500

Identifiable intangible assets - trade names (1)
 
300,000

Goodwill (2)
 
248,058

Total assets acquired
 
$
4,850,998

 
 
 
Long-term debt and other liabilities
 
$
2,412,998

Total liabilities assumed
 
$
2,412,998

Net assets acquired
 
$
2,438,000

(1)  
Identifiable intangible assets were measured using a combination of income approaches. Trade names were valued using a "Relief-from-Royalty" method. Non-contractual customer relationships were valued using a "Multi-period excess earnings" method. Identifiable intangible assets will be amortized over 5 - 10 years.
(2)  
Goodwill was the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill recorded in connection with the acquisition is attributable to assembled workforces and future profitability expected to arise from the acquired entity.
From its acquisition date through September 30, 2017 , 5 Star has provided the following activity:
 
 
2017
 
 
5 Star
Revenues
 
$
6,348,734

Net income  (a)
 
776,182

a. Includes $327,351 in depreciation and amortization
The following table presents unaudited pro forma information as if the acquisition of 5 Star had occurred as of January 1, 2016:
 
 
Nine Months Ended September 30, 2017
Year Ended December 31, 2016
Revenues
 
$
12,680,853

$
13,970,985

Net income (loss)
 
494,612

(839,125
)

4.
Inventories
A summary of the Company's inventories is shown below:
 
 
September 30,
 
December 31,
 
 
2017
 
2016
Supplies
 
$
9,038,905

 
$
4,020,670

Raw materials
 
1,552,225

 
75,971

Work in process
 
289,104

 
205,450

Finished goods
 
1,283,991

 
1,822,110

Total inventory
 
$
12,164,225

 
$
6,124,201



18

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

5.
Property, Plant and Equipment     
Property, plant and equipment include the following:
 
 
 
September 30,
 
December 31,
 
Useful Life
 
2017
 
2016
Land
 
 
$
11,316,910

 
$
5,040,482

Land improvements
15 years or life of lease
 
9,317,354

 
3,640,976

Buildings
15-39 years
 
58,814,815

 
54,833,021

Drilling rigs and related equipment
3-15 years
 
151,883,172

 
138,526,519

Pressure pumping equipment
3-5 years
 
174,609,203

 
96,500,592

Coil tubing equipment
4-10 years
 
28,006,153

 
28,019,217

Rail improvements
10-20 years
 
5,962,779

 
4,276,928

Vehicles, trucks and trailers
5-10 years
 
50,263,851

 
33,140,599

Machinery and equipment
7-20 years
 
52,866,319

 
35,548,357

Other property and equipment
3-12 years
 
14,208,936

 
11,461,839

 
 
 
557,249,492

 
410,988,530

Deposits on equipment and equipment in process of assembly
 
 
22,225,520

 
9,427,307

 
 
 
579,475,012

 
420,415,837

Less: accumulated depreciation
 
 
232,157,296

 
178,296,174

Property, plant and equipment, net
 
 
$
347,317,716

 
$
242,119,663


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  nine  months ended  September 30, 2017 , proceeds from the sale of equipment damaged or lost down-hole were  $347,844  and gain on sales of equipment damaged or lost down-hole was  $221,779 . There were  no  proceeds from the sale of equipment damaged or lost down-hole for the  nine  months ended  September 30, 2016 .

A summary of depreciation, depletion, accretion and amortization expense is outlined below:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Depreciation expense
 
$
24,104,784

 
$
15,223,767

 
$
56,301,053

 
$
47,030,398

Accretion expense (see Note 2)
 
24,825

 
165

 
39,234

 
494

Depletion expense (see Note 2)
 
682,367

 
431,706

 
1,066,839

 
650,933

Amortization expense (see Note 6)
 
2,411,757

 
2,265,833

 
6,947,257

 
6,801,333

Depreciation, depletion, accretion and amortization
 
$
27,223,733

 
$
17,921,471

 
$
64,354,383

 
$
54,483,158


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.

19

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

6.
Goodwill and Intangible Assets
The Company had the following definite lived intangible assets recorded:
 
 
September 30,
 
December 31,
 
 
2017
 
2016
Customer relationships
 
$
35,798,000

 
$
33,605,000

Trade names
 
8,790,000

 
7,110,000

Less: accumulated amortization - customer relationships
 
24,027,625

 
17,655,228

Less: accumulated amortization - trade names
 
2,067,803

 
1,492,943

Intangible assets, net
 
$
18,492,572

 
$
21,566,829


Amortization expense for intangible assets was $6,947,257 and $6,801,333 for the nine months ended September 30, 2017 and 2016 , respectively. The original life of customer relationships range from 4 to 10 years with a remaining average useful life of 4.57 years. Trade names are amortized over a 10 year useful life and as of September 30, 2017 the remaining useful life was 9.04 years.

Aggregated expected amortization expense for the future periods is expected to be as follows:
Year ended December 31:
 
Amount
Remainder of 2017
 
$
2,357,126

2018
 
8,581,505

2019
 
1,096,004

2020
 
1,096,004

2021
 
1,090,252

Thereafter
 
4,271,681

 
 
$
18,492,572


Goodwill was $99,810,819 and $88,726,875 at September 30, 2017 and December 31, 2016 , respectively. Changes in the goodwill for the year ended December 31, 2016 and the nine months ended September 30, 2017 are set forth below:
Balance, January 1, 2016
 
$
88,726,875

Additions
 

Balance, December 31, 2016
 
88,726,875

Additions - 2017 Stingray Acquisition (Note 3)
 
10,192,486

Additions - Higher Power Acquisition (Note 3)
 
643,400

Additions - 5 Star Acquisition (Note 3)
 
248,058

Balance, September 30, 2017
 
$
99,810,819












20

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

7.
Accrued Expenses and Other Current Liabilities
Accrued expense and other current liabilities included the following:
 
 
September 30,
 
December 31,
 
 
2017
 
2016
Accrued compensation, benefits and related taxes
 
$
7,257,925

 
$
2,432,093

Financed insurance premiums
 

 
3,293,859

State & local taxes payable
 
1,519,073

 
319,597

Insurance reserves
 
2,270,444

 
971,351

Deferred revenue
 
6,051,796

 

Other
 
4,457,304

 
1,529,298

Total
 
$
21,556,542

 
$
8,546,198


Financed insurance premiums are due in monthly installments, bear interest at rates ranging from 1.79% to 5.00% , are unsecured, and mature within the twelve month period following the close of the year.
8.
Debt
Mammoth Credit Facility

On November 25, 2014, Mammoth entered into a revolving credit and security agreement with a syndicate of banks that provides for maximum borrowings of $170 million . The facility, as amended in connection with the IPO, matures on November 25, 2019. Borrowings under this facility are secured by the assets of Mammoth, inclusive of the subsidiary companies. The maximum availability of the facility is subject to a borrowing base calculation prepared monthly. Concurrent with the execution of the facility, the initial advance was used to repay all the debt of the Company then outstanding. Interest is payable monthly at a base rate set by the lead institution’s commercial lending group plus an applicable margin. Additionally, at the Company's request, outstanding balances are permitted to be converted to LIBOR rate plus applicable margin tranches at set increments of $500,000 . The LIBOR rate option allows the Company to select interest periods from one, two, three or six months. The applicable margin for either the base rate or the LIBOR rate option can vary from 1.5% to 3.0% , based upon a calculation of the excess availability of the line as a percentage of the maximum credit limit. The deferred loan costs associated with this facility are classified in other non-current assets.

At September 30, 2017 , all of the $94,000,000 outstanding balance of the facility was in a one month LIBOR rate option tranche with an interest rate of 3.99% . As of September 30, 2017 , Mammoth had availability of $69,779,297 , which is net of letters of credit of $5,454,187 .

As of December 31, 2016 , the facility was undrawn and had borrowing base availability of $146,181,002 .

The Mammoth facility also contains various customary affirmative and restrictive covenants. Among the various covenants are specifically identified financial covenants placing requirements of a minimum interest coverage ratio ( 3.0 to 1.0), maximum leverage ratio ( 4.0 to 1.0), and minimum availability ( $10 million ). As of September 30, 2017 and December 31, 2016 , the Company was in compliance with its covenants under the facility.

9.
Income Taxes
As discussed in Note 1, the Partnership was converted into a limited liability company on October 12, 2016 and the membership interests in the limited liability company were contributed to the Company. As a result, the Company will file a consolidated return for the period October 12, 2016 through December 31, 2016 . Prior to the conversion, the Partnership, other than Lodging, was not subject to corporate income taxes.

The components of income tax (benefit) expense attributable to the Company for the nine months ended September 30, 2017 and 2016 , are as follows:

21

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

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
U.S. current income tax (benefit) expense
 
$


$
44,232

 
$

 
$
31,352

U.S. deferred income tax (benefit) expense
 
(1,330,254
)

19,324

 
(7,826,628
)
 
29,110

Foreign current income tax expense
 
(100,815
)

998,663

 
505,741

 
2,652,847

Foreign deferred income tax (benefit) expense
 
18,389


(6,258
)
 
(1,935
)
 
26,387

Total
 
$
(1,412,680
)
 
$
1,055,961

 
$
(7,322,822
)
 
$
2,739,696


A reconciliation of the statutory federal income tax amount to the recorded expense is as follows:
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
Loss before income taxes, as reported
 
$
(14,274,443
)
 
$
(32,007,236
)
Bargain purchase gain, net of tax
 
(4,011,512
)
 

Loss before income taxes, as taxed
 
(18,285,955
)
 
(32,007,236
)
Statutory income tax rate
 
35
%
 
35
%
Expected income tax benefit
 
(6,400,084
)
 
(11,202,533
)
Non-taxable entity
 

 
14,763,650

Other permanent differences
 
40,287

 
33,471

State tax benefit
 
(301,569
)
 
60,463

Foreign income tax rate differential
 
(126,630
)
 
(820,580
)
Other
 
(534,826
)
 
(94,775
)
Total
 
$
(7,322,822
)
 
$
2,739,696


Deferred tax assets and liabilities attributable to the Company consisted of the following:
 
 
September 30,
 
December 31,
 
 
2017
 
2016
Deferred tax assets:
 
 
 
 
Allowance for doubtful accounts
 
$
2,049,095

 
$
1,892,761

Net operating loss carryforward
 
4,653,055

 

Deferred stock compensation
 
2,894,538

 
1,686,671

Accrued liabilities
 
1,573,448

 
746,132

Other
 
3,470,006

 
1,785,999

Deferred tax assets
 
14,640,142

 
6,111,563

 
 
 
 


Deferred tax liabilities:
 
 
 
 
Property and equipment
 
$
(54,589,256
)
 
$
(42,525,793
)
Intangible assets
 
(5,995,560
)
 
(7,662,590
)
Unrepatriated foreign earnings
 
(4,948,229
)
 
(3,451,110
)
Other
 
(193,836
)
 
(142,859
)
Deferred tax liabilities
 
(65,726,881
)
 
(53,782,352
)
Net deferred tax liability
 
$
(51,086,739
)
 
$
(47,670,789
)
 
 
 
 
 
Reflected in accompanying balance sheet as:
 
 
 
 
Deferred income taxes
 
$
(51,086,739
)
 
$
(47,670,789
)

22

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

10.
Earnings Per Share
Common Stock Offering

On October 14, 2016, Mammoth Inc.’s common stock began trading on The Nasdaq Global Select Market under the symbol “TUSK.” On October 19, 2016, the Company closed the IPO of 7,750,000 shares of common stock at $15.00 per share. Net proceeds to Mammoth Inc. from its sale of 7,500,000 shares of common stock were approximately $103.1 million .

The authorized capital stock of the Company consists of  200 million  shares of common stock, par value  $0.01  per share, and 20 million shares of preferred stock, par value $0.01 per share.

Earnings Per Share

In connection with the contribution of Operating Entities to the Partnership in November 2014, the Partnership issued an aggregate of 30,000,000 common units to Mammoth Holdings, Gulfport and Rhino. Upon the conversion of the Partnership into Mammoth LLC, a limited liability company, in October 2016, the common units were converted into an equal number of membership interests in Mammoth LLC. Finally, when Mammoth Holdings, Gulfport and Rhino contributed their 30,000,000 membership interests in Mammoth LLC to the Company in connection with the IPO, the Company issued to them an aggregate of 30,000,000 shares of the Company's common stock.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Basic loss per share:
 
 
 
 
 
 
 
 
Allocation of earnings:
 
 
 
 
 
 
 
 
Net loss
 
$
(800,827
)
 
$
(2,978,626
)
 
$
(6,951,621
)
 
$
(34,746,932
)
Weighted average common shares outstanding
 
44,501,885

 
30,000,000

 
40,526,276

 
30,000,000

Basic loss per share
 
$
(0.02
)
 
$
(0.10
)
 
$
(0.17
)
 
$
(1.16
)
 
 
 
 
 
 
 
 
 
Diluted loss per share:
 
 
 
 
 
 
 
 
Allocation of earnings:
 
 
 
 
 
 
 
 
Net loss
 
$
(800,827
)
 
$
(2,978,626
)
 
$
(6,951,621
)
 
$
(34,746,932
)
Weighted average common shares, including dilutive effect  (a)
 
44,501,885

 
30,000,000

 
40,526,276

 
30,000,000

Diluted loss per share
 
$
(0.02
)
 
$
(0.10
)
 
$
(0.17
)
 
$
(1.16
)
a.  
No incremental shares of potentially dilutive restricted stock awards were included for periods presented as their effect was antidulitive under the treasury stock method.

Unaudited Pro Forma Earnings Per Share

The Company’s pro forma basic and diluted earnings per share amounts have been computed based on the weighted-average number of shares of common stock outstanding for the period, as if the shares of common stock issued upon the conversion and contribution of Mammoth LLC to Mammoth Inc. were outstanding for the entire year. A reconciliation of the components of pro forma basic and diluted earnings per common share is presented in the table below:

23

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

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2016
 
September 30, 2016
Pro Forma C Corporation Data (unaudited):
 
 
 
 
Net loss, as reported
 
$
(2,978,626
)
 
$
(34,746,932
)
Pro forma benefit for income taxes
 
(3,896,035
)
 
(9,701,517
)
Pro forma net loss
 
$
917,409

 
$
(25,045,415
)
 
 
 
 
 
Basic loss per share:
 
 
 
 
Allocation of earnings:
 
 
 
 
Net loss
 
$
917,409

 
$
(25,045,415
)
Weighted average common shares outstanding
 
43,107,452

 
43,107,452

Basic loss per share
 
$
0.02

 
$
(0.58
)
 
 
 
 
 
Diluted loss per share:
 
 
 
 
Allocation of earnings:
 
 
 
 
Net loss
 
$
917,409

 
$
(25,045,415
)
Weighted average common shares, including dilutive effect (a)