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

Annual report pursuant to Section 13 and 15(d)

Acquisitions

Acquisitions

12 Months Ended

Dec. 31, 2018

Acquisition of Air Rescue Systems and Brim Equipment Assets

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

The acquisition of ARS qualifies under FASB ASC 805, Business Combinations, as a business combination. The purchase of the Brim Equipment Assets was negotiated and funded as part of the acquisition. Therefore, the purchase of the Brim Equipment Assets also qualifies as a business combination under ASC 805. Cobra Aviation is able to exercise significant influence over Brim Acquisitions, but is a minority owner and does not have controlling financial interest. As a result, Cobra Aviation's investment in Brim Acquisitions is accounted for as an equity method investment under FASB ASC 323, Investments-Equity Method and Joint Ventures. See Note 9 for additional information on our investment in Brim Acquisitions.

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

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



	ARS		Brim Equipment Assets
Accounts receivable	$	146	$	—
Property, plant and equipment	1,702		1,990
Identifiable intangible assets - trade name^(a)	120		—
Goodwill^(b)	694		2,243
Other non-current assets	5		—
Total assets acquired	$	2,667	$	4,233


a.	Trade name was valued using a "Relief-from-Royalty" method and will be amortized over 20 years.


b.	Goodwill was the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill recorded in connection with the acquisition is attributable to assembled workforces and future profitability expected to arise from the acquired entity.

From the acquisition date through December 31, 2018, ARS and the Brim Equipment Assets provided the following activity (in thousands):



	2018
	ARS			Brim Equipment Assets
Revenues	$	—		$	—
Net loss^(a)	(25		)	—

a. Includes depreciation expense of $0.02 million for ARS.

The following table presents unaudited pro forma information as if the ARS and the Brim Equipment Assets acquisitions had occurred as of January 1, 2017 (in thousands):



	Years Ended December 31,					Years Ended December 31,
	2018		2017			2018		2017
	ARS					Brim Equipment Assets
Revenues	$	3,055	$	2,641		$	4,478	$	1,448
Net (loss) income	207		(39		)	2,410		459

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

Acquisition of WTL Oil

On May 31, 2018, the Company completed its acquisition of WTL for total consideration of $5.5 million in cash to the sellers plus $0.6 million in consideration to be paid upon completion of certain contractual obligations. The seller completed these obligations and the Company paid the additional $0.6 million to the seller during the three months ended September 30, 2018.

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

The following table summarizes the fair value of WTL as of May 31, 2018 (in thousands):



	WTL
Property, plant and equipment	$	2,960
Identifiable intangible assets - customer relationships^(a)	930
Identifiable intangible assets - trade name^(a)	650
Goodwill^(b)	1,567
Total assets acquired	$	6,107


a.	Identifiable intangible assets were measured using a combination of income approaches. Trade names were valued using a "Relief-from-Royalty" method. Non-contractual customer relationships were valued using a "Multi-period excess earnings" method. Identifiable intangible assets will be amortized over 10-20 years.

Goodwill was the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill recorded in connection with the acquisition is attributable to the assembled workforce and future profitability expected to arise from the acquired entity.

From the acquisition date through December 31, 2018, WTL provided the following activity (in thousands):



	2018
Revenues	$	7,511
Net loss^(a)	(149		)

a. Includes depreciation and amortization expense of $1.0 million.

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



	Years Ended December 31,
	2018			2017
Revenues	$	10,270		$	4,229
Net (loss) income	(64		)	165

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

Acquisition of RTS Energy Services

On June 15, 2018, the Company completed its acquisition of RTS for total consideration of $7.6 million in cash to the sellers plus $0.5 million to be paid 90 days after closing subject to contractual conditions. The seller completed these obligations and the Company paid the additional $0.5 million to the seller during the three months ended September 30, 2018.

The Company used cash on hand and borrowings under its credit facility to fund the acquisition. The acquisition of RTS expanded Mammoth's cementing services into the Permian Basin and added acidizing to the Company's service offerings.

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



	RTS
Inventory	$	180
Property, plant and equipment	7,787
Goodwill^(a)	133
Total assets acquired	$	8,100

a. Goodwill was the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill recorded in connection with the acquisition is attributable to the assembled workforce and future profitability expected to arise from the acquired entity.

From the acquisition date through December 31, 2018, RTS provided the following activity (in thousands):



	2018
Revenues	$	6,682
Net loss^(a)	(3,210		)

a. Includes depreciation expense of $0.9 million.

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



	Years Ended December 31,
	2018			2017
Revenues	$	16,212		$	20,877
Net (loss) income	(4,066		)	1,141

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

Acquisition of 5 Star

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

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

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



	5 Star
Accounts receivable	$	2,440
Property, plant and equipment	1,863
Identifiable intangible assets - trade names ^(a)	300
Goodwill ^(b)	248
Total assets acquired	$	4,851

Long-term debt and other liabilities	$	2,413
Total liabilities assumed	$	2,413
Net assets acquired	$	2,438


a.	Identifiable intangible assets were measured using a combination of income approaches. Trade names were valued using a "Relief-from-Royalty" method. Non-contractual customer relationships were valued using a "Multi-period excess earnings" method. Identifiable intangible assets will be amortized over 10 years.


b.	Goodwill was the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill recorded in connection with the acquisition is attributable to assembled workforces and future profitability expected to arise from the acquired entity.

From its acquisition date through December 31, 2018, 5 Star has provided the following activity (in thousands):



	2018		2017
Revenues^(a)	$	143,302	$	25,216
Net income^(b)	4,149		4,191

a.Includes intercompany revenues of $112.6 million and $16.0 million, respectively, for 2018 and 2017

b.Includes depreciation and amortization expense of $3.5 million and $0.8 million, respectively, for 2018 and 2017

The following table presents unaudited pro forma information as if the acquisition of 5 Star had occurred as of January 1, 2017 (in thousands):



	Year Ended
	December 31, 2017
Revenues	$	31,548
Net income	3,910

Acquisition of Higher Power

On April 21, 2017, the Company completed its acquisition of Higher Power for total consideration of $4.0 million, including $3.3 million in cash to the sellers plus $0.8 million in consideration to be paid in equal annual installments over the next three years. The Company accelerated payout and funded the remaining consideration of $0.8 million during the year ended December 31, 2018. Mammoth funded the purchase price for Higher Power with cash on hand and borrowings under its credit facility. The acquisition of Higher Power added an energy infrastructure component to the Company's business, helping to diversify its service offerings.

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

The following table summarizes the fair value of Higher Power as of April 21, 2017 (in thousands):



	Higher Power
Property, plant and equipment	$	1,744
Identifiable intangible assets - customer relationships	1,613
Goodwill ^(a)	643
Total assets acquired	$	4,000


a.	Goodwill was the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill recorded in connection with the acquisition is attributable to assembled workforces and future profitability expected to arise from the acquired entity.

From its acquisition date through December 31, 2018, Higher Power has provided the following activity (in thousands):



	2018			2017
Revenues^(a)	$	220,281		$	39,571
Net income^(b)	(5,868		)	5,127

a.Includes intercompany revenues of $191.2 million and $27.4 million, respectively, for 2018 and 2017

b.Includes depreciation and amortization of $7.1 million and $2.0 million, respectively, for 2018 and 2017

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



	Year Ended
	December 31, 2017
Revenues	$	42,343
Net income	5,004

Acquisition of Sturgeon

On March 20, 2017, and as amended on May 12, 2017, the Company entered into a definitive contribution agreement with MEH Sub, Wexford Offshore Sturgeon Corp., Gulfport, Rhino and Mammoth Energy Partners LLC (the “Sturgeon Contribution Agreement”). Under the Sturgeon Contribution Agreement, the Company agreed to acquire 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 $103.7 million.

As a result of this transaction, the Company's historical financial information has been recast to combine the Consolidated Statements of Comprehensive Income (Loss) and the 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.

The Company recognized $1.3 million of transaction related costs during the year ended December 31, 2017 related to this acquisition.

Acquisition of Chieftain

On March 27, 2017, as amended as of May 24, 2017, the Company entered into a 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 natural sand proppant services segment. The Chieftain acquisition added sand reserves, increased our production capacity and provided access to the Union Pacific railroad, which affords access to both the Mid-Continent and Permian basins in support of the Company’s pressure pumping services.

The following table summarizes the fair value of the Chieftain Acquisition as of May 26, 2017 (in thousands):



	Total
Property, plant and equipment ^(a)	$	23,373
Sand reserves ^(b)	20,910
Total assets acquired	$	44,283

Asset retirement obligation	1,732
Total liabilities assumed	$	1,732
Total allocation of purchase price	$	42,551
Bargain purchase price ^{(c, d)}	(6,231		)
Total purchase price	$	36,320


a.	Property, plant and equipment fair value measurements were prepared by utilizing a combined fair market value and cost approach. The market approach relies on comparability of assets using market data information. The cost approach places emphasis on the physical components and characteristics of the asset. It places reliance on estimated replacement cost, depreciation and economic obsolescence.


b.	The fair value of the sand reserves was determined based on the excess cash flow method, a form of the income approach. The method provides a value based on the estimated remaining life of sand reserves, projected financial information and industry projections.


c.	Amount in Consolidated Statements of Comprehensive Income (Loss) reflected net of income taxes of $2.2 million.


d.	The fair value of the business was determined based on the excess cash flow method, a form of the income approach.

Since the acquisition date, the Chieftain Assets have provided the following activity (in thousands):



	2018		2017
Revenues^(a)	$	52,628	$	22,847
Net income^(b)	8,379		5,520

a.Includes intercompany revenues of $14.8 million and $12.3 million, respectively, for 2018 and 2017

b.Includes depreciation and amortization of $4.9 million and $2.8 million, respectively, for 2018 and 2017

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



	Year Ended
	December 31, 2017
Revenues	$	22,847
Net income	5,655

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

Acquisition of Stingray

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

The 2017 Stingray Acquisition closed on June 5, 2017. Pursuant to the Stingray Contribution Agreements, Mammoth issued 1,392,548 shares of its common stock, 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 $25.8 million.

At the acquisition date, the components of the consideration transferred were as follows (in thousands):



Consideration attributable to Cementing^(a)	$	12,975
Consideration attributable to SR Energy^(a)	12,787
Total consideration transferred	$	25,762

a. See summary of acquired assets and liabilities below



	SR Energy		Cementing		Total
	(in thousands)
Cash and cash equivalents	$	1,611	$	1,060	$	2,671
Accounts receivable, net	3,913		495		4,408
Receivables from related parties	3,684		1,418		5,102
Inventories	—		306		306
Prepaid expenses	35		32		67
Property, plant and equipment^(a)	13,061		7,459		20,520
Identifiable intangible assets - customer relationships^(b)	—		1,140		1,140
Identifiable intangible assets - trade names^(b)	550		270		820
Goodwill^(c)	3,929		6,264		10,193
Other assets	7		—		7
Total assets acquired	$	26,790	$	18,444	$	45,234

Accounts payable and accrued liabilities	$	5,890	$	2,063	$	7,953
Long-term debt^(d)	5,074		2,000		7,074
Deferred tax liability	3,039		1,406		4,445
Total liabilities assumed	$	14,003	$	5,469	$	19,472
Net assets acquired	$	12,787	$	12,975	$	25,762


a.	Property, plant and equipment fair value measurements were prepared by utilizing a combined fair market value and cost approach. The market approach relies on comparability of assets using market data information. The cost approach places emphasis on the physical components and characteristics of the asset. It places reliance on estimated replacement cost, depreciation and economic obsolescence.


b.	Identifiable intangible assets were measured using a combination of income approaches. Trade names were valued using a "relief-from-Royalty" method. Non-contractual customer relationships were valued using a "multi-period excess earnings" method. Identifiable intangible assets will be amortized over 5-10 years.

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.


d.	Long-term debt assumed was paid off subsequent to the acquisition.

Since the acquisition date, the businesses acquired have provided the following activity (in thousands):



	2018						2017
	SR Energy			Cementing			SR Energy			Cementing
Revenues^(a)	$	29,287		$	6,426		$	11,572		$	7,500
Net loss^{(b, c)}	(2,539		)	(5,869		)	(1,626		)	(1,963		)


a.	Includes intercompany revenues of $3.0 million and $0.6 million, respectively, for SR Energy for 2018 and 2017 and $0.3 million and a nominal amount, respectively, for Cementing for 2018 and 2017.


b.	Includes depreciation and amortization of $5.4 million and $3.4 million, respectively, for SR Energy for 2018 and 2017 and $1.5 million and $4.1 million, respectively, for Cementing for 2018 and 2017.


c.	Includes non-cash impairment expense of $4.4 million for Cementing in 2018 related to the impairment of intangible assets and goodwill as a result of moving Cementing equipment from the Utica shale to the Permian basin.

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



	Year Ended
	December 31, 2017
Revenues	$	35,142
Net loss	(4,066		)

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 year ended December 31, 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.