10-Q 1 a2018-06x3010xq.htm 10-Q Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018
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
 
ý
 
 
 
 
 
 
 
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 August 3, 2018, there were 44,755,678 shares of common stock, $0.01 par value, outstanding.
                                                            



MAMMOTH ENERGY SERVICES, INC.



TABLE OF CONTENTS
 
 
 
 
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2.
Item 4.
Item 5.
Item 6.
 
 




GLOSSARY OF OIL AND NATURAL GAS AND ELECTRICAL INFRASTRUCTURE TERMS
The following is a glossary of certain oil and natural gas industry terms used in this report:
Acidizing
To pump acid into a wellbore to improve a well's productivity or injectivity.
Blowout
An uncontrolled flow of reservoir fluids into the wellbore, and sometimes catastrophically to the surface. A blowout may consist of salt water, oil, natural gas or a mixture of these. Blowouts can occur in all types of exploration and production operations, not just during drilling operations. If reservoir fluids flow into another formation and do not flow to the surface, the result is called an underground blowout. If the well experiencing a blowout has significant open-hole intervals, it is possible that the well will bridge over (or seal itself with rock fragments from collapsing formations) down-hole and intervention efforts will be averted.
Bottomhole assembly
The lower portion of the drillstring, consisting of (from the bottom up in a vertical well) the bit, bit sub, a mud motor (in certain cases), stabilizers, drill collar, heavy-weight drillpipe, jarring devices (“jars”) and crossovers for various threadforms. The bottomhole assembly must provide force for the bit to break the rock (weight on bit), survive a hostile mechanical environment and provide the driller with directional control of the well. Oftentimes the assembly includes a mud motor, directional drilling and measuring equipment, measurements-while-drilling tools, logging-while-drilling tools and other specialized devices.
Cementing
To prepare and pump cement into place in a wellbore.
Coiled tubing
A long, continuous length of pipe wound on a spool. The pipe is straightened prior to pushing into a wellbore and rewound to coil the pipe back onto the transport and storage spool. Depending on the pipe diameter (1 in. to 4 1/2 in.) and the spool size, coiled tubing can range from 2,000 ft. to 23,000 ft. (610 m to 6,096 m) or greater length.
Completion
A generic term used to describe the assembly of down-hole tubulars and equipment required to enable safe and efficient production from an oil or gas well. The point at which the completion process begins may depend on the type and design of the well.
Directional drilling
The intentional deviation of a wellbore from the path it would naturally take. This is accomplished through the use of whipstocks, bottomhole assembly (BHA) configurations, instruments to measure the path of the wellbore in three-dimensional space, data links to communicate measurements taken down-hole to the surface, mud motors and special BHA components and drill bits, including rotary steerable systems, and drill bits. The directional driller also exploits drilling parameters such as weight on bit and rotary speed to deflect the bit away from the axis of the existing wellbore. In some cases, such as drilling steeply dipping formations or unpredictable deviation in conventional drilling operations, directional-drilling techniques may be employed to ensure that the hole is drilled vertically. While many techniques can accomplish this, the general concept is simple: point the bit in the direction that one wants to drill. The most common way is through the use of a bend near the bit in a down-hole steerable mud motor. The bend points the bit in a direction different from the axis of the wellbore when the entire drillstring is not rotating. By pumping mud through the mud motor, the bit turns while the drillstring does not rotate, allowing the bit to drill in the direction it points. When a particular wellbore direction is achieved, that direction may be maintained by rotating the entire drillstring (including the bent section) so that the bit does not drill in a single direction off the wellbore axis, but instead sweeps around and its net direction coincides with the existing wellbore. Rotary steerable tools allow steering while rotating, usually with higher rates of penetration and ultimately smoother boreholes.
Down-hole
Pertaining to or in the wellbore (as opposed to being on the surface).
Down-hole motor
A drilling motor located in the drill string above the drilling bit powered by the flow of drilling mud. Down-hole motors are used to increase the speed and efficiency of the drill bit or can be used to steer the bit in directional drilling operations. Drilling motors have become very popular because of horizontal and directional drilling applications and the day rates for drilling rigs.
Drilling rig
The machine used to drill a wellbore.
Drillpipe or Drill pipe
Tubular steel conduit fitted with special threaded ends called tool joints. The drillpipe connects the rig surface equipment with the bottomhole assembly and the bit, both to pump drilling fluid to the bit and to be able to raise, lower and rotate the bottomhole assembly and bit.
Drillstring or Drill string
The combination of the drillpipe, the bottomhole assembly and any other tools used to make the drill bit turn at the bottom of the wellbore.
Horizontal drilling
A subset of the more general term “directional drilling,” used where the departure of the wellbore from vertical exceeds about 80 degrees. Note that some horizontal wells are designed such that after reaching true 90-degree horizontal, the wellbore may actually start drilling upward. In such cases, the angle past 90 degrees is continued, as in 95 degrees, rather than reporting it as deviation from vertical, which would then be 85 degrees. Because a horizontal well typically penetrates a greater length of the reservoir, it can offer significant production improvement over a vertical well.
Hydraulic fracturing
A stimulation treatment routinely performed on oil and gas wells in low permeability reservoirs. Specially engineered fluids are pumped at high pressure and rate into the reservoir interval to be treated, causing a vertical fracture to open. The wings of the fracture extend away from the wellbore in opposing directions according to the natural stresses within the formation. Proppant, such as grains of sand of a particular size, is mixed with the treatment fluid to keep the fracture open when the treatment is complete. Hydraulic fracturing creates high-conductivity communication with a large area of formation and bypasses any damage that may exist in the near-wellbore area.
Hydrocarbon
A naturally occurring organic compound comprising hydrogen and carbon. Hydrocarbons can be as simple as methane, but many are highly complex molecules, and can occur as gases, liquids or solids. Petroleum is a complex mixture of hydrocarbons. The most common hydrocarbons are natural gas, oil and coal.

i


Mesh size
The size of the proppant that is determined by sieving the proppant through screens with uniform openings corresponding to the desired size of the proppant. Each type of proppant comes in various sizes, categorized as mesh sizes, and the various mesh sizes are used in different applications in the oil and natural gas industry. The mesh number system is a measure of the number of equally sized openings per square inch of screen through which the proppant is sieved.
Mud motors
A positive displacement drilling motor that uses hydraulic horsepower of the drilling fluid to drive the drill bit. Mud motors are used extensively in directional drilling operations.
Natural gas liquids
Components of natural gas that are liquid at surface in field facilities or in gas processing plants. Natural gas liquids can be classified according to their vapor pressures as low (condensate), intermediate (natural gasoline) and high (liquefied petroleum gas) vapor pressure.
Nitrogen pumping unit
A high-pressure pump or compressor unit capable of delivering high-purity nitrogen gas for use in oil or gas wells. Two basic types of units are commonly available: a nitrogen converter unit that pumps liquid nitrogen at high pressure through a heat exchanger or converter to deliver high-pressure gas at ambient temperature, and a nitrogen generator unit that compresses and separates air to provide a supply of high pressure nitrogen gas.
Plugging
The process of permanently closing oil and gas wells no longer capable of producing in economic quantities. Plugging work can be performed with a well servicing rig along with wireline and cementing equipment; however, this service is typically provided by companies that specialize in plugging work.
Plug
A down-hole packer assembly used in a well to seal off or isolate a particular formation for testing, acidizing, cementing, etc.; also a type of plug used to seal off a well temporarily while the wellhead is removed.
Pounds per square inch
A unit of pressure. It is the pressure resulting from a one pound force applied to an area of one square inch.
Pressure pumping
Services that include the pumping of liquids under pressure.
Producing formation
An underground rock formation from which oil, natural gas or water is produced. Any porous rock will contain fluids of some sort, and all rocks at considerable distance below the Earth’s surface will initially be under pressure, often related to the hydrostatic column of ground waters above the reservoir. To produce, rocks must also have permeability, or the capacity to permit fluids to flow through them.
Proppant
Sized particles mixed with fracturing fluid to hold fractures open after a hydraulic fracturing treatment. In addition to naturally occurring sand grains, man-made or specially engineered proppants, such as resin-coated sand or high-strength ceramic materials like sintered bauxite, may also be used. Proppant materials are carefully sorted for size and sphericity to provide an efficient conduit for production of fluid from the reservoir to the wellbore.
Resource play
Accumulation of hydrocarbons known to exist over a large area.
Shale
A fine-grained, fissile, sedimentary rock formed by consolidation of clay- and silt-sized particles into thin, relatively impermeable layers.
Tight oil
Conventional oil that is found within reservoirs with very low permeability. The oil contained within these reservoir rocks typically will not flow to the wellbore at economic rates without assistance from technologically advanced drilling and completion processes. Commonly, horizontal drilling coupled with multistage fracturing is used to access these difficult to produce reservoirs.
Tight sands
A type of unconventional tight reservoir. Tight reservoirs are those which have low permeability, often quantified as less than 0.1 millidarcies.
Tubulars
A generic term pertaining to any type of oilfield pipe, such as drill pipe, drill collars, pup joints, casing, production tubing and pipeline.
Unconventional resource
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


The following is a glossary of certain electrical infrastructure industry terms used in this report:
Distribution
The distribution of electricity from the transmission system to individual customers.
Substation
A part of an electrical transmission and distribution system that transforms voltage from high to low, or the reverse.
Transmission
The movement of electrical energy from a generating site, such as a power plant, to an electric substation.

iii


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Various statements contained in this report that express a belief, expectation, or intention, or that are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. In particular, the factors discussed in this report and detailed under Part II, Item 1A. Risk Factors in this report and our Annual Report on Form 10–K for the year ended December 31, 2017 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 quarterly report, are forward-looking statements. These forward-looking statements may be found in the “Business,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other sections of this quarterly report. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “would,” “expect,” “plan,” “project,” “budget,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “seek,” “objective,” “continue,” “will be,” “will benefit,” or “will continue,” the negative of such terms or other comparable terminology.

The forward-looking statements contained in this report are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors, which are difficult to predict and many of which are beyond our control. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, our management’s assumptions about future events may prove to be inaccurate. Our management cautions all readers that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to many factors including those described in Part II, Item 1A. Risk Factors in this report and our Annual Report on Form 10–K for the year ended December 31, 2017 and Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report. All forward-looking statements speak only as of the date of this report. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.



iv

MAMMOTH ENERGY SERVICES, INC.



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

MAMMOTH ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
ASSETS
 
June 30,
 
December 31,
 
 
2018
 
2017
CURRENT ASSETS
 
(in thousands)
Cash and cash equivalents
 
$
10,702

 
$
5,637

Accounts receivable, net
 
312,850

 
243,746

Receivables from related parties
 
30,674

 
33,788

Inventories
 
12,717

 
17,814

Prepaid expenses
 
13,811

 
12,552

Other current assets
 
816

 
886

Total current assets
 
381,570

 
314,423

 
 
 
 
 
Property, plant and equipment, net
 
423,315

 
351,017

Sand reserves
 
73,759

 
74,769

Intangible assets, net - customer relationships
 
6,204

 
9,623

Intangible assets, net - trade names
 
6,726

 
6,516

Goodwill
 
101,511

 
99,811

Deferred income tax asset
 
31,892

 
6,739

Other non-current assets
 
4,146

 
4,345

Total assets
 
$
1,029,123

 
$
867,243

LIABILITIES AND EQUITY
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
Accounts payable
 
$
177,353

 
$
141,306

Payables to related parties
 
1,916

 
1,378

Accrued expenses and other current liabilities
 
54,701

 
40,895

Income taxes payable
 
131,210

 
36,409

Total current liabilities
 
365,180

 
219,988

 
 
 
 
 
Long-term debt
 

 
99,900

Deferred income tax liabilities
 
31,036

 
34,147

Asset retirement obligation
 
3,138

 
2,123

Other liabilities
 
4,100

 
3,289

Total liabilities
 
403,454

 
359,447

 
 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 18)
 

 

 
 
 
 

EQUITY
 
 
 

Equity:
 
 
 
 
Common stock, $0.01 par value, 200,000,000 shares authorized, 44,752,765 and 44,589,306 issued and outstanding at June 30, 2018 and December 31, 2017, respectively
 
448

 
446

Additional paid in capital
 
528,421

 
508,010

Retained earnings
 
100,247

 
2,001

Accumulated other comprehensive loss
 
(3,447
)
 
(2,661
)
Total equity
 
625,669

 
507,796

Total liabilities and equity
 
$
1,029,123

 
$
867,243


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

1

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


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
REVENUE
(in thousands, except per share amounts)
Services revenue
$
455,545

 
$
29,659

 
$
864,204

 
$
56,751

Services revenue - related parties
40,611

 
44,603

 
89,699

 
77,565

Product revenue
27,708

 
10,395

 
52,748

 
13,767

Product revenue - related parties
9,730

 
13,605

 
21,192

 
25,145

Total revenue
533,594

 
98,262

 
1,027,843

 
173,228

 
 
 
 
 
 
 
 
COST AND EXPENSES
 
 
 
 
 
 
 
Services cost of revenue (exclusive of depreciation, depletion, amortization and accretion of $26,898, $51,473, $17,651 and $33,489, respectively, for the three and six months ended June 30, 2018 and three and six months ended June 30, 2017)
302,283

 
57,104

 
593,262

 
102,565

Services cost of revenue - related parties (exclusive of depreciation, depletion, amortization and accretion of $0, $0, $0 and $0, respectively, for the three and six months ended June 30, 2018 and three and six months ended June 30, 2017)
2,428

 
262

 
4,220

 
692

Product cost of revenue (exclusive of depreciation, depletion, amortization and accretion of $3,879, $6,193, $2,204 and $3,566, respectively, for the three and six months ended June 30, 2018 and three and six months ended June 30, 2017)
35,117

 
19,974

 
68,447

 
32,581

Selling, general and administrative (Note 12)
64,595

 
7,393

 
102,677

 
13,806

Selling, general and administrative - related parties
532

 
307

 
961

 
631

Depreciation, depletion, amortization and accretion
30,795

 
19,893

 
57,703

 
37,130

Impairment of long-lived assets
187

 

 
187

 

Total cost and expenses
435,937

 
104,933

 
827,457

 
187,405

Operating income (loss)
97,657

 
(6,671
)
 
200,386

 
(14,177
)
 
 
 
 
 
 
 
 
OTHER (EXPENSE) INCOME
 
 
 
 
 
 
 
Interest expense, net
(959
)
 
(1,112
)
 
(2,196
)
 
(1,509
)
Bargain purchase gain, net of tax

 
4,012

 

 
4,012

Other, net
(486
)
 
(203
)
 
(514
)
 
(387
)
Total other (expense) income
(1,445
)
 
2,697

 
(2,710
)
 
2,116

Income (loss) before income taxes
96,212

 
(3,974
)
 
197,676

 
(12,061
)
Provision (benefit) for income taxes
53,512

 
(2,804
)
 
99,430

 
(5,910
)
Net income (loss)
$
42,700

 
$
(1,170
)
 
$
98,246

 
$
(6,151
)
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax of $86, $272, $434 and $454, respectively, for the three and six months ended June 30, 2018 and three and six months ended June 30, 2017
(325
)
 
181

 
(786
)
 
409

Comprehensive income (loss)
$
42,375

 
$
(989
)
 
$
97,460

 
$
(5,742
)
 
 
 
 
 
 
 
 
Net income (loss) per share (basic) (Note 14)
$
0.95

 
$
(0.03
)
 
$
2.20

 
$
(0.16
)
Net income (loss) per share (diluted) (Note 14)
$
0.95

 
$
(0.03
)
 
$
2.18

 
$
(0.16
)
Weighted average number of shares outstanding (basic) (Note 14)
44,737

 
39,500

 
44,700

 
38,506

Weighted average number of shares outstanding (diluted) (Note 14)
45,059

 
39,500

 
44,977

 
38,506

 
 
 
 
 
 
 
 
 
 
 
 
 








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)

 
 
 
 
 
 
 
 
 
 
 
 
Retained
Additional
 
 
 
Common Stock
Members'
Earnings
Paid-In
 
 
 
Shares
Amount
Equity
(Deficit)
Capital
AOCL
Total
 
(in thousands)
Balance at January 1, 2017
37,500

$
375

$
81,739

$
(56,323
)
$
400,206

$
(3,216
)
$
422,781

Net income of Sturgeon prior to acquisition


640




640

Stingray acquisition
1,393

14



25,748


25,762

Sturgeon acquisition
5,607

56

(82,379
)

78,313


(4,010
)
Stock based compensation
89

1



3,743


3,744

Net income



58,324



58,324

Other comprehensive income





555

555

Balance at December 31, 2017
44,589

$
446

$

$
2,001

$
508,010

$
(2,661
)
$
507,796

Equity based compensation (Note 15)




17,487


17,487

Stock based compensation
164

2



2,924


2,926

Net income



98,246



98,246

Other comprehensive loss




(786
)
(786
)
Balance at June 30, 2018
44,753

$
448

$

$
100,247

$
528,421

$
(3,447
)
$
625,669








































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

3

MAMMOTH ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


 
Six Months Ended June 30,
 
2018
 
2017
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
98,246

 
$
(6,151
)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
 
 
 
Equity based compensation (Note 15)
17,487

 

Stock based compensation
2,916

 
1,620

Depreciation, depletion, accretion and amortization
57,703

 
37,130

Amortization of coil tubing strings
1,120

 
1,046

Amortization of debt origination costs
199

 
199

Bad debt expense
53,790

 
19

(Gain) loss on disposal of property and equipment
(128
)
 
127

Gain on bargain purchase

 
(4,012
)
Impairment of long-lived assets
187

 

Deferred income taxes
(27,906
)
 
(6,529
)
Changes in assets and liabilities, net of acquisitions of businesses:
 
 
 
Accounts receivable, net
(122,908
)
 
(4,793
)
Receivables from related parties
3,114

 
(12,995
)
Inventories
4,156

 
(4,932
)
Prepaid expenses and other assets
(1,195
)
 
1,528

Accounts payable
34,186

 
20,557

Payables to related parties
538

 
(83
)
Accrued expenses and other liabilities
10,193

 
1,301

Income taxes payable
94,753

 
(28
)
Net cash provided by operating activities
226,451

 
24,004

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(105,349
)
 
(66,575
)
Purchases of property and equipment from related parties
(3,436
)
 

Business acquisitions
(13,356
)
 
(39,570
)
Proceeds from disposal of property and equipment
898

 
781

Business combination cash acquired (Note 4)

 
2,671

Net cash used in investing activities
(121,243
)
 
(102,693
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Borrowings from lines of credit
52,000

 
79,150

Repayments of lines of credit
(151,900
)
 
(14,150
)
Repayments of equipment financing note
(145
)
 

Repayment of Stingray acquisition long-term debt

 
(7,074
)
Net cash (used in) provided by financing activities
(100,045
)
 
57,926

Effect of foreign exchange rate on cash
(98
)
 
73

Net change in cash and cash equivalents
5,065

 
(20,690
)
Cash and cash equivalents at beginning of period
5,637

 
29,239

Cash and cash equivalents at end of period
$
10,702

 
$
8,549

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
2,543

 
$
1,086

Cash paid for income taxes
$
32,584

 
$
912

Supplemental disclosure of non-cash transactions:
 
 
 
Purchases of property and equipment included in accounts payable and accrued expenses
$
20,897

 
$
7,836

Acquisition of Sturgeon, Stingray Cementing LLC and Stingray Energy Services LLC (Note 4)
$

 
$
23,091

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

4

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


1.
Organization and Nature of Business
Mammoth Energy Services, Inc. (the “Company,” “Mammoth Inc.” or “Mammoth”), together with its subsidiaries, is an integrated, growth-oriented company serving both the oil and gas and the electric utility industries in North America and U.S. territories. Mammoth's subsidiaries provide a diversified set of drilling and completion services to the exploration and production industry and its infrastructure division provides transmission, distribution and logistics services to various public and privately owned utilities throughout the U.S. and Puerto Rico. 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, Mammoth Energy Holdings LLC (“Mammoth Holdings,” an entity controlled by Wexford), Gulfport Energy Corporation (“Gulfport”) and Rhino Resource Partners LP (“Rhino”) (collectively known as the “Predecessor Interest”) contributed their interest in certain of the entities presented below to the Partnership in exchange for 20 million limited partner units. Mammoth Energy Partners GP, LLC (the “General Partner”) held a non-economic general partner interest.

On October 12, 2016, the Partnership was converted into a Delaware limited liability company named Mammoth Energy Partners LLC (“Mammoth LLC”), and then Mammoth Holdings, Gulfport and Rhino, as all the members of Mammoth LLC, contributed their member interests in Mammoth LLC to Mammoth Inc. Prior to the conversion and the contribution, Mammoth Inc. was a wholly-owned subsidiary of the Partnership. Following the conversion and the contribution, Mammoth LLC (as the converted successor to the Partnership) was a wholly-owned subsidiary of Mammoth Inc. Mammoth Inc. did not conduct any material business operations until Mammoth LLC was contributed to it. On October 19, 2016, Mammoth Inc. closed its initial public offering of 7,750,000 shares of common stock (the “IPO”), which included an aggregate of 250,000 shares that were offered by Mammoth Holdings, Gulfport and Rhino, at a price to the public of $15.00 per share.

On June 29, 2018, Gulfport and MEH Sub LLC ("MEH Sub"), an entity controlled by Wexford, (collectively, the "Selling Stockholders") completed an underwritten secondary public offering of 4,000,000 shares of the Company’s common stock at a purchase price to the Selling Stockholders of $38.01 per share. The Selling Stockholders granted the underwriters an option to purchase up to an aggregate of 600,000 additional shares of the Company's common stock at the same purchase price. This option was exercised, in part, and on July 30, 2018, the underwriters purchased an additional 385,000 shares of common stock from the Selling Stockholders at the same price per share. The Selling Stockholders received all proceeds from this offering.

At June 30, 2018 and December 31, 2017, Wexford, Gulfport and Rhino beneficially owned the following shares of outstanding common stock of Mammoth Inc.:
 
 
At June 30, 2018
 
At December 31, 2017
 
 
Share Count
 
% Ownership
 
Share Count
 
% Ownership
Wexford
 
22,252,277

 
49.7
%
 
25,009,319

 
56.1
%
Gulfport
 
9,943,645

 
22.2
%
 
11,171,887

 
25.1
%
Rhino
 
104,100

 
0.2
%
 
568,794

 
1.3
%
Outstanding shares owned by related parties
 
32,300,022

 
72.1
%
 
36,750,000

 
82.5
%
Total outstanding
 
44,752,765

 
100.0
%
 
44,589,306

 
100.0
%

Operations

The Company's infrastructure services include electric utility contracting services focused on the repair, upgrade, maintenance and construction of transmission and distribution networks. The Company’s infrastructure services also provide storm repair and restoration services in response to natural disasters including hurricanes, ice or other storm-related damage. 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. The Company's natural sand proppant services include the distribution and production of natural sand proppant that is used primarily for hydraulic fracturing in the oil and gas industry. The Company's contract land and directional drilling services provides drilling rigs and directional tools for both

5

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

vertical and horizontal drilling of oil and natural gas wells and salt water disposal wells. The Company also provides other services, including coil tubing units used to enhance the flow of oil and natural gas, flowback, cementing, aciziding, equipment rentals, crude oil hauling and remote accommodations.

All of the Company’s operations are in North America and in the Caribbean. The Company operates its oil and natural gas businesses in the Permian Basin, the Utica Shale, the Eagle Ford Shale, the Marcellus Shale, the Granite Wash, the SCOOP, the STACK, the Cana-Woodford Shale, the Cleveland Sand and the oil sands located in Northern Alberta, Canada. The Company operates its energy infrastructure services in the northeast, southwest and midwest portions of the United States and Puerto Rico. The Company's oil and natural gas business depends in large part on the conditions in the oil and natural gas industry and, specifically, on the amount of capital spending by its customers. Any prolonged increase or decrease in oil and natural gas prices affects the levels of exploration, development and production activity, as well as the entire health of the oil and natural gas industry. Changes in the commodity prices for oil and natural gas could have a material effect on the Company’s results of operations and financial condition. The Company’s business also depends on infrastructure spending on maintenance, upgrade, expansion and repair and restoration. Any prolonged decrease in spending by electric utility companies or delays or reductions in government appropriations could have a material adverse effect on the Company’s results of operations and financial condition.

2.
Basis of Presentation and Significant Accounting Policies

Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements include the accounts of the Company and its subsidiaries and the variable interest entity ("VIE") for which the Company is the primary beneficiary. All material intercompany accounts and transactions have been eliminated.

This report has been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, and reflects all adjustments, which in the opinion of management are necessary for the fair presentation of the results for the interim periods, on a basis consistent with the annual audited consolidated financial statements. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the summary of significant accounting policies and notes thereto included in the Company’s most recent annual report on Form 10-K.

On June 5, 2017, the Company acquired Sturgeon Acquisitions LLC ("Sturgeon") and Sturgeon's wholly owned subsidiaries Taylor Frac, LLC, Taylor Real Estate Investments, LLC and South River Road, LLC. Prior to its acquisition of Sturgeon, the Company and Sturgeon were under common control and it is required under 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 with the Company as if the acquisition had been effective since the date Sturgeon commenced operations. Refer to Note 4 - Acquisitions for additional disclosure regarding the acquisition of Sturgeon.
 
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 condition of customers changes, circumstances develop, or additional information becomes available, adjustments to the allowance for doubtful accounts may be required. In the event the Company was to determine that a customer may not be able to make required payments, the Company would increase the allowance through a charge to income in the period in which that determination is made. Uncollectible accounts receivable are periodically charged against the allowance for doubtful accounts once a final determination is made regarding their uncollectability.


6

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

Following is a roll forward of the allowance for doubtful accounts for the year ended December 31, 2017 and the six months ended June 30, 2018 (in thousands):

Balance, January 1, 2017
 
$
5,377

Additions charged to expense
 
16,206

Additions other
 
179

Deductions for uncollectible receivables written off
 
(25
)
Balance, December 31, 2017
 
21,737

Additions charged to expense
 
53,790

Deductions for uncollectible receivables written off
 
(1,758
)
Balance, June 30, 2018
 
$
73,769


In October 2017, Cobra Acquisitions LLC ("Cobra"), one of the Company's subsidiaries, entered into a contract with the Puerto Rico Electric Power Authority ("PREPA") to perform repairs to PREPA’s electrical grid as a result of Hurricane Maria. At June 30, 2018 and December 31, 2017, the Company reviewed receivables due from PREPA and made specific reserves consistent with Company policy which resulted in additions to the allowance for doubtful accounts totaling $53.6 million and $16.0 million, respectively, for the six months ended June 30, 2018 and year ended December 31, 2017.

Additionally, the Company has made specific reserves consistent with Company policy which resulted in additions to allowance for doubtful accounts totaling $0.2 million and $0.2 million, respectively, for the six months ended June 30, 2018 and year ended December 31, 2017. The Company will continue to pursue collection until such time as final determination is made consistent with Company policy.

Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents in excess of federally insured limits and trade receivables. Following is a summary of our significant customers based on percentages of total accounts receivable balances at June 30, 2018 and December 31, 2017 and percentages of total revenues derived for the three and six months ended June 30, 2018 and 2017:
 
REVENUES
 
ACCOUNTS RECEIVABLE
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
At June 30,
At December 31,
 
2018
2017
 
2018
2017
 
2018
2017
Customer A(a)
65
%
%
 
65
%
%
 
59
%
56
%
Customer B(b)
9
%
59
%
 
11
%
59
%
 
9
%
12
%
a.
Customer A is a third-party customer. Revenues and the related accounts receivable balances earned from Customer A were derived from the Company's infrastructure services segment.
b.
Customer B is a related party customer. Revenues and the related accounts receivable balances earned from Customer B were derived from the Company's pressure pumping services segment, natural sand proppant services segment, contract land and directional drilling services segment and other businesses.

Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents, trade receivables, trade payables, amounts receivable or payable to related parties, and long-term debt. The carrying amount of cash and cash equivalents, trade receivables, receivables from related parties and trade payables approximates fair value because of the short-term nature of the instruments. The fair value of long-term debt approximates its carrying value because the cost of borrowing fluctuates based upon market conditions.

New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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,

7

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

and interim periods within that fiscal year. The Company plans to adopt this ASU effective January 1, 2019 utilizing the modified retrospective method of adoption. This new leasing guidance will 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 may have on the Company's consolidated financial statements and results of operations.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Accounting,” which simplifies the accounting for share-based payments granted to non-employees by aligning the accounting with requirements for employee share-based compensation. Upon transition, this ASU requires non-employee awards to be measured at fair value as of the adoption date. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within that fiscal year. Early adoption is permitted. Currently, the Company has not elected to early adopt this ASU and is evaluating the impact it will have on the Company's consolidated financial statements.

3.
Revenues

Adoption of ASC 606 "Revenues from Contracts with Customers"
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and most industry-specific guidance. The new guidance requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.

On January 1, 2018, the Company adopted ASU 2014-09 and its related amendments (collectively, "ASC 606") using the modified retrospective method applied to contracts which were not completed as of January 1, 2018. Revenues for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts continue to be reported under previous revenue recognition guidance. While ASC 606 requires additional disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, its adoption has not had a material impact on the measurement or recognition of the Company's revenues.

The adoption of ASC 606 represents a change in accounting principle. After evaluation of all contracts not completed as of January 1, 2018, the Company determined the cumulative effect of adopting ASC 606 was immaterial, and as such, has not recorded an adjustment to the opening balance of retained earnings on January 1, 2018.

Revenue Recognition
The following table presents revenues disaggregated by service line (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Revenue:
 
 
 
 
 
 
 
Pressure pumping services
$
101,406

 
$
50,196

 
$
202,544

 
$
90,836

Infrastructure services
360,250

 
1,709

 
685,709

 
1,709

Natural sand proppant services
52,845

 
24,762

 
103,860

 
40,359

Contract land and directional drilling services
17,210

 
12,472

 
32,440

 
23,223

Other services
20,167

 
10,242

 
43,062

 
19,092

Eliminations
(18,284
)
 
(1,119
)
 
(39,772
)
 
(1,991
)
Total revenue
$
533,594

 
$
98,262

 
$
1,027,843

 
$
173,228


Pressure Pumping Services
Pressure pumping services are typically provided based upon a purchase order, contract or on a spot market basis. Services are provided on a day rate, contracted or hourly basis. Generally, the Company accounts for pressure pumping services as a single performance obligation satisfied over time. In certain circumstances, the Company supplies proppant that is utilized for pressure pumping as part of the agreement with the customer. The Company accounts for these pressure pumping agreements as multiple performance obligations satisfied over time. Jobs for these services are typically short-term in nature and range from a few hours to multiple days. Generally, revenue is recognized over time upon the

8

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

completion of each segment of work based upon a completed field ticket, which includes the charges for the services performed, mobilization of the equipment to the location and personnel.

Pursuant to a contract with one of its customers, the Company has agreed to provide that customer with use of two pressure pumping fleets for the period covered by the contract. Under this agreement, performance obligations are satisfied as services are rendered based on the passage of time rather than the completion of each segment of work. The Company has the right to receive consideration from this customer even if circumstances prevent us from performing work. All consideration owed to the Company for services performed during the contractual period is fixed and the right to receive it is unconditional.

Additional revenue is generated through labor charges and the sale of consumable supplies that are incidental to the service being performed. Such amounts are recognized ratably over the period during which the corresponding goods and services are consumed.

Infrastructure Services
Infrastructure services are typically provided pursuant to master service agreements, repair and maintenance contracts or fixed price and non-fixed price installation contracts. Pricing under these contracts may be unit priced, cost-plus/hourly (or time and materials basis) or fixed price (or lump sum basis). The Company accounts for infrastructure services as a single performance obligation satisfied over time. Revenue is recognized over time as work progresses based on the days completed or as the contract is completed.

Natural Sand Proppant Services
The Company sells natural sand proppant through sand supply agreements with its customers. Under these agreements, sand is typically sold at a flat rate per ton or a flat rate per ton with an index-based adjustment. The Company recognizes revenue at the point in time when the customer obtains legal title to the product, which may occur at the production facility, rail origin or at the destination terminal.

Certain of the Company's sand supply agreements contain a minimum volume commitment related to sand purchases whereby the Company charges a shortfall payment if the customer fails to meet the required minimum volume commitment. These agreements may also contain make-up provisions whereby shortfall payments can be applied in future periods against purchased volumes exceeding the minimum volume commitment. If a make-up right exists, the Company has future performance obligations to deliver excess volumes of product in subsequent months. In accordance with ASC 606, if the customer fails to meet the minimum volume commitment, the Company will assess whether it expects the customer to fulfill its unmet commitment during the contractually specified make-up period based on discussions with the customer and management's knowledge of the business. If the Company expects the customer will make-up deficient volumes in future periods, revenue related to shortfall payments will be deferred and recognized on the earlier of the date on which the customer utilizes make-up volumes or the likelihood that the customer will exercise its right to make-up deficient volumes becomes remote. If the Company does not expect the customer will make-up deficient volumes in future periods, the breakage model will be applied and revenue related to shortfall payments will be recognized when the model indicates the customer's inability to take delivery of excess volumes. During the three and six months ended June 30, 2018, the Company recognized $0.3 million in revenue related to shortfall payments.

In certain of the Company's sand supply agreements, the customer obtains control of the product when it is loaded into rail cars and the customer reimburses the Company for all freight charges incurred. The Company has elected to account for shipping and handling as activities to fulfill the promise to transfer the sand. If revenue is recognized for the related product before the shipping and handling activities occur, the Company accrues the related costs of those shipping and handling activities.

Contract Land and Directional Drilling Services
Contract drilling services are provided under daywork contracts. Directional drilling services, including motor rentals, are provided on a day rate or hourly basis, and revenue is recognized as work progresses. Performance obligations are satisfied over time as the work progresses based on the measure of output. Mobilization revenue and costs are recognized over the days of actual drilling.

Other Services
The Company also provides coil tubing, pressure control, flowback, cementing, acidizing, equipment rentals, crude oil hauling and remote accommodations services, which are reported under other services. These services are typically provided based upon a purchase order, contract or on a spot market basis. Services are provided on a day rate, contracted or hourly basis. Performance obligations for these services are satisfied over time and revenue is recognized as the work

9

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

progresses based on the measure of output. Jobs for these services are typically short-term in nature and range from a few hours to multiple days.

Practical Expedients
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts in which variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied distinct good or service that forms part of a single performance obligation.

Performance Obligations and Contract Balances
As of June 30, 2018 and January 1, 2018, the Company had contract liabilities totaling $15.0 million, which are included in accrued expenses and other current liabilities in the unaudited condensed consolidated balance sheets, and did not have any contract assets. Revenue recognized in the current period from performance obligations satisfied in previous periods was a nominal amount for the three and six months ended June 30, 2018. As of June 30, 2018, the Company had unsatisfied performance obligations totaling $68.5 million, which will be recognized over the next 2.5 years.

4.
Acquisitions

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

From the acquisition date through 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):

10

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

 
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

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 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.

(c) 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.

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


11

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

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


12

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

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 the assembled workforce and future profitability expected to arise from the acquired entity.
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

13

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

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.

14

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


(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.
c.
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.

15

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

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.

5.
Inventories
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. A summary of the Company's inventories is shown below (in thousands):
 
 
June 30,
 
December 31,
 
 
2018
 
2017
Supplies
 
$
7,264

 
$
9,437

Raw materials
 
321

 
219

Work in process
 
1,326

 
2,370

Finished goods
 
3,806

 
5,788

Total inventory
 
$
12,717

 
$
17,814



16

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

6.
Property, Plant and Equipment     
Property, plant and equipment include the following (in thousands):
 
 
 
June 30,
 
December 31,
 
Useful Life
 
2018
 
2017
Pressure pumping equipment
3-5 years
 
$
199,333

 
$
190,211

Drilling rigs and related equipment
3-15 years
 
137,075

 
132,260

Machinery and equipment(a)
7-20 years
 
140,308

 
97,569

Buildings
15-39 years
 
47,593

 
45,992

Vehicles, trucks and trailers(b)
5-10 years
 
91,680

 
54,055

Coil tubing equipment
4-10 years
 
28,068

 
28,053

Land
N/A
 
14,183

 
11,317

Land improvements
15 years or life of lease
 
9,614

 
9,614

Rail improvements
10-20 years
 
13,101

 
5,540

Other property and equipment
3-12 years
 
15,006

 
12,687

 
 
 
695,961

 
587,298

Deposits on equipment and equipment in process of assembly
 
 
33,349

 
20,348

 
 
 
729,310

 
607,646

Less: accumulated depreciation(c)
 
 
305,995

 
256,629

Property, plant and equipment, net
 
 
$
423,315

 
$
351,017

a.
Included in machinery and equipment are assets under capital leases totaling $1.8 million and $1.8 million, respectively, at June 30, 2018 and December 31, 2017.
b.
Included in vehicles, trucks and trailers are assets under capital leases totaling $3.8 million and $1.0 million, respectively, at June 30, 2018 and December 31, 2017.
c.
Accumulated depreciation for assets under capital leases totaled $0.9 million and $0.8 million, respectively, at June 30, 2018 and December 31, 2017.

Proceeds from customers for horizontal and directional drilling services equipment damaged or lost down-hole are reflected in revenue with the carrying value of the related equipment charged to cost of service revenues and are reported as cash inflows from investing activities in the statement of cash flows. For the six months ended June 30, 2018 and 2017, proceeds from the sale of equipment damaged or lost down-hole were $0.6 million and $0.3 million, respectively, and gains on sales of equipment damaged or lost down-hole were $0.5 million and $0.2 million, respectively.

A summary of depreciation, depletion, amortization and accretion expense is below (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Depreciation expense(a)
$
27,058

 
$
17,229

 
$
51,456

 
$
32,196

Depletion expense
1,340

 
382

 
1,427

 
384

Amortization expense
2,382

 
2,268

 
4,790

 
4,536

Accretion expense
15

 
14

 
30

 
14

Depreciation, depletion, amortization and accretion
$
30,795

 
$
19,893

 
$
57,703

 
$
37,130

a.
Includes depreciation expense for assets under capital leases totaling $0.4 million and $0.2 million, respectively, for the six months ended June 30, 2018 and 2017.

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.

17

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

7.
Intangible Assets and Goodwill
The Company had the following definite lived intangible assets recorded (in thousands):
 
 
June 30,
 
December 31,
 
 
2018
 
2017
Customer relationships
 
$
36,725

 
$
35,795

Trade names
 
9,443

 
8,793

Less: accumulated amortization - customer relationships
 
(30,521
)
 
(26,172
)
Less: accumulated amortization - trade names
 
(2,717
)
 
(2,277
)
Intangible assets, net
 
$
12,930

 
$
16,139


Amortization expense for intangible assets was $4.8 million and $4.5 million, respectively, for the six months ended June 30, 2018 and 2017. The original life of customer relationships ranges from 4 to 10 years with a remaining average useful life of 3.9 years. The original life of trade names ranges from 10 to 20 years with a remaining average useful life of 9.1 years.

Aggregated expected amortization expense for the future periods is expected to be as follows (in thousands):
 
 
Amount
Remainder of 2018
 
$
3,969

2019
 
1,293

2020
 
1,293

2021
 
1,288

2022
 
1,266

Thereafter
 
3,821

 
 
$
12,930


Goodwill was $101.5 million and $99.8 million, respectively, at June 30, 2018 and December 31, 2017. Changes in the goodwill for the year ended December 31, 2017 and the six months ended June 30, 2018 are set forth below (in thousands):
Balance, January 1, 2017
 
$
88,727

Additions - 2017 Stingray Acquisition (Note 4)
 
10,193

Additions - Higher Power Acquisition (Note 4)
 
643

Additions - 5 Star Acquisition (Note 4)
 
248

Balance, December 31, 2017
 
99,811

Additions - WTL Acquisition (Note 4)
 
1,567

Additions - RTS Acquisition (Note 4)
 
133

Balance, June 30, 2018
 
$
101,511



18

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

8.
Accrued Expenses and Other Current Liabilities
Accrued expense and other current liabilities included the following (in thousands):
 
 
June 30,
 
December 31,
 
 
2018
 
2017
Deferred revenue
 
15,100

 
15,210

Accrued compensation, benefits and related taxes
 
19,917

 
11,552

Financed insurance premiums
 
1,638

 
4,876

Insurance reserves
 
4,183

 
2,942

State and local taxes payable
 
8,205

 
2,126

Other
 
5,658

 
4,189

Total
 
$
54,701

 
$
40,895


Financed insurance premiums are due in monthly installments, are unsecured and mature within the twelve month period following the close of the year. As of June 30, 2018 and December 31, 2017, the applicable interest rate associated with financed insurance premiums was 2.75%.

9.
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, 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 $0.5 million. 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 June 30, 2018, there were no outstanding borrowings under the credit facility and $162.7 million of available borrowing capacity, after giving effect to $6.5 million of outstanding letters of credit. At December 31, 2017, there were outstanding borrowings under the credit facility of $99.9 million, leaving an aggregate of $62.8 million of borrowing capacity under the facility, after giving effect to $6.5 million of outstanding letters of credit.

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 June 30, 2018 and December 31, 2017, the Company was in compliance with the financial covenants under the facility.

Sturgeon Credit Facility

On June 30, 2015, Sturgeon entered in to a three-year $25.0 million revolving line of credit secured by substantially all of the assets of Sturgeon (“the Sturgeon revolver”). Advances under the Sturgeon revolver bore interest at 2% plus the greater of (a) the Base Rate as set by the lender's commercial lending group, (b) the sum of the Federal Funds Open Rate plus one half of one percent and (c) the sum of the Daily LIBOR rate. Additionally, at Sturgeon’s request, advances could be obtained at LIBOR plus 3%. The LIBOR rate option allowed Sturgeon to select interest periods from one, two, three or six month LIBOR futures spot rates. The Sturgeon revolver was terminated on June 6, 2017.


19

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

10.
Other Liabilities

Other liabilities included the following (in thousands):
    
 
 
June 30,
 
December 31,
 
 
2018
 
2017
Capital lease obligations
 
$
4,253

 
$
2,015

Equipment financing arrangement
 
1,436

 
1,605

Other
 
250

 
500

Total
 
5,939

 
4,120

Less: Current portion of capital lease and equipment financing obligations included in accrued expenses and other current liabilities
 
(1,839
)
 
(831
)
Total Other Liabilities
 
$
4,100

 
$
3,289


The Company leases vehicles and other equipment under capital leases with varying terms and expiration dates through 2020. The weighted average implied interest rate under our capital leases as of June 30, 2018 and December 31, 2017 was 14.2% and 19.1%, respectively. Additionally, the Company entered into a five-year equipment financing arrangement maturing in 2022 that bears interest at 4.6% as of June 30, 2018. Principal and interest on capital leases and the equipment financing arrangement are paid monthly. Aggregate future payments under the Company's non-cancelable capital leases and equipment financing arrangement as of June 30, 2018 are as follows (in thousands):

2018
$
890

2019
2,593

2020
1,696

2021
664

2022
360

Total future minimum payments
6,203

Less interest payments
(514
)
Present value of future minimum payments
$
5,689


11.
Variable Interest Entity

On April 6, 2018, Dire Wolf Energy Services LLC ("Dire Wolf"), a wholly owned subsidiary of the Company, entered into a Voting Trust Agreement with TVPX Aircraft Solutions Inc. (the "Voting Trustee"). Under the Voting Trust Agreement, Dire Wolf transferred 100% of its membership interest in Cobra Aviation Services LLC ("Cobra Aviation") to the Voting Trustee in exchange for Voting Trust Certificates. Dire Wolf retained the obligation to absorb all expected returns or losses of Cobra Aviation. Prior to the transfer of membership interest to the Voting Trustee, Cobra Aviation was a wholly owned subsidiary of Dire Wolf. Cobra Aviation owns and operates a helicopter primarily for services provided to Cobra Acquisitions, a wholly owned subsidiary of the Company. Dire Wolf entered into the Voting Trust Agreement in order to meet certain registration requirements.

Dire Wolf's voting rights are not proportional to its obligation to absorb expected returns or losses of Cobra Aviation and all of Cobra Aviation's activities are conducted on behalf of Dire Wolf, which has disproportionately fewer voting rights; therefore, Cobra Aviation meets the criteria of a VIE. Cobra Aviation's operational activities are directed by Dire Wolf's officers and Dire Wolf has the option to terminate the Voting Trust Agreement at any time. Therefore, the Company, through Dire Wolf, is considered the primary beneficiary of the VIE and consolidates Cobra Aviation at June 30, 2018.


20

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

12.
Selling, General and Administrative Expense

Selling, general and administrative ("SG&A") expense includes of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Cash expenses:
 
 
 
 
 
 
 
Compensation and benefits
$
10,978

 
$
2,966

 
$
18,677

 
$
5,381

Professional services
2,981

 
1,652

 
5,568

 
3,581

Other(a)
3,935

 
2,015

 
5,542

 
3,880

Total cash SG&A expense
17,894

 
6,633

 
29,787

 
12,842

Non-cash expenses:
 
 
 
 
 
 
 
Bad debt provision
28,263

 
17

 
53,790

 
(25
)
Equity based compensation(b)
17,487

 

 
17,487

 

Stock based compensation
1,483

 
1,050

 
2,574

 
1,620

Total non-cash SG&A expense
47,233

 
1,067

 
73,851

 
1,595

Total SG&A expense
$
65,127

 
$
7,700

 
$
103,638

 
$
14,437

a.
Includes travel-related costs, IT expenses, rent, utilities and other general and administrative-related costs.
b.
Represents compensation expense for non-employee awards, which were issued and are payable by certain affiliates of Wexford (the sponsor level). See Note 15 for additional detail.
13.
Income Taxes
The components of income tax expense (benefit) attributable to the Company for the three and six months ended June 30, 2018 and 2017, are as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Foreign current income tax expense
$
67,665

 
$
21

 
$
125,712

 
$
606

Foreign deferred income tax benefit
(15,266
)
 
(14
)
 
(25,386
)
 
(20
)
U.S. current income tax expense
1,636



 
1,624

 

U.S. deferred income tax benefit
(523
)

(2,811
)
 
(2,520
)
 
(6,496
)
Total
$
53,512

 
$
(2,804
)
 
$
99,430

 
$
(5,910
)

The Company's effective tax rate was 50% and 37%, respectively, for the six months ended June 30, 2018 and 2017. The increase in the effective tax rate is primarily due to the equity based compensation expense recognized during the six months ended June 30, 2018 as well as a higher tax rate in Puerto Rico, where most of our income was generated during the six months ended June 30, 2018, compared to the United States tax rate. No income was generated in Puerto Rico during the six months ended June 30, 2017. Additionally, the Company's effective tax rate can fluctuate as a result of, among other things, discrete items, state income taxes, permanent differences and changes in pre-tax income.

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. To assess that likelihood, the Company uses estimates and judgments regarding future taxable income, as well as the jurisdiction in which such taxable income is generated, to determine whether a valuation allowance is required. During the six months ended June 30, 2018, the Company recorded a change in valuation allowance of $9.2 million related to foreign tax credits that are not expected to be utilized.

On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the “Tax Act”). As a result, the Company recorded a provisional amount for effects of the Tax Act totaling $31.0 million during the fourth quarter of 2017. The Company continues to evaluate the impact of the Tax Act and no revisions were recorded to the provisional amount during the six months ended June 30, 2018. The Company expects to complete its detailed analysis of the effects of the Tax Act no later than the fourth quarter of 2018.


21

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

14.
Earnings (Loss) Per Share

Reconciliations of the components of basic and diluted net income (loss) per common share are presented in the table below (in thousands, except per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Allocation of earnings:
 
 
 
 
 
 
 
Net income (loss)
$
42,700

 
$
(1,170
)
 
$
98,246

 
$
(6,151
)
Weighted average common shares outstanding
44,737

 
39,500

 
44,700

 
38,506

Basic earnings (loss) per share
$
0.95

 
$
(0.03
)
 
$
2.20

 
$
(0.16
)
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Allocation of earnings (loss):
 
 
 
 
 
 
 
Net income (loss)
$
42,700

 
$
(1,170
)
 
$
98,246

 
$
(6,151
)
Weighted average common shares, including dilutive effect (a)
45,059

 
39,500

 
44,977

 
38,506

Diluted earnings (loss) per share
$
0.95

 
$
(0.03
)
 
$
2.18

 
$
(0.16
)
a. 
No incremental shares of potentially dilutive restricted stock awards were included for the three and six months ended June 30, 2017 as their effect was antidulitive under the treasury stock method.

15.
Equity Based Compensation
Upon formation of certain operating entities by Wexford, Gulfport and Rhino, specified members of management (the “Specified Members”) and certain non-employee members (the “Non-Employee Members”) were granted the right to receive distributions from the operating entities after the contribution member’s unreturned capital balance was recovered (referred to as “Payout” provision).

On November 24, 2014, the awards were modified in conjunction with the contribution of the operating entities to Mammoth. These awards were not granted in limited or general partner units. The awards are for interests in the distributable earnings of the members of MEH Sub, Mammoth’s majority equity holder.

On the IPO closing date, the unreturned capital balance of Mammoth's majority equity holder was not fully recovered from its sale of common stock in the IPO. As a result, Payout did not occur and no compensation cost was recorded.

On June 29, 2018, as part of an underwritten secondary public offering, MEH Sub sold 2,764,400 shares of the Company’s common stock at a purchase price to MEH Sub of $38.01 per share. MEH Sub received the proceeds from this offering. As a result, a portion of the Non-Employee Member awards reached Payout. During the three months ended June 30, 2018, the Company recognized equity compensation expense totaling $17.5 million related to these non-employee awards. These awards are at the sponsor level and this transaction had no dilutive impact or cash impact to the Company.

Payout for the remaining awards is expected to occur following additional sales by MEH Sub of its shares of the Company's common stock, which is considered not probable until the event occurs. For the Specified Member awards, the unrecognized amount, which represents the fair value of the award as of the modification dates or grant date, was $5.6 million. For the Non-Employee Member awards, the unrecognized amount, which represents the fair value of the awards as of June 30, 2018 was $43.1 million.

16.
Stock Based Compensation

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


22

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

Restricted Stock Units

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

A summary of the status and changes of the unvested shares of restricted stock under the 2016 Plan is presented below.
 
 
Number of Unvested Restricted Shares
 
Weighted Average Grant-Date Fair Value
Unvested shares as of January 1, 2018
 
640,632

 
$
19.44

Granted
 
93,556

 
26.83

Vested
 
(149,098
)
 
21.29

Forfeited
 

 

Unvested shares as of June 30, 2018
 
585,090

 
$
21.07


As of June 30, 2018, there was $9.2 million of total unrecognized compensation cost related to the unvested restricted stock. The cost is expected to be recognized over a weighted average period of approximately 1.8 years.

Included in cost of revenue and selling, general and administrative expenses is stock based compensation expense of $1.7 million and $1.1 million, respectively, for the three months ended June 30, 2018 and 2017 and $2.9 million and $1.6 million, respectively, for the six months ended June 30, 2018 and 2017.

17.
Related Party Transactions
Transactions between the subsidiaries of the Company and the following companies are included in Related Party Transactions: Gulfport; Grizzly Oil Sands ULC (“Grizzly”); El Toro Resources LLC (“El Toro”); Cementing and SR Energy (collectively, prior to the 2017 Stingray Acquisition, the “2017 Stingray Companies”); Everest Operations Management LLC (“Everest”); Elk City Yard LLC (“Elk City Yard”); Double Barrel Downhole Technologies LLC (“DBDHT”); Caliber Investment Group LLC (“Caliber”); Dunvegan North Oilfield Services ULC (“Dunvegan”); Predator Drilling LLC (“Predator”); and T&E Flow Services LLC (“T&E”).

Following is a summary of related party transactions (in thousands):
 
 
REVENUES
 
ACCOUNTS RECEIVABLE
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
At June 30,
At December 31,
 
 
2018
2017
 
2018
2017
 
2018
2017
Pressure Pumping and Gulfport
(a)
$
33,831

$
41,100

 
$
72,377

$
72,845

 
$
20,127

$
25,054

Muskie and Gulfport
(b)
9,730

13,605

 
21,192

25,145

 
4,428

1,947

Panther Drilling and Gulfport
(c)

952

 
56

1,994

 
12

872

Cementing and Gulfport
(d)
2,048

903

 
4,876

903

 
1,739

2,255

SR Energy and Gulfport
(e)
4,626

1,565

 
11,579

1,565

 
4,292

3,348

Panther Drilling and El Toro
(f)


 
345


 


Redback Energy and El Toro
(g)
92

34

 
92

158

 


Coil Tubing and El Toro
(h)


 
360


 
(2
)

Bison Drilling and Predator
(i)


 


 

234

Other Relationships
 
14

49

 
14

100

 
78

78

 
 
$
50,341

$
58,208

 
$
110,891

$
102,710

 
$
30,674

$
33,788

a.
Pressure Pumping provides pressure pumping, stimulation and related completion services to Gulfport.
b.
Muskie has agreed to sell and deliver, and Gulfport has agreed to purchase, specified annual and monthly amounts of natural sand proppant, subject to certain exceptions specified in the agreement, and pay certain costs and expenses.
c.
Panther Drilling performs drilling services for Gulfport pursuant to a master service agreement.
d.
Cementing performs well cementing services for Gulfport.
e.
SR Energy performs rental services for Gulfport.
f.
Panther provides services for El Toro, an entity controlled by Wexford, pursuant to a master service agreement.
g.
Redback Energy performs completion and production services for El Toro pursuant to a master service agreement.
h.
Coil Tubing provides to El Toro services in connection with completion and drilling activities.
i.
Bison Drilling provides equipment rentals to Predator, an entity in which Wexford owns a minority interest.

23

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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
At June 30,
At December 31,
 
 
2018
2017
 
2018
2017
 
2018
2017
 
 
COST OF REVENUE
 
COST OF REVENUE
 
ACCOUNTS PAYABLE
Cobra and T&E
(a)
$
1,486

$

 
$
2,762

$

 
$
289

$
457

Higher Power and T&E
(a)
950


 
1,458


 
576

3

Panther and DBDHT
(b)


 

128

 

77

The Company and 2017 Stingray Companies
(c)

207

 

444

 


Other
 
(8
)
55

 

120

 

218

 
 
$
2,428

$
262

 
$
4,220

$
692

 
$
865

$
755

 
 
 
 
 
 
 
 
 
 
 
 
SELLING, GENERAL AND ADMINISTRATIVE COSTS
 
SELLING, GENERAL AND ADMINISTRATIVE COSTS
 
 
 
The Company and Everest
(d)
$
55

$
50

 
$
86

$
108

 
$
6

$
19

The Company and Wexford
(e)
290

165

 
473

398

 
78

150

The Company and Caliber
(f)
145

72

 
346

72

 
47

1

Other
 
42

20

 
56

53

 

2

 
 
$
532

$
307

 
$
961

$
631

 
$
131

$
172

 
 
 
 
 
 
 
 
 
 
 
 
CAPITAL EXPENDITURES
 
CAPITAL EXPENDITURES
 
 
 
Cobra and T&E
(a)
$
757

$

 
$
1,131

$

 
$
170

$
66

Higher Power and T&E
(a)
1,575


 
2,773


 
750

385

 
 
$
2,332

$

 
$
3,904

$

 
$
920

$
451

 
 
 
 
 
 
 
 
$
1,916

$
1,378

a.
Cobra and Higher Power purchase materials and services from T&E, an entity in which a member of management's family owns a minority interest.
b.
Panther rents rotary steerable equipment in connection with its directional drilling services from DBDHT.
c.
Prior to the 2017 Stingray Acquisition, the 2017 Stingray Companies provided certain services to the Company and, from time to time, the 2017 Stingray Companies paid for goods and services on behalf of the Company.
d.
Everest has historically provided office space and certain technical, administrative and payroll services to the Company and the Company has reimbursed Everest in amounts determined by Everest based on estimates of the amount of office space provided and the amount of employees’ time spent performing services for the Company.
e.
Wexford provides certain administrative and analytical services to the Company and, from time to time, the Company pays for goods and services on behalf of Wexford.
f.
Caliber leases office space to Mammoth.

On June 29, 2018, Gulfport and certain entities controlled by Wexford (the "Selling Stockholders") completed an underwritten secondary public offering of 4,000,000 shares of the Company’s common stock at a purchase price to the Selling Stockholders of $38.01 per share. The Selling Stockholders received all proceeds from this offering. The Company incurred costs of approximately $0.7 million related to the secondary public offering during the three months ended June 30, 2018.
18.
Commitments and Contingencies
Lease Obligations

The Company leases real estate, rail cars and other equipment under long-term operating leases with varying terms and expiration dates through 2062.

Minimum Purchase Commitments

The Company has entered into agreements with suppliers that contain minimum purchase obligations. Failure to purchase the minimum amounts may require the Company to pay shortfall fees. However, the minimum quantities set forth in the agreements are not in excess of currently expected future requirements.

Capital Spend Commitments

The Company has entered into agreements with suppliers to acquire capital equipment.


24

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

Aggregate future minimum payments under these obligations in effect at June 30, 2018 are as follows (in thousands):
Year ended December 31:
 
Operating Leases
 
Capital Spend Commitments
 
Minimum Purchase Commitments
Remainder of 2018
 
$
12,148

 
$
16,393

 
$
19,254

2019
 
18,091

 

 
12,125

2020
 
15,622

 

 
400

2021
 
12,029

 

 
165

2022
 
8,995

 

 

Thereafter
 
6,057

 

 

 
 
$
72,942

 
$
16,393

 
$
31,944


For the six months ended June 30, 2018 and 2017, the Company recognized rent expense of $10.2 million and $4.2 million, respectively.

The Company has various letters of credit that were issued under the Company's revolving credit agreement which is collateralized by substantially all of the assets of the Company. The letters of credit are categorized below (in thousands):
 
 
June 30,
 
December 31,
 
 
2018
 
2017
Environmental remediation
 
$
3,582

 
$
3,582

Insurance programs
 
2,486

 
2,486

Rail car commitments
 
455

 
455

Total letters of credit
 
$
6,523

 
$
6,523


The Company has insurance coverage for physical partial loss to its assets, employer’s liability, automobile liability, commercial general liability, workers’ compensation and insurance for other specific risks. The Company has also elected in some cases to accept a greater amount of risk through increased deductibles on certain insurance policies. As of June 30, 2018 and December 31, 2017, the policies require a deductible per occurrence of up to $0.3 million. The Company establishes liabilities for the unpaid deductible portion of claims incurred relating to physical loss to its assets, employer's liability, automobile liability, commercial general liability and workers’ compensation based on estimates. As of June 30, 2018 and December 31, 2017, the policies contained an aggregate stop loss of $2.0 million. The Company also self-insures its employee health insurance. The Company has coverage on its self-insurance program in the form of a stop loss of $0.2 million per participant and an aggregate stop-loss of $5.8 million for the calendar year ending December 31, 2018. These estimates may change in the near term as actual claims continue to develop. As of June 30, 2018 and December 31, 2017, accrued insurance claims were $4.2 million and $2.9 million, respectively.

Pursuant to certain customer contracts in our infrastructure services segment, the Company warrants equipment and labor performed under the contracts for a specified period following substantial completion of the work. Generally, the warranty is for one year or less. No liabilities were accrued as of June 30, 2018 and December 31, 2017 and no expense was recognized during the six months ended June 30, 2018 or 2017 related to warranty claims. However, if warranty claims occur, the Company could be required to repair or replace warrantied items, which in most cases are covered by warranties extended from the manufacturer of the equipment. In the event the manufacturer of equipment failed to perform on a warranty obligation or denied a warranty claim made by the Company, the Company could be required to pay for the cost of the repair or replacement.

In the ordinary course of business, the Company is required to provide bid bonds to certain customers in the infrastructure services segment as part of the bidding process. These bonds provide a guarantee to the customer that the Company, if awarded the project, will perform under the terms of the contract. Bid bonds are typically provided for a percentage of the total contract value. Additionally, the Company may be required to provide performance and payment bonds for contractual commitments related to projects in process. These bonds provide a guarantee to the customer that the Company will perform under the terms of a contract and that the Company will pay subcontractors and vendors. If the Company fails to perform under a contract or to pay subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. The Company must reimburse the surety for expenses or outlays it

25

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

incurs. As of June 30, 2018, outstanding bid bonds and performance and payment bonds totaled $1.1 million and $1.6 million, respectively. The estimated the cost to complete projects secured by the performance and payment bonds totaled $0.6 million as of June 30, 2018. As of December 31, 2017, the Company did not have any outstanding bid bonds or performance and payment bonds.

The Company is routinely involved in state and local tax audits. During 2015, the State of Ohio assessed taxes on the purchase of equipment the Company believes is exempt under state law. The Company appealed the assessment and a hearing was held in 2017. As a result of the hearing, the Company received a decision from the State of Ohio. The Company is appealing the decision and while it is not able to predict the outcome of the appeal, this matter is not expected to have a material adverse effect on the Company's financial position, results of operations or cash flows.

On August 1, 2016, a putative class and collective action lawsuit alleging that Redback Energy failed to pay a class of workers overtime in compliance with the Fair Labor Standards Act and Texas law was filed titled Michael Caffey, individually and on behalf of all others similarly situated v. Redback Energy Services LLC in the U.S. District Court for the Western District of Texas. The parties reached a settlement of this matter in April 2017. The settlement was paid and did not have a material impact on the Company's financial position, results of operations or cash flows.

On January 26, 2017, a collective action lawsuit alleging that Stingray Pressure Pumping LLC ("Pressure Pumping") failed to pay a class of workers in compliance with the Fair Labor Standards Act was filed titled Ryan Crosby vs. Stingray Pressure Pumping LLC, in the United Stated District Court for the Southern District of Ohio Eastern Division. The Company is evaluating the background facts at this time and is not able to predict the outcome of this lawsuit or whether it will have a material impact on the Company’s financial position, results of operations or cash flows.

On June 27, 2017, a complaint alleging negligence, as a result of a motor vehicle accident, was filed titled Donnelle Banks, individually and as parent and next Friend for Leila Ann Hollis, a minor, vs. Redback Coil Tubing LLC and Mammoth Energy Services, Inc. in the District Court of Gregg County, Texas. This matter is covered by insurance and did not have a material impact on the Company’s financial position, results of operations or cash flows.

On June 27, 2018, the Company's registered agent notified the Company that it had been served with a putative class action lawsuit titled Wendco of Puerto Rico Inc.; Multisystem Restaurant Inc.; Restaurant Operators Inc.; Apple Caribe, Inc.; on their own behalf and in representation of all businesses that conduct business in the Commonwealth of Puerto Rico vs. Mammoth Energy Services Inc.; Cobra Acquisitions, LLC; D. Grimm Puerto Rico, LLC; Aseguradoras A, B & C; John Doe; Richard Doe, in the Commonwealth of Puerto Rico Superior Court of San Juan. The plaintiffs allege negligent acts by the defendants caused an electrical failure in Puerto Rico resulting in damages of at least $300 million. The Company believes this claim is without merit and will vigorously defend the action. However, the Company continues to evaluate the background facts and at this time is not able to predict the outcome of this lawsuit or whether it will have a material impact on the Company's financial position, results of operations or cash flows.

The Company is involved in various other legal proceedings in the ordinary course of business. Although the Company cannot predict the outcome of these proceedings, legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of these matters could have a material adverse effect on the Company's business, financial condition, results of operations or cash flows.

Defined contribution plan

The Company sponsors a 401(k) defined contribution plan for the benefit of substantially all employees at their date of hire. The plan allows eligible employees to contribute up to 92% of their annual compensation, not to exceed annual limits established by the federal government. The Company makes discretionary matching contributions of up to 3% of an employee’s compensation and may make additional discretionary contributions for eligible employees. For the three and six months ended June 30, 2018, the Company paid $1.8 million and $3.4 million, respectively, in contributions to the plan. The Company did not make contributions to the plan during the three and six months ended June 30, 2017.
19.
Reporting Segments
As of June 30, 2018, our revenues, income before income taxes and identifiable assets are primarily attributable to four reportable segments. The Company principally provides energy services in connection with on-shore drilling of oil and natural gas wells for small to large domestic independent oil and natural gas producers and electric infrastructure services to government-funded utilities, private utilities, public investor-owned utilities and co-operative utilities.

26

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


The Company's Chief Executive Officer and Chief Financial Officer comprise the Company's Chief Operating Decision Maker function ("CODM"). Segment information is prepared on the same basis that the CODM manages the segments, evaluates the segment financial statements and makes key operating and resource utilization decisions. Segment evaluation is determined on a quantitative basis based on a function of operating income (loss), as well as a qualitative basis, such as nature of the product and service offerings and types of customers.

As of June 30, 2018, the Company’s four reportable segments include pressure pumping services ("Pressure Pumping"), infrastructure services ("Infrastructure"), natural sand proppant services ("Sand") and contract land and directional drilling services ("Drilling").

The pressure pumping services segment provides hydraulic fracturing services primarily in the Utica Shale of Eastern Ohio, Marcellus Shale in Pennsylvania, Permian Basin in Texas and the mid-continent region in Oklahoma. The infrastructure services segment provides electric utility infrastructure services to government-funded utilities, private utilities, public investor-owned utilities and co-operative utilities in Puerto Rico and the northeast, southwest and midwest portions of the United States. The sand segment mines, processes and sells sand for use in hydraulic fracturing. The sand segment primarily services the Utica Shale, Permian Basin, SCOOP, STACK and Montney Shale in British Columbia and Alberta, Canada. The contract land and directional drilling services segment provides vertical, horizontal and directional drilling services primarily in the Permian Basin in West Texas.

The Company also provides coil tubing services, pressure control services, flowback services, cementing services, equipment rental services, crude oil hauling services and remote accommodation services. The businesses that provide these services are distinct operating segments, which the CODM reviews independently when making key operating and resource utilization decisions. None of these operating segments meet the quantitative thresholds of a reporting segment and do not meet the aggregation criteria set forth in ASC 280 Segment Reporting. Therefore, results for these operating segments are included in the column labeled "All Other" in the tables below. Additionally, assets for corporate activities, which primarily include cash and cash equivalents, inter-segment accounts receivable, prepaid insurance and certain property and equipment, are included in the All Other column. Although Mammoth LLC, which holds these corporate assets, meets one of the quantitative thresholds of a reporting segment, it does not engage in business activities from which it may earn revenues and its results are not regularly reviewed by the Company's CODM when making key operating and resource utilization decisions. Therefore, the Company does not include it as a reportable segment.

Sales from one segment to another are generally priced at estimated equivalent commercial selling prices. Total revenue and Total cost of revenue amounts included in the Eliminations column in the following tables include inter-segment transactions conducted between segments. Receivables due for sales from one segment to another and for corporate allocations to each segment are included in the Eliminations column for Total assets in the following tables. All transactions conducted between segments are eliminated in consolidation. Transactions conducted by companies within the same reporting segment are eliminated within each reporting segment. The following tables set forth certain financial information with respect to the Company’s reportable segments (in thousands):

27

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

Three months ended June 30, 2018
Pressure Pumping
Infrastructure
Sand
Drilling
All Other
Eliminations
Total
Revenue from external customers
$
100,333

$
360,250

$
37,439

$
17,126

$
18,446

$

$
533,594

Intersegment revenues
1,073


15,406

84

1,721

(18,284
)

Total revenue
101,406

360,250

52,845

17,210

20,167

(18,284
)
533,594

Cost of revenue, exclusive of depreciation, depletion, amortization and accretion
61,593

210,189

35,117

15,280

17,649


339,828

Intersegment cost of revenues
16,174

754

1,019

(40
)
129

(18,036
)

Total cost of revenue
77,767

210,943

36,136

15,240

17,778

(18,036
)
339,828

Selling, general and administrative
20,822

39,786

1,787

1,591

1,141


65,127

Depreciation, depletion, amortization and accretion
13,829

4,094

3,881

5,349

3,642


30,795

Impairment of long-lived assets



187



187

Operating income (loss)
(11,012
)
105,427

11,041

(5,157
)
(2,394
)
(248
)
97,657

Interest expense, net
341

106

76

265

171


959

Other expense
80

330

36

32

8


486

Income (loss) before income taxes
$
(11,433
)
$
104,991

$
10,929

$
(5,454
)
$
(2,573
)
$
(248
)
$
96,212

Three months ended June 30, 2017
Pressure Pumping
Infrastructure
Sand
Drilling
All Other
Eliminations
Total
Revenue from external customers
$
49,924

$
1,709

$
24,000

$
12,472

$
10,157

$

$
98,262

Intersegment revenues
272


762


85

(1,119
)

Total revenue
50,196

1,709

24,762

12,472

10,242

(1,119
)
98,262

Cost of revenue, exclusive of depreciation, depletion, amortization and accretion
35,826

1,626

19,974

12,033

7,881


77,340

Intersegment cost of revenues
847


267


5

(1,119
)

Total cost of revenue
36,673

1,626

20,241

12,033

7,886

(1,119
)
77,340

Selling, general and administrative
2,403

307

2,416

1,435

1,139


7,700

Depreciation, depletion, amortization and accretion
9,626

340

2,206

4,974

2,747


19,893

Operating income (loss)
1,494

(564
)
(101
)
(5,970
)
(1,530
)

(6,671
)
Interest expense, net
303

4

353

440

12


1,112

Bargain purchase gain


(4,012
)



(4,012
)
Other expense
4


140

60

(1
)

203

Income (loss) before income taxes
$
1,187

$
(568
)
$
3,418

$
(6,470
)
$
(1,541
)
$

$
(3,974
)
Six months ended June 30, 2018
Pressure Pumping
Infrastructure
Sand
Drilling
All Other
Eliminations
Total
Revenue from external customers
$
196,912

$
685,709

$
73,942

$
32,354

$
38,926

$

$
1,027,843

Intersegment revenues
5,632


29,918

86

4,136

(39,772
)

Total revenue
202,544

685,709

103,860

32,440

43,062

(39,772
)
1,027,843

Cost of revenue, exclusive of depreciation, depletion, amortization and accretion
128,205

404,265

68,447

29,755

35,257


665,929

Intersegment cost of revenues
31,576

2,545

5,305

122

234

(39,782
)

Total cost of revenue
159,781

406,810

73,752

29,877

35,491

(39,782
)
665,929

Selling, general and administrative
23,485

71,637

3,431

2,844

2,241


103,638

Depreciation, depletion, amortization and accretion
27,815

6,501

6,197

9,704

7,486


57,703

Impairment of long-lived assets



187



187

Operating income (loss)
(8,537
)
200,761

20,480

(10,172
)
(2,156
)
10

200,386

Interest expense, net
845

182

156

660

353


2,196

Other expense
92

332

23

72

(5
)

514

Income (loss) before income taxes
$
(9,474
)
$
200,247

$
20,301

$
(10,904
)
$
(2,504
)
$
10

$
197,676


28

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

Six months ended June 30, 2017
Pressure Pumping
Infrastructure
Sand
Drilling
All Other
Eliminations
Total
Revenue from external customers
$
90,377

$
1,709

$
38,912

$
23,223

$
19,007

$

$
173,228

Intersegment revenues
459


1,447


85

(1,991
)

Total revenue
90,836

1,709

40,359

23,223

19,092

(1,991
)
173,228

Cost of revenue, exclusive of depreciation, depletion, amortization and accretion
64,533

1,712

32,582

22,986

14,025


135,838

Intersegment cost of revenues
1,532


454


5

(1,991
)

Total cost of revenue
66,065

1,712

33,036

22,986

14,030

(1,991
)
135,838

Selling, general and administrative
4,180

355

4,474

2,728

2,700


14,437

Depreciation, depletion, amortization and accretion
18,784

340

3,569

9,942

4,495


37,130

Operating income (loss)
1,807

(698
)
(720
)
(12,433
)
(2,133
)

(14,177
)
Interest expense, net
431

4

486

657

(69
)

1,509

Bargain purchase gain


(4,012
)



(4,012
)
Other expense
7


154

224

2


387

Income (loss) before income taxes
$
1,369

$
(702
)
$
2,652

$
(13,314
)
$
(2,066
)
$

$
(12,061
)

 
Pressure Pumping
Infrastructure
Sand
Drilling
All Other
Eliminations
Total
As of June 30, 2018:
 
 
 
 
 
 
 
Total assets(a)
$
277,895

$
341,171

$
199,421

$
92,578

$
150,579

$
(32,521
)
$
1,029,123

Goodwill
$
86,043

$
891

$
2,684

$

$
11,893

$

$
101,511

As of December 31, 2017:
 
 
 
 
 
 
 
Total assets(a)
$
297,140

$
205,275

$
190,859

$
88,527

$
243,767

$
(158,325
)
$
867,243

Goodwill
$
86,043

$
891

$
2,684

$

$
10,193

$

$
99,811

a.
Total assets included in the All Other column include Mammoth LLC corporate assets totaling $34.3 million and $148.8 million, respectively, as of June 30, 2018 and December 31, 2017, of which $16.9 million and $137.4 million are inter-segment accounts receivable which are eliminated in consolidation.
20.
Subsequent Events
On July 9, 2018, the Company and certain of its direct and indirect subsidiaries entered into a third amendment to Mammoth's revolving credit facility with the lenders party thereto and PNC Bank, National Association, as a lender and agent for the lenders (the "Third Amendment"). Among other things, the Third Amendment permits (i) the declaration of quarterly cash distributions on the shares representing equity of Mammoth if, among other things, after giving effect to the payment of such dividend or distributions contemplated by the declaration, pro forma excess availability would be no less than 22.5% of the maximum available credit and no default or event of default exists, (ii) the payment of the declared dividends or distributions if (x) such dividends or distributions are made within sixty (60) days after the declaration thereof and (y) on the date such dividends or distributions are made, (1) after giving effect to the payment of such dividend or distribution, pro forma excess availability would be no less than 22.5% of the maximum available credit and (2) no material default or material event of default shall have occurred, or would result therefrom, and (iii) the issuance of third-party surety bonds in favor of Mammoth and its subsidiaries in relation with their bonded contracts, in each case subject to the additional limitations described in the Third Amendment.

On July 10, 2018, the Company's wholly owned subsidiary, Pressure Pumping and Gulfport entered into Amendment No. 2 to that certain Amended & Restated Master Services Agreement for Pressure Pumping Services, effective as of October 1, 2014, as amended effective January 1, 2016 (the “Existing Pressure Pumping Agreement”). Under the Existing Pressure Pumping Agreement, Pressure Pumping provides hydraulic fracturing, stimulation and related completion and rework services to Gulfport with two dedicated frac spreads and related equipment. The amendment extended the term of the existing pressure pumping agreement until December 31, 2021, unless it is terminated earlier in accordance with its terms, and expanded the service area to include both Ohio and Oklahoma. The amendment also provides that Gulfport has the right to suspend pressure pumping services for up to one crew by upon a minimum of 90 days prior written notice to Pressure Pumping, with no further payment or other obligation to Pressure Pumping for such suspended crew. Pressure Pumping will be obligated to resume any such suspended pressure pumping services upon 90 days prior written notice by

29

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

Gulfport, unless such notice is waived by Pressure Pumping. The amendment also provides for the initial suspension of pressure pumping services to Gulfport for a period July 1, 2018 through September 30, 2018, during which period Pressure Pumping may use the dedicated frac spreads for other customers. If during the initial suspension period Pressure Pumping’s use of the dedicated frac spreads for other customers does not reach a certain level, then Gulfport will pay agreed costs to Pressure Pumping and Pressure Pumping will perform services for Gulfport with respect to such amount. In addition, if during such initial suspension period Pressure Pumping is unable to utilize the dedicated frac spreads for other customers, Gulfport will pay agreed recoupment costs to Pressure Pumping during the period of October 1, 2018 to December 31, 2018.

On August 6, 2018, the Company's wholly owned subsidiary, Muskie Proppant LLC ("Muskie Proppant") and Gulfport entered into a Second Amendment to the Sand Supply Agreement, effective as of October 1, 2014, as amended effective November 15, 2015. The amendment extends the term of the agreement until December 31, 2021.

The Company's unsatisfied performance obligations increased approximately $88.8 million as a result of the amendments to the pressure pumping and sand supply agreements with Gulfport.

On July 16, 2018, the Company's Board of Directors initiated a quarterly dividend policy and declared the Company's first quarterly cash dividend of $0.125 per share of common stock, to be paid on August 14, 2018 to stockholders of record as of the close of business on August 7, 2018. Based on the number of shares outstanding at June 30, 2018, the total dividend payable to stockholders on August 14, 2018 will be approximately $5.6 million.

Subsequent to June 30, 2018, the Company entered into rail car and property lease agreements with aggregate commitments of $2.4 million.

Subsequent to June 30, 2018, the Company ordered additional capital equipment with aggregate commitments of $9.6 million.

Subsequent to June 30, 2018, subsidiaries in the Company's infrastructure segment entered into an air chart agreement, barge chartering agreement and other service agreements with aggregate commitments of $2.5 million, $2.1 million and $0.6 million, respectively.

30


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto presented in this Quarterly Report and the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in Item 1A. "Risk Factors” in this Quarterly Report and in our Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission, or the SEC, on February 28, 2018 and the section entitled “Forward-Looking Statements” appearing elsewhere in this Quarterly Report.

Overview

We are an integrated, growth-oriented company serving both the oil and gas and the electric utility industry in North America and US territories. Our primary business objective is to grow our operations and create value for stockholders through organic opportunities and accretive acquisitions. Our suite of services includes pressure pumping services, infrastructure services, natural sand proppant services, contract land and directional drilling services and other energy services, including coil tubing, flowback, cementing, acidizing, equipment rental, crude oil hauling, water transfer and remote accommodations. Our pressure pumping services division provides hydraulic fracturing services. Our infrastructure services division provides construction, upgrade, maintenance and repair services to the electrical infrastructure industry. Our natural sand proppant services division mines, processes and sells proppant used for hydraulic fracturing. Our contract land and directional drilling services division provides drilling rigs and crews for operators as well as rental equipment, such as mud motors and operational tools, for both vertical and horizontal drilling. In addition to these service divisions, we also provide coil tubing services, pressure control services, flowback services, cementing services, acidizing services, equipment rentals, crude oil hauling services, water transfer and remote accommodations. We believe that the services we offer play a critical role in increasing the ultimate recovery and present value of production streams from unconventional resources as well as maintaining and improving electrical infrastructure. Our complementary suite of services provides us with the opportunity to cross-sell our services and expand our customer base and geographic positioning.

On November 24, 2014, Mammoth Energy Holdings LLC, or Mammoth Holdings, Gulfport Energy Corporation, or Gulfport, and Rhino Exploration LLC, or Rhino, contributed to Mammoth Energy Partners LP, or the Partnership, their respective interests in the following entities: Bison Drilling and Field Services, LLC, or Bison Drilling; Bison Trucking LLC, or Bison Trucking; White Wing Tubular Services LLC, or White Wing; Barracuda Logistics LLC, or Barracuda; Panther Drilling Systems LLC, or Panther Drilling; Redback Energy Services LLC, or Redback Energy Services; Redback Coil Tubing LLC, or Redback Coil Tubing; Muskie Proppant LLC, or Muskie Proppant; Stingray Pressure Pumping LLC, or Pressure Pumping; Stingray Logistics LLC, or Logistics; and Great White Sand Tiger Lodging Ltd., or Lodging. Upon completion of these contributions, Mammoth Holdings, Gulfport and Rhino beneficially owned a 68.7%, 30.5% and 0.8% equity interest, respectively, in the Partnership.

On October 12, 2016, prior to and in connection with the IPO, the Partnership converted to a Delaware limited liability company named Mammoth Energy Partners LLC, or Mammoth LLC, and Mammoth Holdings, Gulfport and Rhino contributed their respective membership interests in Mammoth LLC to us in exchange for shares of our common stock, and Mammoth LLC became our wholly-owned subsidiary.

On October 19, 2016, we closed our IPO of 7,750,000 shares of common stock, of which 7,500,000 shares were sold by us and the remaining 250,000 shares were sold by certain selling stockholders, at a price to the public of $15.00 per share. Our common stock is traded on the Nasdaq Global Select Market under the symbol “TUSK.” Unless the context otherwise requires, references in this report to “we,” “our,” “us,” or like terms, when used in a historical context for periods prior to October 12, 2016 refer to the Partnership and its subsidiaries. References in this report to “we,” “our,” “us,” or like terms, when used in the present tense or for periods commencing on or after October 12, 2016 refer to Mammoth Energy Services, Inc., or Mammoth Inc., and its subsidiaries. Mammoth Inc. was formed in June 2016, and did not conduct any material business operations prior to the completion of the IPO and the contribution described above completed on October 12, 2016 immediately prior to the IPO. Prior to the IPO, Mammoth Inc. was a wholly-owned subsidiary of the Partnership.

On June 5, 2017, we acquired Sturgeon Acquisitions LLC, or Sturgeon, and Sturgeon's wholly owned subsidiaries Taylor Frac, LLC, Taylor Real Estate Investments, LLC and South River Road, LLC. Prior to the acquisition, we and Sturgeon were under common control and, in accordance with generally accepted accounting principles in the United States, or GAAP, we have accounted for this acquisition in a manner similar to the pooling of interest method of accounting. Therefore, our

31


historical financial information for all periods included in this Quarterly Report on Form 10-Q has been recast to combine Sturgeon's financial results with our financial results as if the acquisition had been effective since Sturgeon commenced operations.

Second Quarter 2018 Highlights and Recent Developments

Executed New $900 million Contract with PREPA

On May 26, 2018, our wholly owned subsidiary Cobra Acquisitions LLC, or Cobra, entered into a new master services agreement with the Puerto Rico Electric Power Authority, or PREPA, to complete the restoration of the electrical transmission and distribution system components damaged by Hurricane Maria and to support the initial phase of reconstruction of the electrical power system in Puerto Rico, which we refer to as the New PREPA Contract. Cobra has agreed to provide the labor, supervision, tools and materials necessary to provide the restoration and reconstruction services under the New PREPA Contract, which has a one-year term ending May 25, 2019 and provides for total payments not to exceed $900.0 million. The New PREPA Contract was awarded at the conclusion of a request for proposal (RFP) bid process that began in February 2018. The New PREPA Contract is in addition to the contract that Cobra entered into in October 2017, as subsequently amended, to provide restoration services to PREPA.

Acquisition of WTL Oil and RTS Energy Services

During the second quarter of 2018, we completed the acquisitions of WTL Oil LLC, or WTL, and RTS Energy Services LLC, or RTS, for $6.1 million and $8.1 million, respectively. WTL provides crude oil hauling services in the Permian Basin and mid-continent region. RTS provides cementing and acidizing services in the Permian Basin.

Completed Underwritten Secondary Offering of Common Stock

On June 29, 2018, Gulfport and certain entities controlled by Wexford Capital LP, as the selling stockholders, completed an underwritten secondary public offering of 4,000,000 shares of the Company’s common stock at a purchase price to the selling stockholders of $38.01 per share. The selling stockholders received all proceeds from this offering. The selling stockholders also granted the underwriters an option to purchase up to an aggregate of 600,000 additional shares of our common stock at the same purchase price. This option was exercised, in part, and on July 30, 2018, the underwriters purchased an additional 385,000 shares of common stock from the selling stockholders at the same price per share.
Extended Pressure Pumping Services and Sand Supply Agreements with Gulfport
On July 10, 2018, we amended our existing agreement with Gulfport pursuant to which we, through our subsidiary Pressure Pumping, provide hydraulic fracturing, stimulation and related completion and rework services to Gulfport with two dedicated frac spreads and related equipment. The amendment extended the term of the existing pressure pumping agreement until December 31, 2021, unless it is terminated earlier in accordance with its terms, and expanded the service area to include both Ohio and Oklahoma. The pressure pumping amendment also provides that Gulfport has the right to suspend pressure pumping services for up to one crew by upon a minimum of 90 days prior written notice to Pressure Pumping, with no further payment or other obligation to Pressure Pumping for such suspended crew. Pressure Pumping will be obligated to resume any such suspended pressure pumping services upon 90 days prior written notice by Gulfport, unless such notice is waived by Pressure Pumping.

The pressure pumping amendment also provides for the initial suspension of pressure pumping services to Gulfport for a period July 1, 2018 through September 30, 2018, during which period Pressure Pumping may use the dedicated frac spreads for other customers. If during the initial suspension period Pressure Pumping’s use of the dedicated frac spreads for other customers does not reach a certain level, then Gulfport will pay agreed costs to Pressure Pumping and Pressure Pumping will perform services for Gulfport with respect to such amount. In addition, if during such initial suspension period Pressure Pumping is unable to utilize the dedicated frac spreads for other customers, Gulfport will pay agreed recoupment costs to Pressure Pumping during the period of October 1, 2018 to December 31, 2018.

On August 6, 2018, we amended our existing agreement with Gulfport pursuant to which we, through our subsidiary Muskie Proppant, sell and deliver specified amounts of sand to Gulfport. The amendment extends the term of the existing sand supply agreement until December 31, 2021.


32


Industry Overview

Oil and Natural Gas Industry  
  
The oil and natural gas industry has traditionally been volatile and is influenced by a combination of long-term, short-term and cyclical trends, including the domestic and international supply and demand for oil and natural gas, current and expected future prices for oil and natural gas and the perceived stability and sustainability of those prices, production depletion rates and the resultant levels of cash flows generated and allocated by exploration and production companies to their drilling, completion and related services and products budget. The oil and natural gas industry is also impacted by general domestic and international economic conditions, political instability in oil producing countries, government regulations (both in the United States and elsewhere), levels of customer demand, the availability of pipeline capacity and other conditions and factors that are beyond our control.

Demand for most of our oil and natural gas products and services depends substantially on the level of expenditures by companies in the oil and natural gas industry. The levels of capital expenditures of our customers are predominantly driven by the oil and natural gas prices. Over the past several years, commodity prices, particularly oil, has seen significant volatility with pricing ranging from a high of $110.53 per barrel on September 6, 2013 to a low of $26.19 per barrel on February 11, 2016. During early 2017, oil prices stabilized around the $50 per barrel level and started a gradual upward trend which continued into the second quarter of 2018, where oil prices averaged $67.85.

We anticipate demand for our oil and natural gas services and products will continue to be dependent on commodity prices. If commodity prices stabilize at current levels or continue to increase, we expect to experience further increases in demand for our services and products, particularly in our completion and production, natural sand proppant and contract land and directional drilling businesses. Decreases in commodity prices, however, may result in a reduction in the demand for our drilling, completion and other products and services.

Energy Infrastructure Industry
    
In 2017, we expanded into the electric infrastructure business, offering both commercial and storm restoration services to government-funded utilities, private utilities, public investor owned utilities and cooperatives. Since we commenced operations in this line of business, substantially all of our infrastructure revenues has been generated from storm restoration work, primarily from PREPA due to damage caused by Hurricane Maria. On October 19, 2017, Cobra and PREPA entered into an emergency master services agreement for repairs to PREPA’s electrical grid. The one-year contract, as amended, provides for payments of up to $945.4 million. On May 26, 2018, Cobra and PREPA entered into a new one-year, $900.0 million master services agreement to provide additional repair services and begin the initial phase of reconstruction of the electrical power system in Puerto Rico. PREPA is currently subject to bankruptcy proceedings pending in the U.S. District Court for the District of Puerto Rico. As a result, PREPA's ability to meet its payment obligations under the contract will be largely dependent upon funding from the Federal Emergency Management Agency or other sources. In the event PREPA does not have or does not obtain the funds necessary to satisfy its obligations to Cobra under the contracts, terminates the contracts or curtails our services prior to the end of the contract terms, our financial condition, results of operations and cash flows could be materially and adversely affected. In addition, government contracts are subject to various uncertainties, restrictions and regulations, including oversight audits by government representatives and profit and cost controls, which could result in withholding or delayed payments to us or efforts to recover payments already made.

The demand for our infrastructure services in the continental United States has steadily increased since we expanded in to the infrastructure business. Our infrastructure teams are working for multiple utilities across the northeastern, midwestern and southwestern portions of the United States. We believe we will be able to continue to grow our customer base in the continental United States and increase the backlog of work over the coming years.

Natural Sand Proppant Industry

In the natural sand proppant industry, demand growth for frac sand and other proppants is primarily driven by advancements in oil and natural gas drilling and well completion technology and techniques, such as horizontal drilling and hydraulic fracturing, as well as overall industry activity growth. Demand for proppant declined in 2015 and throughout most of 2016 with reduced well completion activity; however, we believe that demand for proppant will continue to grow over the long-term, as it did throughout 2017 and the first half of 2018. Over the past 18 months, several new and existing suppliers announced planned capacity additions of frac sand supply, particularly in the Permian Basin. We expect frac sand supply to exceed growth in demand over the coming months and quarters in the Permian Basin. While planned capacity may exceed the expectations for frac sand demand in the Permian Basin, the collectively available industry capacity is constrained due to (i)

33


availability of the grades of sand that are currently in demand, (ii) general operating conditions and normal downtime and (iii) logistics constraints. The industry is expected to add significant capacity over the next 12 to 18 months, particularly in the Permian Basin. We believe that the coarseness, conductivity, sphericity, acid-solubility and crush-resistant properties of our Northern White sand reserves and our transportation infrastructure afford us an advantage over many of our competitors and make us one of a select group of sand producers capable of delivering high volumes of frac sand that is optimal for oil and natural gas production to all major unconventional resource basins currently producing throughout North America.

During the first half of 2018, constraints in the rail system adversely impacted frac sand deliveries from our Taylor sand facility in Jackson County, Wisconsin. As a result, we estimate production at our Taylor facility was 23% lower during the first half of 2018 than it would have been in the absence of these constraints. We anticipate that these rail system constraints will be alleviated later in 2018. Production at our Piranha facility was not impacted by these rail constraints.

34


Results of Operations

Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017
 
Three Months Ended
 
June 30, 2018
 
June 30, 2017
 
(in thousands)
Revenue:
 
 
 
Pressure pumping services
$
101,406

 
$
50,196

Infrastructure services
360,250

 
1,709

Natural sand proppant services
52,845

 
24,762

Contract land and directional drilling services
17,210

 
12,472

Other services
20,167

 
10,242

Eliminations
(18,284
)
 
(1,119
)
Total revenue
533,594

 
98,262

 
 
 
 
Cost of revenue:
 
 
 
Pressure pumping services (exclusive of depreciation and amortization of $13,841 and $9,597, respectively, for the three months ended June 30, 2018 and 2017)
77,767

 
36,673

Infrastructure services (exclusive of depreciation and amortization of $4,088 and $340, respectively, for the three months ended June 30, 2018 and 2017)
210,943

 
1,626

Natural sand proppant services (exclusive of depreciation, depletion and accretion of $3,879 and $2,204, respectively, for the three months ended June 30, 2018 and 2017)
36,136

 
20,241

Contract land and directional drilling services (exclusive of depreciation of $5,349 and $4,970, respectively, for the three months ended June 30, 2018 and 2017)
15,240

 
12,033

Other services (exclusive of depreciation and amortization of $3,620 and $2,744, respectively, for the three months ended June 30, 2018 and 2017)
17,778

 
7,886

Eliminations
(18,036
)
 
(1,119
)
Total cost of revenue
339,828

 
77,340

Selling, general and administrative expenses
65,127

 
7,700

Depreciation, depletion, amortization and accretion
30,795

 
19,893

Impairment of long-lived assets
187

 

Operating income (loss)
97,657

 
(6,671
)
Interest expense, net
(959
)
 
(1,112
)
Bargain purchase gain

 
4,012

Other expense, net
(486
)
 
(203
)
Income (loss) before income taxes
96,212

 
(3,974
)
Provision (benefit) for income taxes
53,512

 
(2,804
)
Net income (loss)
$
42,700

 
$
(1,170
)

Revenue. Revenue for the three months ended June 30, 2018 increased $436 million, or 443%, to $534 million from $98 million for the three months ended June 30, 2017. The increase in total revenues is primarily attributable to a $359 million increase in infrastructure services revenue during the three months ended June 30, 2018, representing 82% of the overall increase. Additionally, pressure pumping services revenue and natural sand proppant revenue increased $51 million and $28 million, respectively, representing 12% and 6% of the overall increase.

Revenue derived from related parties was $50 million, or 9% of our total revenues, for the three months ended June 30, 2018 and $58 million, or 59% of our total revenues, for the three months ended June 30, 2017. Substantially all of our related party revenue is derived from Gulfport under pressure pumping and sand contracts. On July 10, 2018, we executed an

35


amendment with Gulfport to extend the term of our pressure pumping contract through December 2021. While the terms of the contract amendment provide Gulfport the right to suspend our services under certain conditions, we do not believe that any such suspension would have a material adverse effect on our operations or financial condition based on current utilization and pricing. Additionally, on August 6, 2018, we executed an amendment with Gulfport to extend the term of our sand supply agreement through December 2021. Revenue by operating division was as follows:

Pressure Pumping Services. Pressure pumping services division revenue increased $51 million, or 102%, to $101 million for the three months ended June 30, 2018 from $50 million for the three months ended June 30, 2017. Revenue derived from related parties was $34 million, or 33% of total pressure pumping revenues, for the three months ended June 30, 2018 compared to $41 million, or 82% of total pressure pumping revenues, for the three months ended June 30, 2017. Substantially all of our related party revenue is derived from Gulfport. Inter-segment revenues, consisting primarily of revenue derived from our sand segment, totaled $1 million and $0.3 million, respectively, for the three months ended June 30, 2018 and 2017.

The increase in our pressure pumping services revenue was primarily driven by the startup of our fourth, fifth and sixth pressure pumping fleets in June, August and October 2017, respectively, in the SCOOP/STACK and Permian Basin, which contributed revenues of $51 million during the three months ended June 30, 2018. Additionally, the number of stages completed increased to 1,815 for the three months ended June 30, 2018 from 1,287 for the three months ended June 30, 2017.

Infrastructure Services. Infrastructure services division revenue increased $358 million to $360 million for the three months ended June 30, 2018 from $2 million for the three months ended June 30, 2017. We generated $347 million, or 96% of total infrastructure services revenue, from our contract with PREPA for repairs to Puerto Rico's electrical grid as a result of Hurricane Maria. For additional information regarding our contracts with PREPA and our infrastructure services, see "Industry Overview - Electrical Infrastructure Industry" above.

Natural Sand Proppant Services. Natural sand proppant services division revenue increased $28 million, or 113%, to $53 million for the three months ended June 30, 2018, from $25 million for the three months ended June 30, 2017. Revenue derived from related parties was $10 million, or 18% of total sand revenues, for the three months ended June 30, 2018 and $14 million, or 55% of total sand revenues, for the three months ended June 30, 2017. Inter-segment revenues, consisting primarily of revenue derived from our pressure pumping segment, totaled $15 million, or 29% of total sand revenues, for the three months ended June 30, 2018 and $1 million, or 3% of total sand revenues, for the three months ended June 30, 2017.

The increase in our natural sand proppant services revenue was primarily attributable to a 117% increase in tons of sand sold from approximately 359,053 tons for the three months ended June 30, 2017 to 777,850 tons for the three months ended June 30, 2018. We completed the expansion of our Taylor sand facility in March 2018. In May 2017, we acquired a wet and dry plant and sand mine located on approximately 600 acres in New Auburn, Wisconsin through our purchase of the assets of Chieftain. These assets contributed revenues of $14.6 million to our natural sand proppant division for the three months ended June 30, 2018 compared to $0.2 million for the three months ended June 30, 2017.

Contract Land and Directional Drilling Services. Contract land and directional drilling services division revenue increased $5 million, or 38%, from $12 million for the three months ended June 30, 2017 to $17 million for the three months ended June 30, 2018. Revenue derived from related parties, consisting primarily of directional drilling revenue from Gulfport, was a nominal amount for the three months ended June 30, 2018 and $1 million, or 8% of total drilling revenues, for the three months ended June 30, 2017.

The increase in contract land and directional drilling revenue was primarily attributable to our directional drilling services, which accounted for $4 million, or 76% of the total increase as a result of increased utilization from 26% for the three months ended June 30, 2017 to 47% for the three months ended June 30, 2018. Our rig moving services accounted for $1 million, or 22%, of the operating division increase primarily due to increased activity. Our land drilling services accounted for $0.1 million, or 2%, of the operating division increase as a result of an increase in average day rates from approximately $14,100 for the three months ended June 30, 2017 to approximately $17,229 for the three months ended June 30, 2018, partially offset by a decrease in average active rigs from six for the three months ended June 30, 2017 to four for the three months ended June 30, 2018.

Other Services. Other revenue, consisting of revenue derived from our coil tubing, pressure control, flowback, cementing, acidizing, equipment rental, crude oil hauling and remote accommodation businesses, increased

36


$10 million, or 97%, to $20 million for the three months ended June 30, 2018 from $10 million for the three months ended June 30, 2017. Revenue derived from related parties, consisting primarily of equipment rental and cementing revenue from Gulfport, was $7 million, or 34% of total other revenues, for the three months ended June 30, 2018 and $3 million, or 25% of total other revenues, for the three months ended June 30, 2017. Inter-segment revenues, consisting primarily of revenue derived from our infrastructure and pressure pumping segments, totaled $2 million and $0.1 million, respectively, for the three months ended June 30, 2018 and 2017.

Stingray Cementing and Stingray Energy, which we acquired in June 2017, contributed revenues of $9 million for the three months ended June 30, 2018 compared to $3 million for the three months ended June 30, 2017. Revenues from our coil tubing, pressure control and flowback services increased $3 million for the three months ended June 30, 2018 compared to three months ended June 30, 2017 primarily due to increases in utilization. These increases were partially offset by a decrease in revenue from our remote accommodations business due to a decline in utilization.

Cost of Revenue (exclusive of depreciation, depletion, amortization and accretion expense). Cost of revenue, exclusive of depreciation, depletion, amortization and accretion expense, increased $263 million from $77 million, or 79% of total revenue, for the three months ended June 30, 2017 to $340 million, or 64% of total revenue, for the three months ended June 30, 2018. The increase was primarily due to an expansion of our infrastructure services business, which represented a $209 million increase in cost of revenue, as well as an increase in pressure pumping division costs of $41 million, primarily related to the addition of three new fleets in 2017, and an increase in natural sand proppant division costs of $16 million, primarily due to an increase in tons of sand sold during the three months ended June 30, 2018 compared to the three months ended June 30, 2017. Cost of revenue by operating division was as follows:

Pressure Pumping Services. Pressure pumping services division cost of revenue, exclusive of depreciation and amortization expense, increased $41 million, or 112%, to $78 million for the three months ended June 30, 2018 from $37 million for the three months ended June 30, 2017. The increase was primarily due to the expansion of services into the SCOOP/STACK and Permian Basin with the addition of three fleets. As a percentage of revenue, our pressure pumping services division cost of revenue, exclusive of depreciation and amortization expense of $14 million and $10 million for the three months ended June 30, 2018 and 2017, was 77% and 73%, respectively, for the three months ended June 30, 2018 and 2017. The increase in costs as a percentage of revenue was primarily due to an increase in cost of goods sold as a result of selling sand with our service package to customers in the mid-continent region.

Infrastructure Services. Infrastructure services division cost of revenue, exclusive of depreciation and amortization expense, was $211 million and $2 million, respectively, for the three months ended June 30, 2018 and 2017. The increase is due to the expansion of our infrastructure business in late 2017 and 2018. The largest components of our cost of revenue include labor-related costs, including contract labor, and travel, meals and lodging expense. As a percentage of revenue, cost of revenue, exclusive of depreciation and amortization expense of $4 million and $0.3 million for the three months ended June 30, 2018 and 2017, was 59% and 95%, respectively, for the three months ended June 30, 2018 and 2017.

Natural Sand Proppant Services. Natural sand proppant services division cost of revenue, exclusive of depreciation, depletion and accretion expense, increased $16 million, or 79%, from $20 million for the three months ended June 30, 2017 to $36 million for the three months ended June 30, 2018, primarily due to an increase in cost of goods sold as a result of a 117% increase in tons of sand sold in the 2018 period. As a percentage of revenue, cost of revenue, exclusive of depreciation, depletion and accretion expense of $4 million and $2 million for the three months ended June 30, 2018 and 2017, was 68% and 82%, respectively, for the three months ended June 30, 2018 and 2017. The decrease is primarily due to startup costs incurred for our Piranha plant, which was acquired in May 2017.

Contract Land and Directional Drilling Services. Contract land and directional drilling services division cost of revenue, exclusive of depreciation expense, increased $3 million, or 27%, from $12 million for the three months ended June 30, 2017 to $15 million for the three months ended June 30, 2018, primarily due to an increase in utilization. As a percentage of revenue, our contract land and directional drilling services division cost of revenue, exclusive of depreciation expense of $5 million for both the three months ended June 30, 2018 and 2017, was 89% and 96%, respectively, for the three months ended June 30, 2018 and June 30, 2017. The decrease was primarily due to increased utilization and dayrates.

Other Services. Other services division cost of revenue, exclusive of depreciation and amortization expense, increased $10 million, or 125%, from $8 million for the three months ended June 30, 2017 to $18 million for the three

37


months ended June 30, 2018, primarily due to the acquisition of Stingray Cementing and Stingray Energy in June 2017 and an increase in utilization for our other businesses. As a percentage of revenue, cost of revenue, exclusive of depreciation and amortization expense of $4 million and $2 million for the three months ended June 30, 2018 and 2017, was 88% and 77%, respectively, for the three months ended June 30, 2018 and 2017. The increase is primarily the result of increased equipment rental expense and labor-related costs as a percentage of revenue.

Selling, General and Administrative Expenses. Selling, general and administrative expenses, or SG&A, represent the costs associated with managing and supporting our operations. These expenses increased $57 million, or 746%, to $65 million for the three months ended June 30, 2018, from $8 million for the three months ended June 30, 2017, primarily related to costs incurred for the expansion of our infrastructure business, an increase in the provision for bad debt and an increase in equity based compensation. The equity based compensation represents compensation expense for awards issued by certain Wexford affiliates and had no cash impact to the Company and no dilutive impact relative to the number of shares outstanding. Following is a breakout of SG&A expenses for the periods indicated (in thousands):
 
Three Months Ended
 
June 30, 2018
 
June 30, 2017
Cash expenses:
 
 
 
Compensation and benefits
$
10,978

 
$
2,966

Professional services
2,981

 
1,652

Other(a)
3,935

 
2,015

Total cash SG&A expense
17,894

 
6,633

Non-cash expenses:
 
 
 
Bad debt provision
28,263

 
17

Equity based compensation(b)
17,487

 

Stock based compensation
1,483

 
1,050

Total non-cash SG&A expense
47,233

 
1,067

Total SG&A expense
$
65,127

 
$
7,700

a.
Includes travel-related costs, IT expenses, rent, utilities and other general and administrative-related costs.
b.
Represents compensation expense for non-employee awards, which were issued and are payable by certain affiliates of Wexford (the sponsor level).

Depreciation, Depletion, Amortization and Accretion. Depreciation, depletion, amortization and accretion increased $11 million, or 55%, to $31 million for the three months ended June 30, 2018 from $20 million for the three months ended June 30, 2017. The increase is primarily attributable to an increase in property and equipment purchases in the second half of 2017 and first half of 2018, resulting in increased depreciation expense.
    
Operating Income (Loss). Operating income increased $105 million to $98 million for the three months ended June 30, 2018 compared to an operating loss of $7 million for the three months ended June 30, 2017. The increase was primarily the result of an expansion of our infrastructure services business, which recognized operating income of $106 million and an increase in natural sand proppant operating income of $11 million. These were partially offset by a $13 million decrease in operating income in our pressure pumping segment due to an increase in non-cash equity compensation expense during the three months ended June 30, 2018.

Interest Expense, Net. Interest expense, net was $1 million for both the three months ended June 30, 2018 and 2017. Average outstanding borrowings remained relatively flat for the three months ended June 30, 2018 compared to the three months ended June 30, 2017.

Other Expense, Net. Non-operating charges, net resulted in expense of $0.5 million and $0.2 million, respectively, for the three months ended June 30, 2018 and 2017. Both periods were primarily comprised of loss recognition on assets disposed of during the period.

Income Taxes. We recorded income tax expense of $54 million on pre-tax income of $96 million for the three months ended June 30, 2018 compared to an income tax benefit of $3 million on pre-tax loss of $4 million for the three months ended June 30, 2017. Our effective tax rate was 56% for the three months ended June 30, 2018 compared to 35% for the three months ended June 30, 2017. The increase in effective tax rate is primarily due to the equity based compensation expense recognized during the three months ending June 30, 2018 as well as a higher tax rate in Puerto Rico, where most of our income was

38


generated during the three months ended June 30, 2018, compared to the United States tax rate. No income was generated in Puerto Rico during the three months ended June 30, 2017.

Results of Operations

Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
(in thousands)
Revenue:
 
 
 
Pressure pumping services
$
202,544

 
$
90,836

Infrastructure services
685,709

 
1,709

Natural sand proppant services
103,860

 
40,359

Contract land and directional drilling services
32,440

 
23,223

Other services
43,062

 
19,092

Eliminations
(39,772
)
 
(1,991
)
Total revenue
1,027,843

 
173,228

 
 
 
 
Cost of revenue:
 
 
 
Pressure pumping services (exclusive of depreciation and amortization of $27,818 and $18,725, respectively, for the six months ended June 30, 2018 and 2017)
159,781

 
66,065

Infrastructure services (exclusive of depreciation and amortization of $6,489 and $340, respectively, for the six months ended June 30, 2018 and 2017)
406,810

 
1,712

Natural sand proppant services (exclusive of depreciation, depletion and accretion of $6,193 and $3,566, respectively, for the six months ended June 30, 2018 and 2017)
73,752

 
33,036

Contract land and directional drilling services (exclusive of depreciation of $9,703 and $9,934, respectively, for the six months ended June 30, 2018 and 2017)
29,877

 
22,986

Other services (exclusive of depreciation and amortization of $7,463 and $4,490, respectively, for the six months ended June 30, 2018 and 2017)
35,491

 
14,030

Eliminations
(39,782
)
 
(1,991
)
Total cost of revenue
665,929

 
135,838

Selling, general and administrative expenses
103,638

 
14,437

Depreciation, depletion, amortization and accretion
57,703

 
37,130

Impairment of long-lived assets
187

 

Operating income (loss)
200,386

 
(14,177
)
Interest expense, net
(2,196
)
 
(1,509
)
Bargain purchase gain

 
4,012

Other expense, net
(514
)
 
(387
)
Income (loss) before income taxes
197,676

 
(12,061
)
Provision (benefit) for income taxes
99,430

 
(5,910
)
Net income (loss)
$
98,246

 
$
(6,151
)

Revenue. Revenue for the six months ended June 30, 2018 increased $855 million, or 493%, to $1 billion from $173 million for the six months ended June 30, 2017. The increase in total revenues is primarily attributable to a $684 million increase in infrastructure services revenue, representing 80% of the overall increase. Additionally, pressure pumping services revenue and natural sand proppant revenue increased $112 million and $64 million, respectively, representing 13% and 7% of the overall increase.


39


Revenue derived from related parties was $111 million, or 11% of our total revenues, for the six months ended June 30, 2018 and $103 million, or 59% of our total revenues, for the six months ended June 30, 2017. Substantially all of our related party revenue is derived from Gulfport under pressure pumping and sand contracts. On July 10, 2018, we executed an amendment with Gulfport to extend the term of our pressure pumping contract through December 2021. While the terms of the contract amendment provide Gulfport the right to suspend our services under certain conditions, we do not believe that any such suspension would have a material adverse effect on our operations or financial condition based on current utilization and pricing. Additionally, on August 6, 2018, we executed an amendment with Gulfport to extend the term of our sand supply agreement through December 2021. Revenue by operating division was as follows:

Pressure Pumping Services. Pressure pumping services division revenue increased $112 million, or 123%, to $203 million for the six months ended June 30, 2018 from $91 million for the six months ended June 30, 2017. Revenue derived from related parties was $72 million, or 36% of total pressure pumping revenues, for the six months ended June 30, 2018 compared to $73 million, or 80% of total pressure pumping revenues, for the six months ended June 30, 2017. Substantially all of our related party revenue is derived from Gulfport. Inter-segment revenues, consisting primarily of revenue derived from our sand segment, totaled $6 million and $0 million, respectively, for the six months ended June 30, 2018 and 2017.

The increase in our pressure pumping services revenue was primarily driven by the startup of our fourth, fifth and sixth pressure pumping fleets in June, August and October 2017, respectively, in the SCOOP/STACK and Permian Basin, which contributed revenues of $92 million during the six months ended June 30, 2018. Additionally, the number of stages completed increased to 3,487 for the six months ended June 30, 2018 from 2,147 for the six months ended June 30, 2017.

Infrastructure Services. Infrastructure services division revenue increased $684 million from $2 million for the six months ended June 30, 2017 to $686 million for the six months ended June 30, 2018. We generated $665 million, or 97% of total infrastructure services revenue, from our contract with PREPA for repairs to Puerto Rico's electrical grid as a result of Hurricane Maria. For additional information regarding our contracts with PREPA and our infrastructure services, see "Industry Overview - Electrical Infrastructure Industry" above.

Natural Sand Proppant Services. Natural sand proppant services division revenue increased $64 million, or 157%, to $104 million for the six months ended June 30, 2018, from $40 million for the six months ended June 30, 2017. Revenue derived from related parties was $21 million, or 20% of total sand revenues, for the six months ended June 30, 2018 and $25 million, or 62% of total sand revenues, for the six months ended June 30, 2017. Inter-segment revenues, consisting primarily of revenue derived from our pressure pumping segment, totaled $30 million, or 29% of total sand revenues, for the six months ended June 30, 2018 and $1 million, or 4% of total sand revenues, for the six months ended June 30, 2017.

The increase in our natural sand proppant services revenue was primarily attributable to a 146% increase in tons of sand sold from approximately 614,918 tons for the six months ended June 30, 2017 to 1,513,434 tons for the six months ended June 30, 2018. We completed the expansion of our Taylor sand facility in March 2018. In May 2017, we acquired a wet and dry plant and sand mine located on approximately 600 acres in New Auburn, Wisconsin through our purchase of the assets of Chieftain. These assets contributed revenues of $26 million to our natural sand proppant division for the six months ended June 30, 2018 compared to $0.2 million for the six months ended June 30, 2017.

Contract Land and Directional Drilling Services. Contract land and directional drilling services division revenue increased $9 million, or 40%, from $23 million for the six months ended June 30, 2017 to $32 million for the six months ended June 30, 2018. Revenue derived from related parties, consisting primarily of directional drilling revenue from Gulfport and El Toro Resources LLC, was $0.4 million, or 1% of total drilling revenues, for the six months ended June 30, 2018 compared to $2 million, or 9% of total drilling revenues, for the six months ended June 30, 2017.

The increase in contract land and directional drilling revenue was primarily attributable to our directional drilling services, which accounted for $6 million, or 61% of the total increase as a result of increased utilization from 26% for the six months ended June 30, 2017 to 46% for the six months ended June 30, 2018. Our rig moving services accounted for $2 million, or 24%, of the operating division increase primarily due to increased activity. Our land drilling services accounted for $1 million, or 16%, of the operating division increase as a result of an increase in average day rates from approximately $14,250 for the six months ended June 30, 2017 to approximately $16,882 for

40


the six months ended June 30, 2018, partially offset by a decrease in average active rigs from six for the six months ended June 30, 2017 to five rigs for the six months ended June 30, 2018.

Other Services. Other revenue, consisting of revenue derived from our coil tubing, pressure control, flowback, cementing, acidizing, equipment rental, crude oil hauling and remote accommodations businesses, increased $24 million, or 126%, to $43 million for the six months ended June 30, 2018 from $19 million for the six months ended June 30, 2017. Revenue derived from related parties, consisting primarily of equipment rental and cementing revenue from Gulfport, was $17 million, or 39% of total other revenues, for the six months ended June 30, 2018 and $3 million, or 14% of total other revenues, for the six months ended June 30, 2017. Inter-segment revenues, consisting primarily of revenue derived from our infrastructure and pressure pumping segments, totaled $4 million and $0.1 million for the six months ended June 30, 2018 and 2017.

Stingray Cementing and Stingray Energy, which we acquired in June 2017, contributed revenues of $21 million for the six months ended June 30, 2018 compared to $3 million for the six months ended June 30, 2017. Revenues from our coil tubing, pressure control and flowback services increased $7 million for the six months ended June 30, 2018 compared to six months ended June 30, 2017 primarily due to increases in utilization.

Cost of Revenue (exclusive of depreciation, depletion, amortization and accretion expense). Cost of revenue, exclusive of depreciation, depletion, amortization and accretion expense, increased $530 million from $136 million, or 78% of total revenue, for the six months ended June 30, 2017 to $666 million, or 65% of total revenue, for the six months ended June 30, 2018. The increase was primarily due to the expansion of our infrastructure services business, which represented a $405 million increase in cost of revenue, as well as an increase in pressure pumping division costs of $94 million, primarily related to the addition of three new fleets during 2017, and an increase in natural sand proppant division costs of $41 million, primarily due to an increase in tons of sand sold during the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Cost of revenue by operating division was as follows:

Pressure Pumping Services. Pressure pumping services division cost of revenue, exclusive of depreciation and amortization expense, increased $94 million, or 142%, to $160 million for the six months ended June 30, 2018 from $66 million for the six months ended June 30, 2017. The increase was primarily due to the expansion of services into the SCOOP/STACK and Permian Basin with the addition of three fleets during 2017, which accounted for $83 million, or 88%, of the increase. As a percentage of revenue, our pressure pumping services division cost of revenue, exclusive of depreciation and amortization expense of $28 million and $19 million for the six months ended June 30, 2018 and 2017, was 79% and 73%, respectively, for the six months ended June 30, 2018 and June 30, 2017. The increase in costs as a percentage of revenue was primarily due to an increase in cost of goods sold as a result of selling sand with our service package to customers in the mid-continent region.

Infrastructure Services. Infrastructure services division cost of revenue, exclusive of depreciation and amortization expense, was $407 million and $2 million, respectively, for the six months ended June 30, 2018 and 2017. The increase is due to the expansion of our infrastructure business in late 2017 and 2018. The largest components of our cost of revenue include labor-related costs, including contract labor, and travel, meals and lodging expense. As a percentage of revenue, cost of revenue, exclusive of depreciation and amortization expense of $7 million and $0.3 million for the six months ended June 30, 2018 and 2017, was 59% and 100%, respectively, for the six months ended June 30, 2018 and 2017.

Natural Sand Proppant Services. Natural sand proppant services division cost of revenue, exclusive of depreciation, depletion and accretion expense, increased $41 million, or 123%, from $33 million for the six months ended June 30, 2017 to $74 million for the six months ended June 30, 2018, primarily due to an increase in cost of goods sold as a result of a 146% increase in tons of sand sold in the 2018 period. As a percentage of revenue, cost of revenue, exclusive of depreciation, depletion and accretion expense of $6 million and $4 million for the six months ended June 30, 2018 and 2017, was 71% and 82%, respectively, for the six months ended June 30, 2018 and June 30, 2017. The decrease is primarily due to startup costs incurred for our Piranha plant, which was acquired in May 2017.

Contract Land and Directional Drilling Services. Contract land and directional drilling services division cost of revenue, exclusive of depreciation expense, increased $7 million, or 30%, from $23 million for the six months ended June 30, 2017 to $30 million for the six months ended June 30, 2018, primarily due to increased utilization. As a percentage of revenue, our contract land and directional drilling services division cost of revenue, exclusive of depreciation expense of $10 million for both the six months ended June 30, 2018 and 2017, was 92% and 99%, respectively, for the six months ended June 30, 2018 and June 30, 2017. The decrease was primarily due to higher day rates and a decrease in compensation and benefits expense as a percentage of revenue.

41



Other Services. Other services division cost of revenue, exclusive of depreciation and amortization expense, increased $21 million, or 153%, from $14 million for the six months ended June 30, 2017 to $35 million for the six months ended June 30, 2018, primarily due to the acquisition of Stingray Cementing and Stingray Energy in June 2017. As a percentage of revenue, cost of revenue, exclusive of depreciation and amortization expense of $7 million and $4 million for the six months ended June 30, 2018 and 2017, was 82% and 73%, respectively, for the six months ended June 30, 2018 and 2017. The increase is primarily the result of increased equipment rental expense and labor-related costs as a percentage of revenue.

Selling, General and Administrative Expenses. Selling, general and administrative expenses represent the costs associated with managing and supporting our operations. These expenses increased $89 million, or 618%, to $104 million for the six months ended June 30, 2018, from $14 million for the six months ended June 30, 2017 primarily related to costs incurred for the expansion of our infrastructure business, an increase in provisions for bad debt and an increase in equity based compensation. The equity based compensation represents compensation expense for awards issued by certain Wexford affiliates and had no cash impact to the Company and no dilutive impact relative to the number of shares outstanding. Following is a breakout of SG&A expenses for the periods indicated (in thousands):
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
Cash expenses:
 
 
 
Compensation and benefits
$
18,677

 
$
5,381

Professional services
5,568

 
3,581

Other(a)
5,542

 
3,880

Total cash SG&A expense
29,787

 
12,842

Non-cash expenses:
 
 
 
Bad debt provision
53,790

 
(25
)
Equity based compensation(b)
17,487

 

Stock based compensation
2,574

 
1,620

Total non-cash SG&A expense
73,851

 
1,595

Total SG&A expense
$
103,638

 
$
14,437

a.
Includes travel-related costs, IT expenses, rent, utilities and other general and administrative-related costs.
b.
Represents compensation expense for non-employee awards, which were issued and are payable by certain affiliates of Wexford (the sponsor level).

Depreciation, Depletion, Amortization and Accretion. Depreciation, depletion, amortization and accretion increased $21 million, or 55%, to $58 million for the six months ended June 30, 2018 from $37 million for the six months ended June 30, 2017. The increase is primarily attributable to an increase in property and equipment purchases in the second half of 2017 and first half of 2018, resulting in increased depreciation expense.
    
Operating Income (Loss). Operating income increased $215 million to $200 million for the six months ended June 30, 2018 compared to an operating loss of $14 million for the six months ended June 30, 2017. The increase was primarily the result of an expansion of our infrastructure services business, which accounted for 93%, or $201 million, of the overall increase in operating income and a $21 million increase in natural sand proppant operating income. These were partially offset by a $10 million decrease in pressure pumping operating income due to an increase in non-cash equity compensation expense during the six months ended June 30, 2018.

Interest Expense, Net. Interest expense, net increased $1 million, or 46%, during the six months ended June 30, 2018 primarily due to an increase in average borrowings outstanding during the six months ended June 30, 2018 compared to the six months ended June 30, 2017.

Other Expense, Net. Non-operating charges, net resulted in expense of $1 million and $0.4 million for the six months ended June 30, 2018 and 2017. Both periods were primarily comprised of loss recognition on assets disposed of during the period.

Income Taxes. We recorded income tax expense of $99 million on pre-tax income of $198 million for the six months ended June 30, 2018 compared to an income tax benefit of $6 million on pre-tax loss of $12 million for the six months ended

42


June 30, 2017. Our effective tax rate was 50% for the six months ended June 30, 2018 compared to 37% for the six months ended June 30, 2017. The increase in effective tax rate is primarily due to the equity based compensation expense recognized during the six months ended June 30, 2018 as well as a higher tax rate in Puerto Rico, where most of our income was generated during the six months ended June 30, 2018, compared to the United States tax rate. No income was generated in Puerto Rico during the six months ended June 30, 2017.

Non-GAAP Financial Measures

Adjusted EBITDA

Adjusted EBITDA is a supplemental non-GAAP financial measure that is used by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. We define Adjusted EBITDA as net income (loss) before depreciation, depletion, accretion and amortization, acquisition related costs, public offering costs, equity based compensation, stock based compensation, bargain purchase gain, interest expense, net, other (income) expense, net (which is comprised of the (gain) or loss on disposal of long-lived assets) and provision (benefit) for income taxes. We exclude the items listed above from net income (loss) in arriving at Adjusted EBITDA because these amounts can vary substantially from company to company within our industries depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (loss) or cash flows from operating activities as determined in accordance with GAAP or as an indicator of our operating performance or liquidity. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are components of Adjusted EBITDA. Our computations of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. We believe that Adjusted EBITDA is a widely followed measure of operating performance and may also be used by investors to measure our ability to meet debt service requirements.

The following tables provide a reconciliation of Adjusted EBITDA to the GAAP financial measure of net income or (loss) for each of our operating segments for the specified periods (in thousands).

Consolidated
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Reconciliation of Adjusted EBITDA to net income (loss):
2018
 
2017
 
2018
 
2017
Net income (loss)
$
42,700

 
$
(1,170
)
 
$
98,246

 
$
(6,151
)
Depreciation, depletion, accretion and amortization expense
30,795

 
19,893

 
57,703

 
37,130

Impairment of long-lived assets
187

 

 
187

 

Acquisition related costs
77

 
961

 
31

 
2,208

Public offering costs
731

 

 
731

 

Equity based compensation
17,487

 

 
17,487

 

Stock based compensation
1,660

 
1,050

 
2,916

 
1,620

Bargain purchase gain

 
(4,012
)
 

 
(4,012
)
Interest expense, net
959

 
1,112

 
2,196

 
1,509

Other expense, net
486

 
203

 
514

 
387

Provision (benefit) for income taxes
53,512

 
(2,804
)
 
99,430

 
(5,910
)
Adjusted EBITDA
$
148,594

 
$
15,233

 
$
279,441

 
$
26,781



43


Pressure Pumping Services
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Reconciliation of Adjusted EBITDA to net income (loss):
2018
 
2017
 
2018
 
2017
Net income
$
(11,433
)
 
$
1,187

 
$
(9,474
)
 
$
1,369

Depreciation and amortization expense
13,829

 
9,626

 
27,815

 
18,784

Acquisition related costs
33

 

 
33

 

Public offering costs
202

 

 
202

 

Equity based compensation
17,487

 

 
17,487

 

Stock based compensation
453

 
503

 
871

 
774

Interest expense
341

 
303

 
845

 
431

Other expense, net
80

 
4

 
92

 
7

Adjusted EBITDA
$
20,992

 
$
11,623

 
$
37,871

 
$
21,365


Infrastructure Services
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Reconciliation of Adjusted EBITDA to net income (loss):
2018
 
2017
 
2018
 
2017
Net income (loss)
$
52,359

 
$
(568
)
 
$
99,658

 
$
(702
)
Depreciation and amortization expense
4,094

 
340

 
6,501

 
340

Acquisition related costs
4

 
42

 
(4
)
 
42

Public offering costs
360

 

 
360

 

Stock based compensation
606

 

 
1,063

 

Interest expense
106

 
4

 
182

 
4

Other expense, net
330

 

 
332

 

Provision for income taxes
52,632

 

 
100,589

 

Adjusted EBITDA
$
110,491

 
$
(182
)
 
$
208,681

 
$
(316
)

Natural Sand Proppant Services
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Reconciliation of Adjusted EBITDA to net income (loss):
2018
 
2017
 
2018
 
2017
Net income
$
10,929

 
$
3,409

 
$
20,301

 
$
2,643

Depreciation, depletion, accretion and amortization expense
3,881

 
2,206

 
6,197

 
3,569

Acquisition related costs

 
916

 
(38
)
 
1,954

Public offering costs
95

 

 
95

 

Stock based compensation
205

 
182

 
391

 
252

Bargain purchase gain

 
(4,012
)
 

 
(4,012
)
Interest expense
76

 
353

 
156

 
486

Other expense, net
36

 
140

 
23

 
154

Provision for income taxes

 
9

 

 
9

Adjusted EBITDA
$
15,222

 
$
3,203

 
$
27,125

 
$
5,055



44


Contract Land and Directional Drilling Services
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Reconciliation of Adjusted EBITDA to net income (loss):
2018
 
2017
 
2018
 
2017
Net loss
$
(5,454
)
 
$
(6,470
)
 
$
(10,904
)
 
$
(13,314
)
Depreciation and amortization expense
5,349

 
4,974

 
9,704

 
9,942

Impairment of long-lived assets
187

 

 
187

 

Acquisition related costs

 
3

 

 
25

Public offering costs
34

 

 
34

 

Stock based compensation
301

 
180

 
408

 
292

Interest expense, net
265

 
440

 
660

 
657

Other expense, net
32

 
60

 
72

 
224

Adjusted EBITDA
$
714

 
$
(813
)
 
$
161

 
$
(2,174
)

Other Services(a) 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Reconciliation of Adjusted EBITDA to net income (loss):
2018
 
2017
 
2018
 
2017
Net (loss) income
$
(3,453
)
 
$
1,272

 
$
(1,346
)
 
$
3,853

Depreciation and amortization expense
3,642

 
2,747

 
7,486

 
4,495

Acquisition related costs
40

 

 
40

 
187

Public offering costs
40

 

 
40

 

Stock based compensation
94

 
184

 
183

 
301

Interest expense, net
171

 
12

 
353

 
(69
)
Other expense, net
8

 
(1
)
 
(5
)
 
2

(Benefit) provision for income taxes
880

 
(2,813
)
 
(1,158
)
 
(5,919
)
Adjusted EBITDA
$
1,422

 
$
1,401

 
$
5,593

 
$
2,850


(a) Includes results for our coil tubing, pressure control, flowback, cementing, acidizing, equipment rentals, crude oil hauling and remote accommodations services and corporate related activities. Our corporate related activities do not generate revenue.


45


Adjusted Net Income and Adjusted Earnings per Share

Adjusted net income and adjusted earnings per share are supplemental non-GAAP financial measures that are used by management to evaluate our operating and financial performance. Management believes these measures provide meaningful information about the Company's performance by excluding certain non-cash charges that may not be indicative of the Company's ongoing operating results. Adjusted net income and adjusted earnings per share should not be considered in isolation or as a substitute for net income and earnings per share prepared in accordance with GAAP and may not be comparable to other similarly titled measures of other companies. The following tables provide a reconciliation of adjusted net income and adjusted earnings per share to the GAAP financial measures of net income and earnings per share for the periods specified.

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands, except per share amounts)
Net income, as reported
$
42,700

 
$
(1,170
)
 
$
98,246

 
$
(6,151
)
Equity based compensation
17,487

 

 
17,487

 

Adjusted net income
$
60,187

 
$
(1,170
)
 
$
115,733

 
$
(6,151
)
 
 
 
 
 
 
 
 
Basic earnings per share, as reported
$
0.95

 
$
(0.03
)
 
$
2.20

 
$
(0.16
)
Equity based compensation
0.40

 

 
0.40

 

Adjusted basic earnings per share
$
1.35

 
$
(0.03
)
 
$
2.60

 
$
(0.16
)
 
 
 
 
 
 
 
 
Diluted earnings per share, as reported
$
0.95

 
$
(0.03
)
 
$
2.18

 
$
(0.16
)
Equity based compensation
0.39

 

 
0.39

 

Adjusted diluted earnings per share
$
1.34

 
$
(0.03
)
 
$
2.57

 
$
(0.16
)


46


Liquidity and Capital Resources

We require capital to fund ongoing operations, including maintenance expenditures on our existing fleet of equipment, organic growth initiatives, investments and acquisitions. Since November 2014, our primary sources of liquidity have been cash on hand, borrowings under our revolving credit facility, cash flows from operations and proceeds from our initial public offering. Our primary use of capital has been for investing in property and equipment used to provide our services and to acquire complementary businesses. On July 16, 2018, we initiated a quarterly dividend policy a declared our first quarterly cash dividend to be paid in August 2018. Future declaration of cash dividends are subject to approval by our Board of Directors and may be adjusted at their discretion based on market conditions and capital availability.

As of June 30, 2018, we had no borrowings outstanding under our revolving credit facility and $163 million of available borrowing capacity under this facility, after giving effect to $7 million of outstanding letters of credit.
 
The following table summarizes our liquidity for the periods indicated (in thousands):
 
June 30,
 
December 31,
 
2018
 
2017
Cash and cash equivalents
$
10,702

 
$
5,637

Revolving credit facility availability
169,233

 
169,233

Less long-term debt

 
(99,900
)
Less letter of credit facilities (environmental remediation)
(3,582
)
 
(3,582
)
Less letter of credit facilities (insurance programs)
(2,486
)
 
(2,486
)
Less letter of credit facilities (rail car commitments)
(455
)
 
(455
)
Net working capital (less cash)(a)
5,688

 
88,798

Total
$
179,100

 
$
157,245

a.
Net working capital (less cash) is a non-GAAP measure and is calculated by subtracting total current liabilities of $365 million and cash and cash equivalents of $11 million from total current assets of $382 million as of June 30, 2018. As of December 31, 2017, net working capital (less cash) is calculated by subtracting total current liabilities of $220 million and cash and cash equivalents of $6 million from total current assets of $314 million.

At August 3, 2018, we had no borrowings outstanding under our revolving credit facility, leaving an aggregate of $163 million of available borrowing capacity under this facility, which is net of letters of credit of $7 million.

Liquidity and Cash Flows
    
The following table sets forth our cash flows at the dates indicated (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net cash provided by operating activities
$
125,128

 
$
9,586

 
$
226,451

 
$
24,004

Net cash used in investing activities
(85,755
)
 
(71,952
)
 
(121,243
)
 
(102,693
)
Net cash provided by (used in) financing activities
(39,073
)
 
57,926

 
(100,045
)
 
57,926

Effect of foreign exchange rate on cash
(45
)
 
62

 
(98
)
 
73

Net change in cash
$
255

 
$
(4,378
)
 
$
5,065

 
$
(20,690
)

Operating Activities

Net cash provided by operating activities was $226 million for the six months ended June 30, 2018, compared to $24 million for the six months ended June 30, 2017. Net cash provided by operating activities was $125 million for the three months ended June 30, 2018 compared to $10 million for the three months ended June 30, 2017. The increase in operating cash flows was primarily attributable to the increase in net income as a result of the expansion of our infrastructure services business and improvements in our pressure pumping and sand businesses.

47



Investing Activities
    
Net cash used in investing activities was $121 million for the six months ended June 30, 2018, compared to $103 million for the six months ended June 30, 2017. Net cash used in investing activities was $86 million for the three months ended June 30, 2018, compared to $72 million for the three months ended June 30, 2017. Cash used in investing activities was used to purchase property and equipment that is utilized to provide our services and to acquire complementary businesses.

The following table summarizes our capital expenditures by operating division for the periods indicated (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Pressure pumping services(a)
$
8,233

 
$
24,737

 
$
16,099

 
$
53,402

Infrastructure services(b)
40,778

 
3,958

 
56,556

 
3,958

Natural sand proppant services(c)
6,958

 
2,795

 
12,658

 
2,970

Contract and directional drilling services(d)
7,083

 
3,632

 
10,701

 
5,901

Other(e)
9,959

 
344

 
12,771

 
344

Total capital expenditures
$
73,011

 
$
35,466

 
$
108,785

 
$
66,575

a.     Capital expenditures primarily for pressure pumping equipment for the six months ended June 30, 2018 and 2017.
b.     Capital expenditures primarily for trucks and other equipment for the six months ended June 30, 2018 and 2017.
c.    Capital expenditures primarily for plant upgrades for the six months ended June 30, 2018 and 2017.
d.
Capital expenditures primarily for upgrades to our rig fleet and real estate purchases for the six months ended June 30, 2018 and upgrades to our rig fleet for the six months ended June 30, 2017.
e.    Capital expenditures primarily for equipment for our rental and crude oil hauling businesses for the six months ended June 30, 2018.

Financing Activities

Net cash used in financing activities was $100 million for the six months ended June 30, 2018, compared to net cash provided by financing activities of $58 million for the six months ended June 30, 2017. Net cash used in financing activities was $39 million for the three months ended June 30, 2018, compared to net cash provided by financing activities of $58 million for the three months ended June 30, 2017. Net cash used in financing activities was primarily attributable to net repayments under our revolving credit facility of $39 million and $99 million, respectively for the three and six months ended June 30, 2018. Net cash provided by financing activities was primarily attributable to net borrowings under our revolving credit facility of $65 million for the three and six months ended June 30, 2017.

Effect of Foreign Exchange Rate on Cash

The effect of foreign exchange rate on cash was ($0.1) million and $0.1 million, respectively, for the six months ended June 30, 2018 and 2017. The change was driven primarily by a favorable (unfavorable) shift in the weakness (strength) of the Canadian dollar relative to the U.S. dollar for the cash held in Canadian accounts.

Working Capital

Our working capital totaled $16 million and $94 million, respectively, at June 30, 2018 and December 31, 2017. Our cash balances were $11 million and $6 million, respectively, at June 30, 2018 and December 31, 2017.

Our Revolving Credit Facility

We are party to a $170 million revolving credit and security agreement, dated as of November 25, 2014 as subsequently amended, with PNC Capital Markets LLC, as lead arranger, PNC Bank, National Association, as the administrative and collateral agent, and the lenders from time-to-time party thereto. Our revolving credit facility matures on November 25, 2019. Borrowings under our revolving credit facility are secured by our and our subsidiaries’ assets. The maximum availability for future borrowings under our revolving credit facility is subject to a borrowing base calculation prepared monthly.


48


Effective as of July 12, 2017, our revolving credit facility was amended, providing us with greater flexibility for permitted acquisitions and permitted indebtedness, increasing the maximum amount credited to the borrowing base for sand inventory and for in-transit inventory and increasing certain default thresholds from $5 million to $15 million.

Effective as of July 9, 2018, our revolving credit facility was again amended to, among other things, permit (i) the declaration of quarterly cash distributions on the shares representing equity of Mammoth if, among other things, after giving effect to the payment of such dividend or distributions contemplated by the declaration, pro forma excess availability would be no less than 22.5% of the maximum available credit and no default or event of default exists, (ii) the payment of the declared dividends or distributions if (x) such dividends or distributions are made within sixty (60) days after the declaration thereof and (y) on the date such dividends or distributions are made, (1) after giving effect to the payment of such dividend or distribution, pro forma excess availability would be no less than 22.5% of the maximum available credit and (2) no material default or material event of default shall have occurred, or would result therefrom, and (iii) the issuance of third-party surety bonds in favor of Mammoth and its subsidiaries in relation with their bonded contracts, in each case subject to the additional limitations described in the Third Amendment.

Interest is payable monthly at a base rate set by the institution’s commercial lending group plus an applicable margin. Additionally, at our 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 us to select interest periods from one, two, and 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.

At June 30, 2018, we had no outstanding borrowings under our credit facility. At June 30, 2018, we had availability of $163 million under our revolving credit facility, after giving effect to $7 million of outstanding letters of credit.

Our revolving credit facility contains various customary affirmative and restrictive covenants. Among the covenants are two financial covenants, including a minimum interest coverage ratio (3.0 to 1.0), and a maximum leverage ratio (4.0 to 1.0), and minimum availability ($10.0 million). As of June 30, 2018 and December 31, 2017, we were in compliance with these financial covenants.

Capital Requirements and Sources of Liquidity

During 2018, we currently estimate that our aggregate capital expenditures will be approximately $205 million. These capital expenditures include $98 million in our infrastructure services segment for assets for additional crews, $25 million in our natural sand proppant services segment primarily related to expansion projects, $21 million in our pressure pumping segment for various pressure pumping equipment, $14 million in our contract land and directional drilling services segment primarily for rig upgrades and real estate, $17 million for expansion of our rental equipment business in Ohio and into Oklahoma, $10 million for the expansion of our water transfer business, $8 million for the expansion of our crude hauling business, $6 million for coil tubing equipment and $6 million for other capital expenditures. During the first half of 2018, our capital expenditures totaled $109 million.

We believe that our cash on hand, operating cash flow and available borrowings under our revolving credit facility will be sufficient to fund our operations for at least the next twelve months. However, future cash flows are subject to a number of variables, and significant additional capital expenditures could be required to conduct our operations. There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. Further, we continue to pursue our previously announced acquisition strategy to enhance our portfolio of products and services, market positioning and/or geographic presence in both other existing and new industries. In doing so, we regularly evaluate acquisition opportunities. However, we do not have a specific acquisition budget for 2018 since the timing and size of acquisitions cannot be accurately forecasted. Our acquisitions may be undertaken with cash, our common stock or a combination of cash, common stock and/or other consideration. In the event we make one or more additional acquisitions and the amount of capital required is greater than the amount we have available for acquisitions at that time, we could be required to reduce the expected level of capital expenditures and/or seek additional capital. If we seek additional capital for that or other reasons, we may do so through borrowings under our revolving credit facility, joint venture partnerships, asset sales, offerings of debt or equity securities or other means. We cannot assure you that this additional capital will be available on acceptable terms or at all. If we are unable to obtain funds we need, we may not be able to complete acquisitions that may be favorable to us or finance the capital expenditures necessary to conduct our operations.


49


Off-Balance Sheet Arrangements
Lease Obligations

We lease real estate, rail cars and other equipment under long-term operating leases with varying terms and expiration dates through 2062.

Minimum Purchase Commitments

We have entered into agreements with suppliers that contain minimum purchase obligations. Our failure to purchase the minimum amounts may require us to pay shortfall fees. However, the minimum quantities set forth in the agreements are not in excess of our currently expected future requirements.

Capital Spend Commitments

We have entered into agreements with suppliers to acquire capital equipment.

Aggregate future minimum lease payments under these agreements in effect at June 30, 2018 are as follows (in thousands):
Year ended December 31:
 
Operating Leases
 
Capital Spend Commitments
 
Minimum Purchase Commitments
Remainder of 2018
 
$
12,148

 
$
16,393

 
$
19,254

2019
 
18,091

 

 
12,125

2020
 
15,622

 

 
400

2021
 
12,029

 

 
165

2022
 
8,995

 

 

Thereafter
 
6,057

 

 

 
 
$
72,942

 
$
16,393

 
$
31,944


Other Commitments

Subsequent to June 30, 2018, we entered into rail car and property lease agreements with aggregate commitments of $2.4 million.

Subsequent to June 30, 2018, we ordered additional capital equipment with aggregate commitments of $9.6 million.

Subsequent to June 30, 2018, subsidiaries in the Company's infrastructure segment entered into an air chart agreement, barge chartering agreement and other service agreements with aggregate commitments of $2.5 million, $2.1 million and $0.6 million, respectively.







50


New Accounting Pronouncements
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. We plan to adopt this ASU effective January 1, 2019 utilizing the modified retrospective method of adoption. This new leasing guidance will impact us in situations where we are the lessee, and in certain circumstances we will have a right-of-use asset and lease liability on our consolidated financial statements. We are currently evaluating the effect the new guidance may have on our consolidated financial statements and results of operations.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Accounting,” which simplifies the accounting for share-based payments granted to non-employees by aligning the accounting with requirements for employee share-based compensation. Upon transition, this ASU requires non-employee awards to be measured at fair value as of the adoption date. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within that fiscal year. Early adoption is permitted. Currently, we have not elected to early adopt this ASU and are evaluating the impact it will have on our consolidated financial statements.




51


Item 3. Quantitative and Qualitative Disclosures About Market Risk

The demand, pricing and terms for our products and services are largely dependent upon the level of activity for the U.S. oil and natural gas industry, energy infrastructure industry and natural sand proppant industry. Industry conditions are influenced by numerous factors over which we have no control, including, but not limited to: the supply of and demand for oil and natural gas services, energy infrastructure services and natural sand proppant; the level of construction of transmission lines, substations and distribution networks in the energy infrastructure industry and the level of expenditures of utility companies; the level of prices of, and expectations about future prices for, oil and natural gas and natural sand proppant, as well as energy infrastructure services; the cost of exploring for, developing, producing and delivering oil and natural gas; the expected rates of declining current production; the discovery rates of new oil and natural gas reserves and frac sand reserves meeting industry specifications and consisting of the mesh size in demand; access to pipeline, transloading and other transportation facilities and their capacity; weather conditions; domestic and worldwide economic conditions; political instability in oil-producing countries; environmental regulations; technical advances affecting energy consumption; the price and availability of alternative fuels; the ability of oil and natural gas producers and other users of our services to raise equity capital and debt financing; and merger and divestiture activity in industries in which we operate.

The level of activity in the U.S. oil and natural gas exploration and production, energy infrastructure and natural sand proppant industries is volatile. Expected trends may not continue and demand for our products and services may not reflect the level of activity in these industries. Any prolonged substantial reduction in pricing environment would likely affect demand for our services. A material decline in pricing levels or U.S. activity levels could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Interest Rate Risk

We had a cash and cash equivalents balance of $11 million at June 30, 2018. We do not enter into investments for trading or speculative purposes. We do not believe that we have any material exposure to changes in the fair value of these investments as a result of changes in interest rates. Declines in interest rates, however, will reduce future income.

Interest under our credit facility is payable at a base rate plus an applicable margin. Additionally, at our request, outstanding balances are permitted to be converted to LIBOR rate plus applicable margin tranches. 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. At June 30, 2018, we had no outstanding borrowings under our revolving credit facility. As of June 28, 2018, the last day on which we had outstanding borrowings under our revolving credit facility, a 1% increase or decrease in the interest rate would have increased or decreased our interest expense by approximately $0.2 million per year, based on $20 million outstanding and a weighted average interest rate of 4.55%. We do not currently hedge our interest rate exposure.

Foreign Currency Risk

Our remote accommodation business, which is included in our other energy services segment, generates revenue and incurs expenses that are denominated in the Canadian dollar. These transactions could be materially affected by currency fluctuations. Changes in currency exchange rates could adversely affect our consolidated results of operations or financial position. We also maintain cash balances denominated in the Canadian dollar. At June 30, 2018, we had $3 million of cash, in Canadian dollars, in Canadian accounts. A 10% increase in the strength of the Canadian dollar versus the U.S. dollar would have resulted in an increase in pre-tax income of approximately $0.1 million as of June 30, 2018. Conversely, a corresponding decrease in the strength of the Canadian dollar would have resulted in a comparable decrease in pre-tax income. We have not hedged our exposure to changes in foreign currency exchange rates and, as a result, could incur unanticipated translation gains and losses.

Seasonality

We provide completion and production services as well as contract land and drilling services primarily in the Utica, Permian Basin, Eagle Ford, Marcellus, Granite Wash, Cana Woodford and Cleveland sand resource plays located in the continental U.S. We provide infrastructure services in the northeast, southwest and midwest portions of the United States and in Puerto Rico. We provide remote accommodation services in the oil sands in Alberta, Canada. We serve these markets through our facilities and service centers that are strategically located to serve our customers in Ohio, Texas, Oklahoma, Wisconsin, Minnesota, Kentucky, Puerto Rico and Alberta, Canada. A portion of our revenues are generated in Ohio, Wisconsin, Minnesota, North Dakota, Pennsylvania, West Virginia and Canada where weather conditions may be severe. As a result, our

52


operations may be limited or disrupted, particularly during winter and spring months, in these geographic regions, which would have a material adverse effect on our financial condition and results of operations. Our operations in Oklahoma and Texas are generally not affected by seasonal weather conditions.

53


Item 4. Controls and Procedures

Evaluation of Disclosure Control and Procedures

Under the direction of our Chief Executive Officer and Chief Financial Officer, we have established disclosure controls and procedures, as defined in Rule 13a-15(e) and d under the Exchange Act, that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

As of June 30, 2018, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2018, our disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(d) and 15d-15(d) under the Exchange Act) that occurred during the quarter ended June 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


54


PART II. OTHER INFORMATION
Item 1. Legal Proceedings

Due to the nature of our business, we are, from time to time, involved in litigation or subject to disputes or claims related to our business activities, including breaches of contractual obligations, workers’ compensation claims and employment related disputes. In the opinion of our management, none of the pending litigation, disputes or claims against us is expected to have a material adverse effect on our financial condition, cash flows or results of operations. See Note 18 "Commitments and Contingencies," of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information.

Item 1A. Risk Factors

Security holders and potential investors in our securities should carefully consider the risk factors in our Annual Report on Form 10-K (Commission File No. 001-37917) filed with the SEC on February 28, 2018 and in our Rule 424(b)(5) prospectus summary and related base prospectus filed with the SEC on June 26, 2018. 

There have been no material changes to the Risk Factors previously disclosed in our Prospectus Summary dated July 26, 2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 4. Mine Safety Disclosures

Our operations are subject to the Federal Mine Safety and Health Act of 1977, as amended by the Mine Improvement and New Emergency Response Act of 2006, which imposes stringent health and safety standards on numerous aspects of mineral extraction and processing operations, including the training of personnel, operating procedures, operating equipment and other matters. Our failure to comply with such standards, or changes in such standards or the interpretation or enforcement thereof, could have a material adverse effect on our business and financial condition or otherwise impose significant restrictions on our ability to conduct mineral extraction and processing operations. Following passage of The Mine Improvement and New Emergency Response Act of 2006, MSHA significantly increased the numbers of citations and orders charged against mining operations.  The dollar penalties assessed for citations issued has also increased in recent years.  Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95.1 to this Report.

Item 5. Other Information

Not applicable.


55

MAMMOTH ENERGY SERVICES, INC.



Item 6. Exhibits

The following exhibits are filed as a part of this report:
 
 
 
 
Incorporated By Reference
 
 
 
Exhibit Number
 
Exhibit Description
 
Form
 
Commission File No.
 
Filing Date
 
Exhibit No.
 
Filed Herewith
Furnished Herewith
 
 
8-K
 
001-37917
 
11/15/2016
 
3.1
 
 
 
 
 
8-K
 
001-37917
 
11/15/2016
 
3.2
 
 
 
 
 
S-1/A
 
333-213504
 
10/3/2016
 
4.1
 
 
 
 
 
8-K
 
001-37917
 
11/15/2016
 
4.1
 
 
 
 
 
8-K
 
001-37917
 
11/15/2016
 
4.2
 
 
 
 
 
8-K
 
001-37917
 
11/15/2016
 
4.3
 
 
 
 
 
8-K
 
001-37917
 
5/31/2018
 
10.1
 
 
 
 
 
8-K
 
001-37917
 
7/13/2018
 
10.1
 
 
 
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
X
 
101.1
 
Interactive data files pursuant to Rule 405 of Regulation S-T.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
#
 
Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commission.





56

MAMMOTH ENERGY SERVICES, INC.



Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 
 
 
MAMMOTH ENERGY SERVICES, INC.
Date:
August 7, 2018
 
By:
 
/s/ Arty Straehla
 
 
 
 
 
Arty Straehla
 
 
 
 
 
Chief Executive Officer
 
 
 
 
 
 
Date:
August 7, 2018
 
By:
 
/s/ Mark Layton
 
 
 
 
 
Mark Layton
 
 
 
 
 
Chief Financial Officer
 
 
 
 
 
 
 
 
 
 
 
 


57