Mammoth Energy Services, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Leases

Leases

12 Months Ended

Dec. 31, 2019

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which supersedes the requirements set forth in ASC 840, Leases. The Company adopted this standard effective January 1, 2019 utilizing the transition method which permits an entity to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption with no adjustment made to the comparative periods presented in the consolidated financial statements. Accordingly, the comparative information as of December 31, 2018 and for the years ended December 31, 2018 and 2017, have not been adjusted and continues to be reported under the previous lease standard. The new guidance requires lessees to report a right of use asset and lease liability on the balance sheet for all leases with a term longer than one year, while maintaining substantially similar classifications for financing and operating leases. Lessor accounting remains substantially unchanged with the exception that no leases entered into after the effective date will be classified as leveraged leases.

The Company elected the transition practical expedient package whereby an entity was not required to reassess (i) whether any expired or existing contracts are or contained leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. The adoption of ASC 842 resulted in the recognition of approximately $60.0 million of operating lease right-of-use assets and operating lease liabilities on our consolidated balance sheet as of January 1, 2019 and did not materially impact our consolidated statement of comprehensive (loss) income for the year ended December 31, 2019.

Lessee Accounting

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

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

The rate implicit in the Company's leases is not readily determinable. Therefore, the Company uses its incremental borrowing rate based on information available at the commencement date of its leases in determining the present value of lease payments. The Company's incremental borrowing rate reflects the estimated rate of interest that it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

Lease expense consisted of the following for the year ended December 31, 2019 (in thousands):



	Year Ended December 31, 2019
Operating lease expense	$	21,643
Short-term lease expense	682
Finance lease expense:
Amortization of right-of-use assets	1,134
Interest on lease liabilities	192
Total lease expense	$	23,651

Supplemental balance sheet information related to leases as of December 31, 2019 is as follows:



	December 31, 2019
Operating leases:
Operating lease right-of-use assets	$	43,446
Current operating lease liability	16,432
Long-term operating lease liability	27,102
Finance leases:
Property and equipment, net	$	5,111
Accrued expenses and other current liabilities	1,365
Other liabilities	3,856

Other supplemental information related to leases for the year ended December 31, 2019 is as follows (in thousands):



	Year Ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	21,375
Operating cash flows from finance leases	192
Financing cash flows from finance leases	1,503
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	5,548
Finance leases	3,721



	December 31, 2019
Weighted-average remaining lease term:
Operating leases	3.4 years
Finance leases	4.1 years
Weighted-average discount rate:
Operating leases	4.4	%
Finance leases	4.3	%

Maturities of lease liabilities as of December 31, 2019 are as follows (in thousands):



	Operating Leases		Finance Leases
2020	$	17,948	$	1,563
2021	13,181		1,254
2022	8,747		1,221
2023	4,353		1,214
2024	1,721		441
Thereafter	881		—
Total lease payments	46,831		5,693
Less: Present value discount	3,297		472
Present value of lease payments	$	43,534	$	5,221

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

Lessor Accounting

Certain of the Company's agreements with its customers for contract land drilling services, aviation services and remote accommodation services contain an operating lease component under ASC 842 because (i) there are identified assets, (ii) the customer obtains substantially all of the economic benefits of the identified assets throughout the period of use and (iii) the customer directs the use of the identified assets throughout the period of use. The Company has elected to apply the practical expedient provided to lessors to combine the lease and non-lease components of a contract where the revenue recognition pattern is the same and where the lease component, when accounted for separately, would be considered an operating lease. The practical expedient also allows a lessor to account for the combined lease and non-lease components under ASC 606, Revenue from Contracts with Customers, when the non-lease component is the predominant element of the combined component. The Company's agreements for its contract land drilling services contain a service component in addition to a lease component. The Company has determined the service component is greater than the lease component and therefore, reports revenue for its contract land drilling services under ASC 606.

The Company's lease agreements are generally short-term in nature and lease revenue is recognized over time based on a monthly, daily or hourly rate basis. The Company does not provide an option for the lessee to purchase the rented assets at the end of the lease and the lessees do not provide residual value guarantees on the rented assets. During the year ended December 31, 2019, the Company recognized lease revenue, which is included in services revenue - related parties and services revenue on the consolidated statements of comprehensive (loss) income, of $1.8 million and $0.6 million, respectively.