Mammoth Energy Services, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

Acquisitions

6 Months Ended

Jun. 30, 2018

(a) Acquisition of WTL Oil

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

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

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



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


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

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

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



	2018
Revenues	$	595
Net income^(a)	5

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

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



	Six Months Ended
	June 30, 2018		June 30, 2017
Revenues	$	3,354	$	1,553
Net income	90		62

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

(b) Acquisition of RTS Energy Services

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

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



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

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



	2018
Revenues	$	630
Net income^(a)	7

a. Includes depreciation expense of $0.1 million.

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



	Six Months Ended
	June 30, 2018			June 30, 2017
Revenues	$	10,160		$	8,326
Net income (loss)	(848		)	653

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

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

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

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



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

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


a.	Identifiable intangible assets were measured using a combination of income approaches. Trade names were valued using a "Relief-from-Royalty" method. Identifiable intangible assets will be amortized over 10 years.

From the acquisition date through June 30, 2018, 5 Star provided the following activity (in thousands):



	2018		2017
Revenues^(a)	$	86,720	$	25,216
Net income^(b)	12,903		4,191

a.Includes intercompany revenues of $77.5 million and $16.0 million, respectively, for 2018 and 2017.

b.Includes depreciation and amortization expense of $1.0 million and $0.8 million, respectively, for 2018 and 2017.

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



	Six Months Ended June 30, 2017
Revenues	$	6,332
Net loss	(282		)

(d) Acquisition of Higher Power

On April 21, 2017, the Company completed its acquisition of Higher Power for total consideration of $3.3 million in cash to the sellers plus up to $0.8 million in contingent consideration to be paid in equal annual installments over the next three years subject to contractual conditions. As of June 30, 2018, $0.3 million and $0.3 million, respectively, of the contingent consideration are reflected in accrued expenses and other current liabilities and other liabilities on the unaudited condensed consolidated balance sheet. Mammoth funded the purchase price for Higher Power with cash on hand and borrowings under its credit facility. The acquisition of Higher Power added an energy infrastructure component to the Company's business, helping to diversify its service offerings.

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

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

From the acquisition date through June 30, 2018, Higher Power provided the following activity (in thousands):



	2018		2017
Revenues^(a)	$	122,734	$	39,571
Net income^(b)	16,205		5,127

a.Includes intercompany revenues of $111.4 million and $27.4 million, respectively for 2018 and 2017.

b.Includes depreciation and amortization expense of $2.3 million and $2.0 million, respectively, for 2018 and 2017.

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



	Six Months Ended June 30, 2017
Revenues	$	4,481
Net loss	(411		)

(e) Acquisition of Sturgeon

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

The acquisition of Sturgeon closed on June 5, 2017. Pursuant to the Sturgeon Contribution Agreement, Mammoth issued 5,607,452 shares of its common stock for all outstanding equity interests in Sturgeon. Based upon a closing price of Mammoth's common stock of $18.50 per share on June 5, 2017, the total purchase price was $103.7 million.

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

For the year ended December 31, 2017, $1.3 million of transaction related costs were expensed.

(f) Acquisition of Chieftain

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

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



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

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


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


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


c.	Amount reflected in unaudited condensed consolidated statements of comprehensive income (loss) reflected net of income taxes of $2.2 million.


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

From the acquisition date through June 30, 2018, the Chieftain Assets provided the following activity (in thousands):



	2018		2017
Revenues^(a)	$	35,128	$	22,847
Net income^(b)	10,694		5,520

a.Includes intercompany revenues of $9.6 million and $12.3 million, respectively, for 2018 and 2017

b.Includes depreciation, depletion, amortization and accretion of $2.3 million and $2.8 million, respectively, for 2018 and 2017

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



	Six Months Ended June 30, 2017
Revenues	$	1,312
Net loss	(72		)

The Company's historical financial information was adjusted to give pro forma effect to the events that were directly attributable to the Chieftain Acquisition. The Company recognized $0.8 million of transaction related costs during the year ended December 31, 2017 related to this acquisition.

(g) Acquisition of Stingray

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

The 2017 Stingray Acquisition closed on June 5, 2017. Pursuant to the Stingray Contribution Agreements, Mammoth issued 1,392,548 shares of its common stock for all outstanding equity interests in SR Energy and Cementing. Based upon a closing price of Mammoth's common stock of $18.50 per share on June 5, 2017, the total purchase price was $25.8 million.

The following tables summarize the fair values of Cementing and SR Energy as of June 5, 2017 (in thousands):



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

a. See Summary of acquired assets and liabilities below



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

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


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


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

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


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

From the acquisition date through June 30, 2018, SR Energy and Cementing provided the following activity (in thousands):



	2018						2017
	SR Energy			Cementing			SR Energy			Cementing
Revenues^(a)	$	16,034		$	5,131		$	11,572		$	7,500
Net loss^(b)	(1,586		)	(806		)	(1,626		)	(1,963		)


a.	Includes intercompany revenues of $1.6 million and $0.6 million for SR Energy in 2018 and 2017.


b.	Includes depreciation and amortization expense of $2.8 million and $1.0 million, respectively, for SR Energy and Cementing in 2018 and $3.4 million and $4.1 million, respectively, for SR Energy and Cementing in 2017.

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



	Six Months Ended June 30, 2017
Revenues	$	18,333
Net loss	(1,612		)

The historical financial information was adjusted to give effect to the pro forma events that were directly attributable to the 2017 Stingray Acquisition. The unaudited pro forma consolidated results are not necessarily indicative of what the consolidated results of operations actually would have been had the 2017 Stingray Acquisition been completed on January 1, 2017. In addition, the unaudited pro forma consolidated results do not purport to project the future results of operations of the Company. The Company recognized $0.2 million of transaction related costs during the year ended December 31, 2017 related to this acquisition.