Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this 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” and the section entitled “Forward-Looking Statements” appearing elsewhere in this annual report.
Overview
We are an integrated, growth-oriented energy services company focused on providing products and services to enable the exploration and development of North American onshore unconventional oil and natural gas reserve as well as the construction and repair of the electric grid for private utilities, public investor-owned utilities and co-operative utilities through our infrastructure services businesses. Our primary business objective is to grow our operations and create value for stockholders through organic growth opportunities and accretive acquisitions. Our suite of services includes well completion services, infrastructure services, natural sand proppant services, drilling services and other services. Our well completion services division provides hydraulic fracturing, sand hauling and water transfer services. Our infrastructure services division provides engineering, design, construction, upgrade, maintenance and repair services to the electrical infrastructure industry. Our natural sand proppant services division mines, processes and sells natural sand proppant used for hydraulic fracturing. Our drilling services division currently provides rental equipment, such as mud motors and operational tools, for both vertical and horizontal drilling. In addition to these service divisions, we also provide aviation services, equipment rentals, crude oil hauling services, remote accommodations and equipment manufacturing. 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 in 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.
The growth of our industrial businesses is ongoing. We offer infrastructure engineering services focused on the transmission and distribution industry and also have equipment manufacturing operations and offer fiber optic services. Our equipment manufacturing operations provide us with the ability to repair much of our existing equipment in-house, as well as the option to manufacture certain new equipment we may need in the future. Our fiber optic services include the installation of both aerial and buried fiber. We are continuing to explore other opportunities to expand our industrial business lines.
Our revenues, operating (loss) income and identifiable assets are primarily attributable to four reportable segments: well completion services; infrastructure services; natural sand proppant services; and drilling services. Since the dates presented below, we have conducted our operations through the following entities:
Well Completion Services Segment
•Stingray Pressure Pumping LLC—March 2012
•Silverback Energy LLC—November 2012
•Redback Pump Down Services LLC—January 2015
•Mr. Inspections LLC—January 2015
•Mammoth Equipment Leasing LLC—November 2016
•Bison Sand Logistics LLC—January 2018
•Aquahawk Energy LLC—June 2018
Infrastructure Services Segment
•Cobra Acquisitions LLC, or Cobra—January 2017
•Lion Power Services LLC, formerly Cobra Energy LLC—January 2017
•Higher Power Electrical LLC—April 2017
•5 Star Electric LLC—July 2017
•Python Equipment LLC—December 2018
•Aquawolf LLC—September 2019
•Falcon Fiber Solutions LLC—May 2021
Natural Sand Proppant Services Segment
•Muskie Proppant LLC—September 2011
•Barracuda Logistics LLC—October 2014
•Piranha Proppant LLC—May 2017
54
•Sturgeon Acquisitions LLC—June 2017
•Taylor Frac, LLC—June 2017
•Taylor Real Estate Investments, LLC—June 2017
•South River Road, LLC—June 2017
Drilling Services Segment
•Bison Drilling and Field Services, LLC—November 2010
•Panther Drilling Systems LLC—December 2012
•Bison Trucking LLC—August 2013
Other
•Great White Sand Tiger Lodging Ltd.—October 2007
•Redback Energy Services, LLC—October 2011
•Redback Coil Tubing, LLC—May 2012
•Anaconda Rentals LLC, formerly White Wing Tubular Services LLC—September 2014
•WTL Oil LLC, or WTL, formerly Silverback—June 2016
•Mammoth Energy Services Inc.—June 2016
•Mammoth Energy Partners, LLC—October 2016
•Mako Acquisitions LLC—March 2017
•Stingray Energy Services LLC, or Stingray Energy Services—June 2017
•Stingray Cementing LLC—June 2017
•Tiger Shark Logistics LLC—October 2017
•Cobra Aviation Services LLC—January 2018
•Black Mamba Energy LLC—March 2018
•Stingray Cementing and Acidizing LLC, formerly RTS Energy Services LLC—June 2018
•Ivory Freight Solutions LLC—July 2018
•IFX Transport LLC—December 2018
•Air Rescue Systems LLC—December 2018
•Leopard Aviation LLC—April 2019
•Anaconda Manufacturing LLC—September 2019
Our Response to COVID-19 and Related Market Conditions
We have taken, and continue to take, responsible steps to protect the health and safety of our employees during the COVID-19 pandemic. We are also continuing to monitor the industry and market conditions resulting from the COVID-19 pandemic and have taken mitigating steps in an effort to preserve liquidity, reduce costs and lower capital expenditures. These actions have included reducing headcount, adjusting pay and limiting spending. We will continue to take further actions that we deem to be in the best interest of the Company and our stockholders if the adverse conditions recur. Given the dynamic nature of these events, we are unable to predict the ultimate impact of the COVID-19 pandemic, the volatility in commodity markets, inflationary pressures, rising interest rates, any changes in the near-term or long-term outlook for our industries or overall macroeconomic conditions on our business, financial condition, results of operations, cash flows and stock price or the pace or extent of any subsequent recovery.
Although demand across our three largest segments has improved during 2022 and remained strong in the fourth quarter of 2022, we continue to address the external challenges in today’s economic environment as we remain disciplined with our spending and are focused on continuing to improve our operational efficiencies and cost structure and on enhancing value for our stockholders.
2022 Highlights
•Net loss of $0.6 million, or $0.01 per diluted share, for the year ended December 31, 2022 as compared to net loss of $101.4 million, or $2.18 per diluted share, for the year ended December 31, 2021.
•Adjusted EBITDA of $86.1 million for the year ended December 31, 2022, a $97.7 million increase compared to ($11.6) million for the year ended December 31, 2021. See “Non-GAAP Financial Measures” below for a reconciliation of net income (loss) to Adjusted EBITDA.
55
•Doubled our active frac fleet count from two at the beginning of 2022 to four active fleets to close out the year and have added an additional fleet subsequent to December 31, 2022 for a total of five of our six fleets active currently
•Executed two sand supply agreements with third-party service providers with terms of 12 months and 21 months, respectively, beginning on January 1, 2023. Under the terms of the agreements, we have agreed to supply, in aggregate, approximately 1.75 million tons of sand over the contract periods.
•As part of our environmental and social responsibility initiatives, we previously converted one of our pressure pumping fleets to a dual fuel spread and, subject to market conditions, supply chain constraints and liquidity requirements, have plans to convert our sixth pressure pumping fleet to Tier 4, dual fuel, which we expect will be put into operation in the second half of 2023, as well as upgrade two of our existing fleets to Tier 2, dual fuel, giving us a total of four dual fuel fleets by year-end 2023.
Overview of Our Industries
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 budgets. 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, storage capacity, shortages of equipment and materials 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 prices of oil and natural gas. In March and April 2020, concurrent with the COVID-19 pandemic and quarantine orders in the U.S. and worldwide, oil prices dropped sharply to below zero dollars per barrel for the first time in history due to factors including significantly reduced demand and a shortage of storage facilities. In 2021, U.S. oil production stabilized as commodity prices increased and demand for crude oil rebounded. We saw improvements in the oilfield services industry and in both pricing and utilization of our well completion and drilling services during 2022 and we expect both pricing and utilization to remain at these levels throughout 2023 as a result of an increase in budgets for publicly traded exploration and production companies and elevated activity levels, driven by improved energy demand and strong commodity prices. The ongoing war and related humanitarian crisis in Ukraine, however, could have an adverse impact on the global energy markets and volatility of commodity prices.
In response to market conditions, we have temporarily shut down our cementing and acidizing operations and flowback operations beginning in July 2019, our contract drilling operations beginning in December 2019, our rig hauling operations beginning in April 2020, our coil tubing, pressure control and full service transportation operations beginning in July 2020 and our crude oil hauling operations beginning in July 2021. We continue to monitor the market to determine if and when we can recommence these services.
During 2022, our well completion services division exhibited strong performance, fueled by the increase in demand in the pressure pumping industry. We are currently operating five of our six pressure pumping fleets. Subject to market conditions, supply chain constraints and liquidity requirements, we have plans to upgrade our sixth spread to Tier 4, dual fuel to be put into operation in the second half of 2023, as well as upgrade two of our existing fleets to Tier 2, dual fuel, giving us a total of four dual fuel fleets by year-end 2023. However, strong demand in the pressure pumping industry and continuing supply chain disruptions have resulted in backlogs of equipment and replacement parts for our and our competitors’ pressure pumping fleets, which we expect to persist through at least the first half of 2023. Any of these factors may result in the delay of our plans to convert or activate our sixth pressure pumping fleet, or upgrade two of our existing fleets, in the second half of 2023, which may adversely impact our business, financial condition and cash flow.
We continue to closely monitor our cost structure in response to market conditions and intend to pursue additional cost savings where possible. Further, a significant portion of our revenue from our pressure pumping business had historically been derived from Gulfport. On December 28, 2019, Gulfport filed a lawsuit alleging our breach of our pressure pumping contract with Gulfport and seeking to terminate the contract and recover damages for alleged overpayments, audit costs and legal fees. Gulfport did not make the payments owed to us under this contract for any periods subsequent to its alleged December 28, 2019
56
termination date. Further, on November 13, 2020, Gulfport filed petitions for voluntary relief under chapter 11 of the Bankruptcy Code. On September 21, 2021, we reached a settlement with Gulfport under which all litigation relating to the Stingray Pressure Pumping contract was terminated, Stingray Pressure Pumping released all claims against Gulfport and its subsidiaries with respect to Gulfport’s bankruptcy proceedings and each of the parties released all claims they had against the others with respect to the litigation matters discussed above. We have not been able to obtain long-term contracts with other customers to replace our contract with Gulfport. See Note 19. Commitments and Contingencies to our consolidated financial statements included elsewhere in this report for additional information.
Natural Sand Proppant Industry
In our natural sand proppant services business, we experienced a significant decline in demand of our sand proppant in the second half of 2019 and throughout 2020 as a result of completion activity falling due to lower oil demand and pricing, increased capital discipline by our customers, budget exhaustion and the COVID-19 pandemic. Activity rebounded modestly in 2021 and continued to increase throughout 2022 as we saw an increase in the volume of sand sold. Supply constraints from labor shortages have negatively affected West Texas in-basin mine operations and increased demand for Northern White frac sand for the region in 2022. Demand from oil and gas companies in Western Canada and the Marcellus Shale has also being strong in 2022. The increase in activity in 2022 resulted in an increase in demand and pricing for our sand and we expect that prices will remain at these levels throughout 2023.
As a result of adverse market conditions, production at our Muskie sand facility in Pierce County, Wisconsin has been temporarily idled since September 2018. Our contracted capacity has provided a baseline of business, which has kept our Taylor and Piranha plants operating and our costs competitive.
A portion of our revenue from our natural sand proppant business historically had been derived from Gulfport pursuant to a long-term contract. Gulfport did not made the payments owed to us under this contract for any periods subsequent to May 2020. In September 2020, we filed a lawsuit seeking to recover delinquent payments owed to us under this contract. On November 13, 2020, Gulfport filed petitions for voluntary relief under chapter 11 of the Bankruptcy Code. On September 21, 2021, the Company and Gulfport reached a settlement under which all litigation relating to the Muskie contract was terminated and a portion of Muskie’s contract claim against Gulfport was allowed under Gulfport’s plan of reorganization. See Note 19. Commitments and Contingencies to our consolidated financial statements included elsewhere in this report for additional information.
Energy Infrastructure Industry
Our infrastructure services business provides engineering, design, construction, upgrade, maintenance and repair services to the electrical infrastructure industry. We offer a broad range of services on electric transmission and distribution, or T&D, networks and substation facilities, which include engineering, design, construction, upgrade, maintenance and repair of high voltage transmission lines, substations and lower voltage overhead and underground distribution systems. Our commercial services include the installation, maintenance and repair of commercial wiring. We also provide storm repair and restoration services in response to storms and other disasters. We provide infrastructure services primarily in the northeastern, southwestern, midwestern and western portions of the United States.
We currently have agreements in place with private utilities, public IOUs and Co-Ops. Since we commenced operations in this line of business, a substantial portion of our infrastructure revenue 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, provided for payments of up to $945 million (the “first contract”). On May 26, 2018, Cobra and PREPA entered into a second one-year master services agreement, which provided for payments of up to $900 million, to provide additional repair services and begin the initial phase of reconstruction of the electrical power system in Puerto Rico (the “second contract”). Our work under each of the contracts with PREPA ended on March 31, 2019.
As of December 31, 2022, PREPA owed us approximately $227 million for services we performed, excluding $152.0 million of interest charged on these delinquent balances as of December 31, 2022. See Note 2. Summary of Significant Accounting Policies—Accounts Receivable to our consolidated financial statements included elsewhere in this report. PREPA is currently subject to bankruptcy proceedings, which were filed in July 2017 and are currently 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 contracts is largely dependent upon funding from the Federal Emergency Management Agency, or FEMA, or other sources. On September 30, 2019, we filed a motion with the U.S. District Court for the District of Puerto Rico seeking recovery of the amounts owed to us by PREPA, which motion was stayed by the Court. On March 25, 2020, we filed an urgent motion to modify the stay order and
57
allow our recovery of approximately $62 million in claims related to a tax gross-up provision contained in the first contract. This emergency motion was denied on June 3, 2020 and the Court extended the stay of our motion. On December 9, 2020, the Court again extended the stay of our motion and directed PREPA to file a status report by June 7, 2021. On April 6, 2021, we filed a motion to lift the stay order. Following this filing, PREPA initiated discussion with Cobra, which resulted in PREPA and Cobra filing a joint motion to adjourn all deadlines relative to the April 6, 2021 motion until the June 16, 2021 omnibus hearing as a result of PREPA’s understanding that FEMA would be releasing a report in the near future relating to the first contract. The joint motion was granted by the Court on April 14, 2021. On May 26, 2021, FEMA issued a Determination Memorandum related to the first contract between Cobra and PREPA in which, among other things, FEMA raised two contract compliance issues and, as a result, concluded that approximately $47 million in costs were not authorized costs under the contract. On June 14, 2021, the Court issued an order adjourning Cobra’s motion to lift the stay order to a hearing on August 4, 2021 and directing Cobra and PREPA to meet and confer in good faith concerning, among other things, (i) the May 26, 2021 Determination Memorandum issued by FEMA and (ii) whether and when a second determination memorandum is expected. The parties were further directed to file an additional status report, which was filed on July 20, 2021. On July 23, 2021, with our aid, PREPA filed an appeal of the entire $47 million that FEMA de-obligated in the May 26, 2021 Determination Memorandum. FEMA approved the appeal in part and denied the appeal in part. FEMA found that staffing costs of $24.4 million are eligible for funding. On August 4, 2021, the Court denied Cobra’s April 6, 2021 motion to lift the stay order, extended the stay of our motion seeking recovery of amounts owed to Cobra and directed the parties to file an additional joint status report, which was filed on January 22, 2022. On January 26, 2022, the Court extended the stay and directed the parties to file a further status report by July 25, 2022. On June 7, 2022, Cobra filed a motion to lift the stay order. On June 29, 2022 the Court denied Cobra’s motion and extended the stay to January 2023. On November 21, 2022, FEMA issued a Determination Memorandum related to the 100% federal funded portion of the second contract between Cobra and PREPA in which FEMA concluded that approximately $5.6 million in costs were not authorized costs under the contract. On December 21, 2022, FEMA issued a Determination Memorandum related to the 90% federal cost share portion of the second contract between Cobra and PREPA in which FEMA concluded that approximately $68.1 million in costs were not authorized costs under the contract. PREPA filed a first-level administrative appeal of the November 21, 2022 Determination Memorandum and has indicated that they will review the December 21, 2022 Determination Memorandums and, to the extent they feel plausible, file a first-level administrative appeal of the unauthorized amounts. On January 7, 2023, Cobra and PREPA filed a joint status report with the Court, in which PREPA requested that the Court continue the stay through July 31, 2023 and Cobra requested that the stay be lifted. On January 18, 2023, the Court entered an order extending the stay and directing the parties to file a further status report addressing (i) the status of any administrative appeals in connection with the November and December determination memorandums regarding the second contract, (ii) the status of the criminal proceedings against the former Cobra president and the FEMA official that concluded in December 2022, and (iii) a summary of the outstanding and unpaid amounts arising from the first and second contracts and whether PREPA disputes Cobra’s entitlement to these amounts with the Court by July 31, 2023. On January 20, 2023, Cobra submitted a certified claim for approximately $379 million to FEMA pursuant to the federal Contract Disputes Act. On February 1, 2023, FEMA notified Cobra that it had reviewed the claim and determined that no contract, expressed or implied, exists between FEMA and Cobra. Therefore, no final decision will be issued in response to Cobra’s claim. Cobra has 90 days from the February 1, 2023 decision to file a notice of appeal.
We believe all amounts charged to PREPA were in accordance with the terms of the contracts. Further, we believe these receivables are collectible. However, in the event PREPA (i) does not have or does not obtain the funds necessary to satisfy its obligations to Cobra under the contracts, (ii) obtains the necessary funds but refuses to pay the amounts owed to us or (iii) otherwise does not pay amounts owed to us for services performed, the receivable may not be collected and our financial condition, results of operations and cash flows would be materially and adversely affected. In addition, government contracts are subject to various uncertainties, restrictions and regulations, including oversight audits and compliance reviews by government agencies and representatives. In this regard, on September 10, 2019, the U.S. District Court for the District of Puerto Rico unsealed an indictment that charged the former president of Cobra with conspiracy, wire fraud, false statements and disaster fraud. Two other individuals were also charged in the indictment. The indictment was focused on the interactions between a former FEMA official and the former President of Cobra. Neither we nor any of our subsidiaries were charged in the indictment. On May 18, 2022, the former FEMA official and the former president of Cobra each pled guilty to one-count information charging gratuities related to a project that Cobra never bid upon and was never awarded or received any monies for. On December 13, 2022, the Court sentenced the former Cobra president to custody of the Bureau of Prisons for six months and one day, a term of supervised release of six months and a fine of $25,000. The Court sentenced the FEMA official to custody of the Bureau of Prisons for six months and one day, a term of supervised release of six months and a fine of $15,000. The Court also dismissed the indictment against the two defendants. We do not expect any additional activity in the criminal proceeding. Given the uncertainty inherent in the criminal litigation, however, it is not possible at this time to determine the potential impacts that the sentencings could have on us. PREPA has stated in Court filings that it may contend the alleged criminal activity affects Cobra's entitlement to payment under its contracts with PREPA. It is unclear what PREPA's position will be going forward. See Note 19. Commitments and Contingencies to our consolidated financial statements included elsewhere in this report for additional information regarding these investigations and proceedings. Further, as noted above, our
58
contracts with PREPA have concluded and we have not obtained, and there can be no assurance that we will be able to obtain, one or more contracts with other customers to replace the level of services that we provided to PREPA.
Although the COVID-19 pandemic and resulting economic conditions have not had a material impact on demand or pricing for our infrastructure services, revenues for our infrastructure services declined in 2021 as a result of certain management changes throughout the year, which resulted in crew departures, and a decline in storm restoration activities. During the third quarter of 2021, we made leadership changes in our infrastructure group and have focused on cutting costs, improving margins and enhancing accountability across the division. During 2022, operational improvements combined with increased crew count drove enhanced results. Our average crew count increased from approximately 82 crews as of December 31, 2021 to approximately 91 crews as of December 31, 2022, and we continue to add crew capacity for a sector that has a healthy bidding environment.
Funding for projects in the infrastructure space remains strong with added opportunities expected from the Infrastructure Investment and Jobs Act, which was signed into law on November 15, 2021. We anticipate the federal spending to begin fueling additional projects in this sector beginning in late 2023. We continue to focus on operational execution and pursue opportunities within this sector as we strategically structure our service offerings for growth, intending to increase our infrastructure services activity and expand both our geographic footprint and depth of projects, especially in fiber maintenance and installation projects. In late 2021, we were awarded a fiber installation contract as well as an electric vehicle charging station engineering contract. Both of these projects are currently in process.
We work for multiple utilities primarily across the northeastern, southwestern, midwestern and western portions of the United States. We believe that we are well-positioned to compete for new projects due to the experience of our infrastructure management team, combined with our vertically integrated service offerings. We are seeking to leverage this experience and our service offerings to grow our customer base and increase our revenues in the continental United States over the coming years.
59
Results of Operations
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Years Ended
Revenue: (in thousands)
Cost of revenue:
Selling, general and administrative expenses 39,554 78,246
Depreciation, depletion, amortization and accretion 64,271 78,475
Gains on disposal of assets, net (3,908) (5,147)
Impairment of goodwill — 891
Impairment of other long-lived assets — 1,212
Provision (benefit) for income taxes 13,607 (22,863)
Revenue. Revenue for 2022 increased $133.1 million, or 58%, to $362.1 million from $229.0 million for 2021. The increase in total revenue is primarily attributable to increases in utilization across all operating divisions. Revenue derived from related parties was $1.1 million for 2022 compared to $17.9 million for 2021. Substantially all of our related party revenue for 2021 was derived from Gulfport under pressure pumping and sand contracts which have since ended. Revenue by division was as follows:
Well Completion Services. Well completion services division revenue increased $86.4 million, or 102%, to $170.7 million for 2022 from $84.3 million for 2021. Revenue derived from related parties was $14.8 million, or 18% of total well completion revenue, for 2021. All of our related party revenue for 2021 was derived from Gulfport under a pressure pumping contract which has ended. Intersegment revenue, consisting primarily of revenue derived from our other services and sand segment, totaled $0.8 million and $0.1 million, for 2022 and 2021, respectively.
60
The increase in our well completion services revenue was primarily driven by an increase in both utilization and pricing. The number of stages completed increased 142% to 6,149 for 2022 from 2,544 for 2021. An average of 3.0 of our six fleets were active throughout 2022 compared to 1.1 fleets for 2021.
Infrastructure Services. Infrastructure services division revenue increased $18.1 million, or 19%, to $111.5 million for 2022 from $93.4 million for 2021 primarily due to an increase in average crew count from 82 crews during the year ended December 31, 2021 to an average of 91 crews during the year ended December 31, 2022 as well as improved operational efficiency. This was partially offset by a decline in storm restoration activity during the year ended December 31, 2022 compared to the year ended December 31, 2021, resulting in an $11.0 million decrease in storm restoration revenue.
Natural Sand Proppant Services. Natural sand proppant services division revenue increased $16.5 million, or 47%, to $51.4 million for 2022, from $34.9 million for 2021. Revenue derived from related parties was $2.1 million, or 6% of total sand revenue, for 2021. All of our related party revenue for 2021 was derived from Gulfport under a sand supply contract which has ended. Intersegment revenue, consisting primarily of revenue derived from our well completion segment, was $2.5 million, or 5% of total sand revenue, for 2022 and $4.0 million, or 11% of total sand revenue, for 2021.
The increase in our natural sand proppant services revenue was primarily attributable to a 62% increase in average price per ton of sand sold from $16.76 in 2021 to $27.11 in 2022 coupled with a 40% increase in tons of sand sold from approximately 1.0 million tons in 2021 to 1.4 million tons in 2022. Included in natural sand proppant services revenue is shortfall revenue of $3.1 million and $12.0 million, for 2022 and 2021, respectively.
Drilling Services. Drilling services division revenue increased $6.1 million, or 142%, to $10.4 million for 2022, from $4.3 million for 2021. Revenue derived from related parties, consisting primarily of directional drilling revenue from El Toro Resources LLC, was $0.8 million for 2022 and $0.6 million for 2021. The increase in our drilling services revenue was primarily attributable to increased utilization for our directional drilling business from 21% for 2021 to 44% for 2022 as well as a 44% increase in the average day rate from 2021 to 2022.
Other Services. Revenue from other services, consisting of revenue derived from our aviation, equipment rental, remote accommodation and equipment manufacturing, increased $4.6 million, or 25%, to $23.1 million for 2022 from $18.5 million for 2021. Revenue derived from related parties, consisting primarily of aviation revenue from Brim Equipment Leasing, Inc., or Brim, was $0.3 million, or 1% of total other services revenue, for 2022 and $0.4 million, or 2% of total other services revenue, for 2021. Intersegment revenue, consisting primarily of revenue derived from our infrastructure and well completion segments, totaled $1.6 million and $2.2 million, for 2022 and 2021, respectively.
The increase in our other services revenue was primarily due to improved utilization for our equipment rental business. We rented an average of 249 pieces of equipment to customers during 2022, an increase of 84% from an average of 135 pieces of equipment rented to customers during 2021. Additionally, utilization for remote accommodations business increased. On average, 172 rooms were utilized per night during 2022, a 91% increase from an average of 90 rooms utilized per night in 2021.
Cost of Revenue (exclusive of depreciation, depletion, amortization and accretion expense). Cost of revenue, exclusive of depreciation, depletion, amortization and accretion expense, increased $80.3 million from $198.3 million, or 87% of total revenue, for 2021 to $278.6 million, or 77%of total revenue, for 2022. The increase was primarily due to an increase in cost of revenue across all divisions as a result of improved utilization. Cost of revenue by operating division was as follows:
Well Completion Services. Well completion services division cost of revenue, exclusive of depreciation and amortization expense, increased $64.1 million, or 99%, from $64.6 million for 2021 to $128.7 million for 2022 primarily due to an increase in cost of goods sold as a result of providing sand and chemicals with our service package to customers during 2022 as well as an increase in labor costs as a result of additional fleets in service. As a percentage of revenue, our well completion services division cost of revenue, exclusive of depreciation and amortization expense of $22.1 million in 2022 and $26.4 million in 2021, was 75% and 77%, for 2022 and 2021, respectively.
Infrastructure Services. Infrastructure services division cost of revenue, exclusive of depreciation and amortization expense, increased $1.0 million from $90.6 million for 2021 to $91.6 million for 2022. As a percentage of revenue, cost of revenue, exclusive of depreciation and amortization expense of $16.2 million in 2022 and $21.9 million in 2021, was 82% and 97%, for 2022 and 2021, respectively. The decline as a percentage of revenue is
61
primarily due to improved pricing as well as a decline in labor related costs as a result of improved efficiency of our crews.
Natural Sand Proppant Services. Natural sand proppant services division cost of revenue, exclusive of depreciation, depletion and accretion expense, increased $9.6 million, or 35%, from $27.2 million for 2021 to $36.8 million for 2022. As a percentage of revenue, cost of revenue, exclusive of depreciation, depletion and accretion expense of $8.7 million in 2022 and $9.0 million in 2021, was 72% and 78%, for 2022 and 2021, respectively. The decrease in cost as a percentage of revenue is primarily due to a 62% increase in average sales price and a 37% increase in tons sold.
Drilling Services. Drilling services division cost of revenue, exclusive of depreciation and amortization expense, increased $3.7 million, or 61%, from $6.1 million for 2021 to $9.8 million for 2022, as a result of increased activity. As a percentage of revenue, our drilling services division cost of revenue, exclusive of depreciation and amortization expense of $6.5 million in 2022 and $8.0 million in 2021, was 94% and 141%, for 2022 and 2021, respectively. The decline in 2022 is primarily due to increases in utilization and pricing.
Other Services. Other services cost of revenue, exclusive of depreciation and amortization expense, increased $0.2 million, or 1%, from $16.3 million for 2021 to $16.5 million for 2022. As a percentage of revenue, cost of revenue, exclusive of depreciation and amortization expense of $10.8 million in 2022 and $13.2 million in 2021, was 71% and 88%, for 2022 and 2021, respectively. The decrease as a percentage of revenue in 2022 is primarily due to an increase in utilization.
Selling, General and Administrative Expenses. Selling, general and administrative expenses, or SG&A, represent the costs associated with managing and supporting our operations. The following is a breakout of SG&A expenses for the periods indicated (in thousands):
Years Ended
Cash expenses:
Non-cash expenses:
a. Includes travel-related costs, IT expenses, rent, utilities and other general and administrative-related costs.
b. The bad debt provision for the year ended December 31, 2021 includes $41.2 million related to the Stingray Pressure Pumping and Muskie contracts with Gulfport.
Depreciation, Depletion, Amortization and Accretion. Depreciation, depletion, amortization and accretion decreased $14.2 million, or 18%, to $64.3 million for 2022 from $78.5 million in 2021. The decrease is primarily due to a decline in property and equipment depreciation expense as a result of lower capital expenditures and existing assets being fully depreciated or impaired.
Gains on Disposal of Assets, Net. Gains on the disposal of assets decreased $1.2 million, or 24%, to $3.9 million for 2022 from $5.1 million in 2021. Gains on the disposal of assets is primarily related to the sale of trucks, land and buildings for the year ended December 31, 2022 and trucking assets for the year ended December 31, 2021.
Impairment of Goodwill. We recorded impairment of goodwill of $0.9 million in 2021. As a result of our annual assessment of goodwill, we determined that the carrying value of goodwill for certain of our entities exceeded their fair values at December 31, 2021, resulting in impairment expense of $0.9 million. We did not recognize any impairment of goodwill in 2022.
62
Impairment of Other Long-lived Assets. We recorded impairments of other long-lived assets of $1.2 million for 2021. Beginning in 2021, we temporarily shut down our crude oil hauling operations, resulting in impairment of trade names of $0.5 million. Additionally, as a result of a review of intangible asset balances as of December 31, 2021, we determined the fair value of Higher Power’s trade names and customer relationships was less than their carrying value, resulting in impairment expense of $0.7 million. We did not recognize any impairment of other long-lived assets in 2022.
Operating Loss. We reported an operating loss of $16.4 million for 2022 compared to an operating loss $123.0 million for 2021. The reduced operating loss in 2022 was primarily due to a decline in costs as a percentage of revenue as well as increased activity across all operating divisions as described above.
Interest Expense, net. Interest expense, net increased $5.1 million to $11.5 million for 2022 from $6.4 million for 2021, primarily due to an increase in the interest rate and average borrowings outstanding under our revolving credit facility.
Other Income, net. Other income, net increased $35.7 million during 2022 compared to 2021. During 2021, we recognized expense of $25.0 million related to an agreement to settle a legal matter and legal fees related to the matter totaling $5.4 million. We recognized interest on trade accounts receivable of $41.3 million in 2022 compared to $34.7 million in 2021.
Income Taxes. During 2022, we recorded an income tax expense of $13.6 million on pre-tax income of $13.0 million compared to an income tax benefit of $22.9 million on pre-tax loss of $124.3 million for 2021. Our effective tax rate was 104.8% for 2022 compared to 18.4% for 2021. Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, as well as discrete items, such as changes in the valuation allowance that may not be consistent from year to year. See Note 13 to our consolidated financial statements for additional detail regarding our change in tax expense.
63
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Years Ended
Revenue: (in thousands)
Cost of Revenue:
Selling, general and administrative expenses 78,246 67,185
Depreciation, depletion, amortization and accretion 78,475 95,317
Gains on disposal of assets, net (5,147) (638)
Impairment of other long-lived assets 1,212 12,897
Revenue. Revenue for 2021 decreased $84.1 million, or 27%, to $229.0 million from $313.1 million for 2020. The decrease in total revenue is attributable to declines in revenue across all business lines other than our natural sand proppant services division. Revenue derived from related parties was $17.9 million, or 8% of our total revenue, for 2021 and $50.6 million, or 16% of our total revenue, for 2020. Substantially all of our related party revenue was derived from Gulfport under pressure pumping and sand contracts. Revenue by division was as follows:
Well Completion Services. Well completion services division revenue decreased $4.0 million, or 5%, to $84.3 million for 2021 from $88.3 million for 2020. Revenue derived from related parties was $15 million, or 18% of total well completion revenue, for 2021 and $42.5 million, or 48% of total well completion revenue, for 2020. Substantially all of our related party revenue was derived from Gulfport under a pressure pumping contract which has ended. In 2021, we recognized revenue totaling $15 million related to the modification of our pressure pumping contract with Gulfport. Intersegment revenue, consisting primarily of revenue derived from our other services and sand segment, totaled $0.1 million and $1.1 million, for 2021 and 2020, respectively.
64
The decrease in our well completion services revenue was primarily driven by a decline in utilization. The number of stages completed decreased 12% to 2,544 for 2021 from 2,880 for 2020. An average of 1.1 of our six fleets were active throughout 2021 compared to 1.5 fleets for 2020.
Infrastructure Services. Infrastructure services division revenue decreased $64.3 million, or 41%, to $93.4 million for 2021 from $157.8 million for 2020 primarily due to due to less storm activity during the year ended December 31, 2021 compared to the year ended December 31, 2020 resulting in an $58.4 million decline in storm restoration revenue. Additionally, infrastructure services revenue was negatively impacted by the decrease in crew count from approximately 100 crews as of December 31, 2020 to 82 crews as of December 31, 2021. These crew departures were driven by changes in division level management.
Natural Sand Proppant Services. Natural sand proppant services division revenue increased $0.5 million, or 1%, to $34.9 million for 2021, from $34.4 million for 2020. Revenue derived from related parties was $2.1 million, or 6% of total sand revenue, for 2021 and $8.4 million, or 24% of total sand revenue, for 2020. All of our related party revenue was derived from Gulfport under a sand supply contract which has ended. In 2021, we recognized revenue totaling $2 million related to the modification of our sand supply contract with Gulfport. Intersegment revenue, consisting primarily of revenue derived from our well completion segment, was $4 million, or 11% of total sand revenue, for 2021 and a nominal amount for 2020.
The increase in our natural sand proppant services revenue was primarily attributable to a 107% increase in tons of sand sold from approximately 0.5 million tons in 2020 to 1.0 million tons in 2021 coupled with a 15% increase in average price per ton of sand sold from $14.58 in 2020 to $16.76 in 2021. Included in natural sand proppant services
revenue is shortfall revenue of $12.0 million and $24.8 million, for 2021 and 2020, respectively.
Drilling Services. Drilling services division revenue decreased $3.5 million, or 44%, to $4.3 million for 2021, from $7.8 million for 2020. Revenue derived from related parties, consisting primarily of directional drilling revenue from El Toro Resources LLC, was $0.6 million for 2021 and a nominal amount for 2020.
The decline in our drilling services revenue was primarily attributable to declines in utilization for our directional drilling and rig hauling businesses. In response to market conditions, we temporarily shut down our contract land drilling operations beginning in December 2019 and our rig hauling operations beginning in April 2020.
Other Services. Revenue from other services, consisting of revenue derived from our aviation, coil tubing, pressure control, flowback, cementing, acidizing, equipment rental, crude oil hauling, full service transportation, remote accommodation, equipment manufacturing and infrastructure engineering and design businesses, decreased $10.3 million, or 36%, to $18.5 million for 2021 from $28.8 million for 2020. Revenue derived from related parties, consisting primarily of equipment rental revenue from Gulfport and aviation revenue from Brim was $0.4 million, or 2% of total other services revenue, for 2021 and $1.0 million, or 3% of total other services revenue, for 2020. Intersegment revenue, consisting primarily of revenue derived from our infrastructure and well completion segments, totaled $2.2 million and $2.7 million, respectively for 2021 and 2020.
The decrease in our other services revenue was primarily due to a decline in utilization for our equipment rental business. We rented an average of 135 pieces of equipment to customers during 2021, a decrease of 34% from an average of 204 pieces of equipment rented to customers during 2020. Additionally, utilization for our crude oil hauling and aviation businesses declined. Due to market conditions, we temporarily shut down our coil tubing and full service transportation operations beginning in July 2020 and our crude oil hauling operations beginning in July 2021.
Cost of Revenue (exclusive of depreciation, depletion, amortization and accretion expense). Cost of revenue, exclusive of depreciation, depletion, amortization and accretion expense, decreased $33.7 million from $232.0 million, or 74% of total revenue, for 2020 to $198.3 million, or 87%of total revenue, for 2021. The decrease was primarily due to a decline in activity across all business lines. Cost of revenue by operating division was as follows:
Well Completion Services. Well completion services division cost of revenue, exclusive of depreciation and amortization expense, increased $17.1 million, or 36%, from $47.5 million for 2020 to $64.6 million for 2021 primarily due to an increase in cost of goods sold as a result of providing sand and chemicals with our service package to customers in 2021. As a percentage of revenue, our well completion services division cost of revenue, exclusive of depreciation and amortization expense of $26.4 million in 2021 and $30.4 million in 2020, was 77% and 54%, respectively, for 2021 and 2020, respectively. The increase as a percentage of revenue was primarily due to the recognition of more pressure pumping services standby revenue in 2020, of which there was a lower percentage of
65
costs recognized compared to 2021. Additionally, during 2021 we provided sand and chemicals with our service package to customers, resulting in higher cost of goods sold as a percentage of revenue for this period in comparison to 2020.
Infrastructure Services. Infrastructure services division cost of revenue, exclusive of depreciation and amortization expense, decreased $34.0 million from $124.6 million for 2020 to $90.6 million for 2021, primarily due to a decline in activity. As a percentage of revenue, cost of revenue, exclusive of depreciation and amortization expense of $21.9 million in 2021 and $29.4 million in 2020, was 97% and 79%, for 2021 and 2020, respectively. The increase as a percentage of revenue is primarily due to increased labor costs as a percentage of revenue.
Natural Sand Proppant Services. Natural sand proppant services division cost of revenue, exclusive of depreciation, depletion and accretion expense, increased $1.2 million, or 5%, from $26.0 million for 2020 to $27.2 million for 2021. As a percentage of revenue, cost of revenue, exclusive of depreciation, depletion and accretion expense of $9.0 million in 2021 and $9.8 million in 2020, was 78% and 76%, respectively, for 2021 and 2020, respectively.
Drilling Services. Drilling services division cost of revenue, exclusive of depreciation and amortization expense, decreased $4.8 million, or 44%, from $10.9 million for 2020 to $6.1 million for 2021, as a result of reduced activity. In response to market conditions, we temporarily shut down our contract land drilling operations beginning in December 2019 and our rig hauling operations beginning in April 2020. As a percentage of revenue, our drilling services division cost of revenue, exclusive of depreciation and amortization expense of $8.0 million in 2021 and $10.0 million in 2020, was 141% and 116%, respectively, for 2021 and 2020, respectively. The increase as a percentage of revenue was primarily due to a decline in utilization.
Other Services. Other services cost of revenue, exclusive of depreciation and amortization expense, decreased $10.7 million, or 40%, from $27.1 million for 2020 to $16.3 million for 2021, primarily due to a decline in costs for our equipment rental, coil tubing, and full service transportation businesses as a result of reduced activity. Due to market conditions, we temporarily shut down our coil tubing and full service transportation operations beginning in July 2020 and our crude oil hauling operations beginning in July 2021. As a percentage of revenue, cost of revenue, exclusive of depreciation and amortization expense of $13.2 million in 2021 and $15.7 million in 2020, was 88% and 94%, for 2021 and 2020, respectively. The decrease as a percentage of revenue is primarily due to a decline in equipment rental 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. Following is a breakout of SG&A expenses for the periods indicated (in thousands):
Years Ended
Cash expenses:
Non-cash expenses:
a. Includes travel-related costs, IT expenses, rent, utilities and other general and administrative-related costs.
b. The bad debt provision for the year ended December 31, 2021 includes $41.2 million related to the Stingray Pressure Pumping and Muskie contracts with Gulfport. The bad debt provision for the year ended December 31, 2020, included $19.4 million related to the voluntary petitions for relief filed on November 13, 2020, by Gulfport and certain of its subsidiaries. See Notes 2 and 19 of the Notes to the Consolidated Financial Statements.
66
Depreciation, Depletion, Amortization and Accretion. Depreciation, depletion, accretion and amortization decreased $16.8 million, or 18%, to $78.5 million for 2021 from $95.3 million in 2020. The decrease is primarily due to a decline in property and equipment depreciation expense as a result of lower capital expenditures.
Gains on Disposal of Assets, Net. Gains on the disposal of assets increased by $4.5 million, or 707%, to $5.1 million for 2021 from $0.6 million in 2020, primarily due to an increase in sales of trucking assets in 2021.
Impairment of Goodwill. We recorded impairment of goodwill of $0.9 million and $55.0 million, respectively, in 2021 and 2020. As a result of our annual assessment of goodwill, we determined that the carrying value of goodwill for certain of our entities exceeded their fair values at December 31, 2021, resulting in impairment expense of $0.9 million. As a result of market conditions, we performed an impairment assessment of our goodwill as of March 31, 2020. We determined that the carrying value of goodwill for certain of our entities exceeded their fair values, resulting in impairment expense of $55.0 million.
Impairment of Other Long-lived Assets. We recorded impairments of other long-lived assets of $1.2 million and $12.9 million, respectively, in 2021 and 2020. Beginning in 2021, we temporarily shut down our crude oil hauling operations, resulting in impairment of trade names of $0.5 million. Additionally, as a result of a review of intangible asset balances as of December 31, 2021, we determined the fair value of Higher Power’s trade names and customer relationships was less than their carrying value, resulting in impairment expense of $0.7 million. During 2020, we recorded impairment of property and equipment, including water transfer, crude oil hauling, coil tubing and equipment rental assets, totaling $12.9 million.
Operating Loss. We reported an operating loss of $123.0 million for 2021 compared to operating loss of $148.7 million for 2020. The reduced operating loss was primarily due to the recognition of $67.9 million in impairment expenses during 2020, as compared to $2.1 million in 2021, partially offset by a $19.7 million increase in bad debt expense primarily due to the settlement with Gulfport.
Interest Expense, net. Interest expense, net increased $1.0 million to $6.4 million and $5.4 million for 2021 and 2020, primarily due to an increase in expense recognized on sale-leaseback transactions.
Other Income (Expense), net. Other income, net decreased $29.1 million during 2021 compared to 2020. During 2021, we recognized expense of $25.0 million related to an agreement to settle a legal matter and legal fees related to the matter totaling $5.4 million. This expense was partially offset by a $4.4 million increase in interest on delinquent account receivables.
Income Taxes. During 2021, we recorded an income tax benefit of $22.9 million on pre-tax loss of $124.3 million compared to income tax benefit of $12.2 million on pre-tax loss of $119.8 million for 2020. Our effective tax rate was 18.4% for 2021 compared to 10.2% for 2020. Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, as well as discrete items, such as return to provision adjustments, goodwill impairment and changes in the valuation allowance that may not be consistent from year to year. See Note 13 to our consolidated financial statements for additional detail regarding our change in tax expense.
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 (loss) income before depreciation, depletion, amortization and accretion, gains on disposal of assets, net, impairment of goodwill, impairment of other long-lived assets, public offering costs, stock based compensation, interest expense, net, other income, net (which is comprised of interest on trade accounts receivable and certain legal expenses) and provision (benefit) for income taxes, further adjusted to add back interest on trade accounts receivable. We exclude the items listed above from net (loss) income 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 (loss) income 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.
67
The following tables also 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
Years Ended December 31,
Reconciliation of Adjusted EBITDA to net loss: 2022 2021 2020
Impairment of other long-lived assets — 1,212 12,897
Public offering costs — 91 —
Well Completion Services
Years Ended December 31,
Reconciliation of Adjusted EBITDA to net income (loss): 2022 2021 2020
Gains on disposal of assets, net (615) (770) (388)
Impairment of goodwill — — 53,406
Impairment of other long-lived assets — — 4,203
Public offering costs — 31 —
Interest on trade accounts receivable — (1,841) 1,888
68
Infrastructure Services
Years Ended December 31,
Reconciliation of Adjusted EBITDA to net income (loss): 2022 2021 2020
Gains on disposal of assets, net (795) (286) (443)
Impairment of goodwill — 891 —
Impairment of other long-lived assets — 665 —
Public offering costs — 39 —
Natural Sand Proppant Services
Years Ended December 31,
Reconciliation of Adjusted EBITDA to net loss: 2022 2021 2020
Depreciation, depletion, amortization and accretion 8,732 9,005 9,771
Gains on disposal of assets, net (89) (30) 1,829
Public offering costs — 12 —
Other (income) expense, net (14) (844) 10
Interest on trade accounts receivable — (1) 3
Drilling Services
Years Ended December 31,
Reconciliation of Adjusted EBITDA to net loss: 2022 2021 2020
Depreciation, depletion, amortization and accretion 6,467 7,996 10,039
Gains on disposal of assets, net (172) (202) (353)
Impairment of other long-lived assets — — 326
Public offering costs — 2 —
Other income, net — 25 126
69
Other Services(a)
Years Ended December 31,
Reconciliation of Adjusted EBITDA to net (loss) income: 2022 2021 2020
Impairment of goodwill — — 1,567
Impairment of other long-lived assets — 547 8,368
Public offering costs — 7 —
Interest on trade accounts receivable — — 25
a. Includes results for our aviation, coil tubing, pressure control, equipment rentals, crude oil hauling, full service transportation, remote accommodations and equipment manufacturing and corporate related activities. Our corporate related activities do not generate revenue.
Adjusted Net Loss and Adjusted Loss per Share
Adjusted net loss and adjusted basic and diluted loss 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, such as impairment of goodwill and impairment of other long-lived assets, that may not be indicative of the Company’s ongoing operating results, from net loss. Adjusted net loss and adjusted loss per share should not be considered in isolation or as a substitute for net loss and loss 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 loss and adjusted loss per share to the GAAP financial measures of net loss and loss per share for the periods specified.
Years Ended December 31,
(in thousands, except per share amounts)
Impairment of other long-lived assets — 1,212 12,897
Basic loss per share, as reported $ (0.01) $ (2.18) $ (2.36)
Impairment of goodwill — 0.02 1.20
Impairment of other long-lived assets — 0.03 0.28
Adjusted basic loss per share $ (0.01) $ (2.13) $ (0.88)
Diluted loss per share, as reported $ (0.01) $ (2.18) $ (2.36)
Impairment of goodwill — 0.02 1.20
Impairment of other long-lived assets — 0.03 0.28
Adjusted diluted loss per share $ (0.01) $ (2.13) $ (0.88)
70
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, and the litigation settlement obligations described in Note 19 “Commitments and Contingencies” of the Notes to the Consolidated Financial Statements and under “Capital Requirements and Sources of Liquidity” below. Our primary sources of liquidity have been cash on hand, borrowings under our revolving credit facility and cash flows from operations. Our primary uses of capital have been for investing in property and equipment used to provide our services and to acquire complementary businesses.
The following table summarizes our liquidity as of the dates indicated (in thousands):
December 31,
Less available borrowing capacity reserve (10,000) (10,000)
Less letter of credit facilities (environmental remediation) (3,694) (3,694)
Less letter of credit facilities (insurance programs) (2,800) (3,890)
Less letter of credit facilities (bonding program) — (1,000)
Less letter of credit facilities (rail car commitments) — (455)
a. Net working capital (less cash and current portion of long-term debt) is a non-GAAP measure and, as of December 31, 2022, is calculated by subtracting total current liabilities of $237.2 million and cash and cash equivalents of $17.3 million from total current assets of $496.7 million, further adjusted to add current portion of long-term debt of $83.5 million. As of December 31, 2021, net working capital (less cash) is calculated by subtracting total current liabilities of $150.2 million and cash and cash equivalents of $9.9 million from total current assets of $440.8 million, further adjusted to add current portion of long-term debt of $1.5 million. Amounts include receivables due from PREPA of $379.0 million and $337.8 million and corresponding liabilities of $47.6 million and $42.3 million at December 31, 2022 and 2021, respectively.
As of February 22, 2023, we had $79.7 million in borrowings outstanding under our revolving credit facility, leaving an aggregate of $22.3 million of available borrowing capacity under this facility, after giving effect to $6.4 million of outstanding letters of credit and the requirement to maintain a $10.0 million reserve out of the available borrowing capacity. Our revolving credit facility is currently scheduled to mature on October 19, 2023. See “Our Revolving Credit Facility” below for additional detail.
Continued prolonged volatility in the capital, financial and/or credit markets due to the COVID-19 pandemic, inflationary pressures or otherwise and volatility in commodity prices and/or adverse macroeconomic conditions may further limit our access to, or increase our cost of, capital or make capital unavailable on terms acceptable to us or at all. In addition, if we are unable to comply with the financial covenants under our amended revolving credit facility, or obtain a waiver of forecasted or actual non-compliance with any such financial covenants from our lenders, and an event of default occurs and remains uncured, our lenders would not be required to lend any additional amounts to us, could elect to increase our interest rate by 200 basis points, could elect to declare all outstanding borrowings, together with accrued and unpaid interest and fees, to be due and payable, may have the ability to require us to apply all of our available cash to repay our outstanding borrowings and may foreclose on substantially all of our assets. Further, we may not be able to extend, repay or refinance our existing revolving credit facility at or prior to maturity on the terms acceptable to us or at all.
71
Liquidity and Cash Flows
The following table sets forth our cash flows for the years indicated (in thousands):
Years Ended December 31,
Net cash provided by (used in) operating activities $ 15,266 $ (18,865) $ 6,967
Net cash (used in) provided by investing activities (2,124) 5,507 (2,295)
Net cash (used in) provided by financing activities (5,601) 8,428 4,266
Effect of foreign exchange rate on cash (158) 7 12
Operating Activities
Net cash provided by (used in) operating activities was $15.3 million, ($18.9) million and $7.0 million, respectively, for the years ended December 31, 2022, 2021 and 2020. The change in operating cash flows from 2021 to 2022 was primarily due to an increase in activity and utilization across all of our operating divisions as described in Results of Operations above.
Investing Activities
Net cash (used in) provided by investing activities was ($2.1) million, $5.5 million and ($2.3) million, respectively, for the years ended December 31, 2022, 2021 and 2020. Substantially all remaining cash used in investing activities was used to purchase property and equipment that is utilized to provide our services, which was partially offset by proceeds from the disposal of property and equipment.
The following table summarizes our capital expenditures by operating division for the periods indicated (in thousands):
Years Ended December 31,
Natural sand proppant services(c) 88 484 1,073
Eliminations (153) — —
a. Capital expenditures primarily for upgrades to our pressure pumping fleet to reduce greenhouse gas emissions and maintenance for the years ended December 31, 2022, 2021 and 2020.
b. Capital expenditures primarily for truck, tooling and other equipment purchases for new infrastructure crews for the years ended December 31, 2022, 2021 and 2020.
c. Capital expenditures primarily for maintenance for the years ended December 31, 2022, 2021 and 2020.
d. Capital expenditures primarily for maintenance for the years ended December 31, 2022 and 2021, and for directional drilling equipment for the year ended December 31, 2020.
e. Capital expenditures primarily for equipment for our remote accommodations and equipment rental businesses for the years ended December 31, 2022, 2021 and 2020.
Financing Activities
Net cash (used in) provided by financing activities was ($5.6) million, $8.4 million and $4.3 million, respectively, for the years ended December 31, 2022, 2021 and 2020. Net cash used in financing activities for the year ended December 31, 2022 was primarily attributable to net repayments under our revolving credit facility of $1.5 million and principal payments on financing leases and equipment notes of $4.3 million, partially offset by net proceeds received from sale-leaseback transactions of $0.2 million. Net cash provided by financing activities for the year ended December 31, 2021 was primarily attributable to net proceeds received from sale-leaseback transactions of $6.5 million and net borrowings under our revolving credit facility of $4.2 million, partially offset by principal payment on financing leases and equipment notes of $2.3 million. Net cash provided by financing activities for the year ended December 31, 2020 was primarily attributable to net proceeds of $4.7 million received
72
from a sale-leaseback transaction and net borrowings under our revolving credit facility of $2.6 million, principal payment on financing leases and equipment notes of $2.0 million and payment of debt issuance costs of $1.1 million.
Effect of Foreign Exchange Rate on Cash
The effect of foreign exchange rate on cash was ($0.2) million for the year ended December 31, 2022 and was a nominal amount for both of the years ended December 31, 2021, and 2020. The year-over-year effect was driven primarily by an unfavorable shift in the strength of the Canadian dollar relative to the U.S. dollar for the cash held in Canadian accounts.
Working Capital
Our working capital totaled $259.5 million and $290.5 million, respectively, at December 31, 2022 and 2021. Our cash balances totaled $17.3 million and $9.9 million, respectively, at December 31, 2022 and 2021. Included in working capital are receivables due from PREPA totaling $379.0 million and $337.8 million and corresponding liabilities of $47.6 million and $42.3 million at December 31, 2022 and 2021, respectively.
Our Revolving Credit Facility
On October 19, 2018, we and certain of our direct and indirect subsidiaries, as borrowers, entered into an amended and restated revolving credit facility, as subsequently amended, with the lenders party thereto and PNC Bank, National Association, as a lender and as administrative agent for the lenders. At December 31, 2022, we had outstanding borrowings under our revolving credit facility of $83.5 million and $19.7 million of available borrowing capacity, after giving effect to $6.5 million of outstanding letters of credit and the requirement to maintain a $10.0 million reserve out of the available borrowing capacity.
On February 28, 2022, we entered into a fourth amendment to the revolving credit facility (the “Fourth Amendment”) to, among other things, (i) amend our financial covenants as outlined below, (ii) provide for a conditional increase of the applicable interest margin, (iii) permit certain sale-leaseback transactions, (iv) provide for a reduction in the maximum revolving advance amount in an amount equal to 50% of the PREPA claims proceeds, subject to a floor equal to the sum of eligible billed and unbilled accounts receivables, and (v) classifies the payments pursuant to our settlement agreement with MasTec Renewables Puerto Rico, LLC as restricted payments and required $20.0 million of availability both before and after making such payments.
The financial covenants under our revolving credit facility were amended as follows:
•the leverage ratio was eliminated;
•the fixed charge coverage ratio was reduced to 0.85 to 1.0 for the six months ended June 30, 2022 and increases to 1.1 to 1.0 for the periods thereafter;
•a minimum adjusted EBITDA covenant of $4.7 million, excluding interest on the accounts receivable from PREPA, for the five months ending May 31, 2022 was added; and
•the minimum excess availability covenant was reduced to $7.5 million through March 31, 2022, after which the minimum excess availability covenant increased to $10.0 million.
We were in compliance with the applicable financial covenants under our amended revolving credit facility in effect as of December 31, 2022. For additional information regarding our revolving credit facility, see Note 10. Debt to our consolidated financial statements included elsewhere in this report.
As of February 22, 2023, our outstanding borrowings under our amended revolving credit facility were $79.7 million, leaving an aggregate of $22.3 million of available borrowing capacity, after giving effect to $6.4 million of outstanding letters of credit and the requirement to maintain a $10.0 million reserve out of the available borrowing capacity. If we fail to comply with the financial covenants contemplated by our amended revolving credit facility, or obtain a waiver of forecasted or actual non-compliance with any such financial covenants from our lenders, and an event of default occurs and remains uncured, it will have a material adverse effect on our business, financial condition, liquidity and results of operations.
In addition, our revolving credit facility is currently scheduled to mature on October 19, 2023. We continue to explore various strategic alternatives to extend, refinance, or repay our revolving credit facility on or before the scheduled maturity date. There is no guarantee that such extension, refinancing or repayment will be secured. Considering the maturity date of our revolving credit facility, current macroeconomic conditions and recessionary pressures, we will likely be required to extend, refinance or repay our existing revolving credit facility in unfavorable credit markets. As a result, any such extended or new
73
credit facility could have terms that are less favorable to us than the terms of our existing revolving credit facility, which may significantly increase our cost of capital and may have a material adverse effect on our liquidity and financial condition. For additional information regarding our amended revolving credit facility and financial covenants thereunder, see Note 10. Debt to our consolidated financial statements included elsewhere in this report.
Sale-Leaseback Transactions
On December 30, 2020, we entered into an agreement with First National Capital, LLC, or FNC, whereby we agreed to sell certain assets from our infrastructure segment to FNC for aggregate proceeds of $5.0 million. Concurrent with the sale of assets, we entered into a 36 month lease agreement whereby we will lease back the assets at a monthly rental rate of $0.1 million. On June 1, 2021, we entered into another agreement with FNC whereby we sold additional assets from our infrastructure segment to FNC for aggregate proceeds of $9.5 million and entered into a 42 month lease agreement whereby we lease back the assets at a monthly rental rate of $0.2 million. On June 1, 2022, we entered into another agreement with FNC whereby we sold additional assets from our infrastructure segment to FNC for aggregate proceeds of $4.6 million and entered into a 42 month lease agreement whereby we lease back the assets at a monthly rental rate of $0.1 million. Under the agreements, we have the option to purchase the assets at the end of the lease term. We recorded a liability for the proceeds received and will continue to depreciate the assets. We imputed an interest rate so that the carrying amount of the financial liabilities will be the expected repurchase price at the end of the initial lease terms.
Aviation Note
On November 6, 2020, Leopard and Cobra Aviation entered into a 39 month promissory note agreement with Bank7, or the Aviation Note, in an aggregate principal amount of $4.6 million and received net proceeds of $4.5 million. The Aviation Note bore interest at a rate based on the Wall Street Journal Prime Rate plus a margin of 1%. The Aviation Note was paid off on September 30, 2022.
Equipment Financing Note
In December 2022, we entered into a 42 month financing arrangement with FNC for the purchase of seven new pressure pumping units for an aggregate value of $9.7 million. Under this arrangement, we have agreed to make monthly principal and interest payments totaling $0.3 million over the term of the agreement. This note is secured by the seven pressure pumping units and bears interest at an imputed rate of approximately 14.3%.
Capital Requirements and Sources of Liquidity
As we pursue our business and financial strategy, we regularly consider which capital resources are available to meet our future financial obligations and liquidity requirement. We believe that our cash on hand, operating cash flow and available borrowings under our credit facility will be sufficient to meet our short-term and long-term funding requirements, including funding our current operations, planned capital expenditures, debt service obligations and known contingencies.
Our liquidity and future cash flows, however, are subject to a number of variables, including receipt of payments from our customers, including PREPA, and our ability to extend, refinance or repay our revolving credit facility at or prior to its scheduled maturity date of October 19, 2023. As of December 31, 2022, PREPA owed Cobra approximately $379.0 million for services performed, including $152.0 million of interest charges. Throughout 2021 and 2022, we have released significant data that we obtained through Freedom of Information Act requests along with reviews of both our work and our contracts by the Federal Emergency Management Agency that, we believe, affirm the work performed by Cobra in Puerto Rico. We believe these documents in conjunction with the current Administration’s focus on the recovery of Puerto Rico and our enhanced lobbying efforts will aid in collecting the outstanding amounts owed to us by PREPA. However, in the event PREPA (i) does not have or does not obtain the funds necessary to satisfy its obligations to Cobra under the contracts, (ii) obtains the necessary funds but refuses to pay the amounts owed to Cobra or (iii) otherwise does not pay amounts owed to Cobra for services performed, the receivable may not be collectible, which may adversely impact our liquidity.
During 2022, our capital expenditures totaled $12.7 million, included $11.4 million in our well completion segment primarily related to upgrades to our pressure pumping fleet and water transfer equipment, $0.9 million in our infrastructure segment primarily related to truck, tooling and equipment purchases for new crews and $0.4 million for our other divisions primarily related to equipment additions for our remote accommodations and equipment rental businesses.
During 2023, we currently estimate that our aggregate capital expenditures will be $64 million, depending upon industry conditions and our financial results.These capital expenditures include $42 million for our well completions segment,
74
$12 million for our infrastructure segment, $3 million for our natural sand proppant segment, $1 million for our drilling segment and $6 million for our other businesses.
Also, as noted above in this report, in response to market conditions we have (i) temporarily shut down certain of our oilfield service offerings, including coil tubing, pressure control, flowback, crude oil hauling, cementing, acidizing and land drilling services, (ii) idled certain facilities, including our sand processing plant in Pierce County, Wisconsin and (iii) reduced our workforce across all of our operations. We continue to monitor market conditions to determine if and when we will recommence these services and operations and increase our workforce. Any such recommencement and expansion will further increase our liquidity requirements in advance of revenue generation.
In addition, while we regularly evaluate acquisition opportunities, we do not have a specific acquisition budget for 2023 since the timing and size of acquisitions cannot be accurately forecasted. We continue to evaluate acquisition opportunities, including those in the renewable energy sector as well as transactions involving entities controlled by Wexford. 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 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 any of the above or other reasons, we may do so through borrowings under a revolving credit facility, joint venture partnerships, sale-leaseback transactions, asset sales, offerings of debt or equity securities or other means. Although we expect that our sources of capital will be adequate to fund our short-term and long-term liquidity requirements, 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, our ability to conduct operations, make capital expenditures, satisfy debt services obligations, pay litigation settlement obligations, fund contingencies and/or complete acquisitions that may be favorable to us will be impaired, which would have a material adverse effect on our business, financial condition, results of operations and cash flows. See also Item 1A. Risk Factors included elsewhere in this report.
Contractual and Commercial Commitments
The following table summarizes our contractual obligations and commercial commitments as of December 31, 2022 (in thousands):
Total Less than 1 year 1-3 Years 3-5 Years More than 5 Years
Contractual obligations:
Revolving credit facility(a) $ 83,520 $ 83,520 $ — $ — $ —
Interest and commitment fees on revolving credit facility(b) 7,843 7,843 — — —
a.Excludes interest payments.
b.Assumption of revolving credit facility balance outstanding as of December 31, 2022 of $83.5 million using the weighted average interest rate as of December 31, 2022 of 11.5%.
c.Obligations under a sale-leaseback arrangement for a portion of our infrastructure segment assets.
d.Operating lease obligations primarily relate to rail cars, real estate and other equipment.
e.Financing lease obligations primarily relate to equipment for our well completions and infrastructure segments.
f.Equipment financing obligations relate to equipment for our well completion segment.
75
Critical Accounting Estimates
The preparation of financial statements requires the use of judgments and estimates. Our critical accounting policies are described below to provide a better understanding of how we develop our assumptions and judgments about future events and related estimates and how they can impact our financial statements. A critical accounting estimate is one that requires our most difficult, subjective, or complex judgments and assessments and is fundamental to our results of operations. We identified our most critical accounting estimates to be:
–allowance for doubtful accounts;
–valuations of long-lived assets, including goodwill and intangible assets; and
–litigation and contingencies.
We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the following are the critical accounting policies used in the preparation of our consolidated financial statements, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this report.
Allowance for Doubtful Accounts
We regularly review receivables and provide for estimated losses through an allowance for doubtful accounts. In evaluating the level of established reserves, we make judgments regarding our 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. This process involves judgment and estimation. Accordingly, our results of operations can be affected by adjustments to the allowance due to actual write-offs that differ from estimated amounts.
As of December 31, 2022 and 2021, our allowance for doubtful accounts totaled $3.6 million and $18.1 million, respectively. During 2022, we wrote-off accounts receivable totaling $17.9 million, substantially most of which related to Gulfport. See Notes 2, 3 and 19 to the consolidated financial statements for further information related to Gulfport.
Our accounts receivable balance included $379.0 million and $337.8 million related to PREPA as of December 31, 2022 and 2021, respectively, which includes interest charged on delinquent balances. PREPA has not made any payments to us on their outstanding receivable since 2019. PREPA is currently subject to bankruptcy proceedings and, as a result, their ability to meet their obligations is largely dependent upon funding from the FEMA or other sources. For a description of our collection efforts and related litigation against PREPA, see Note 2. Summary of Significant Accounting Policies—Accounts Receivable and Note 19. Commitments and Contingencies to our consolidated financial statements and Item 1A. “Risk Factors—Risks Related to Our Business and the Industries We Serve” included elsewhere in this annual report.
We continuously review the facts and circumstances related to this receivable to determine if an allowance is needed. We believe all amounts charged to PREPA, including interest charged on delinquent accounts receivable, were in accordance with the terms of the contracts. Further, there have been multiple reviews prepared by or on behalf of FEMA that have concluded that the amounts Cobra charged PREPA were reasonable, that PREPA adhered to Puerto Rican legal statutes regarding emergency situations and that PREPA engaged in a reasonable procurement process. We believe these receivables are collectible and for the reasons previously described as well as other factors, no allowance was deemed necessary at December 31, 2022 or 2021. However, in the event PREPA (i) does not have or does not obtain the funds necessary to satisfy its obligations to Cobra under the contracts, (ii) obtains the necessary funds but refuses to pay the amounts owed to us or (iii) otherwise does not pay amounts owed to us for services performed, the receivable may not be collectible.
See Note 2 to our consolidated financial statements for additional detail regarding our allowance for doubtful accounts.
Valuation of Long-Lived Assets
Long-lived assets on our balance sheet include property, plant and equipment, goodwill and intangible assets. We test goodwill for impairment annually, or more frequently if events or changes in circumstances indicate that an impairment may
76
exist. We conduct impairment tests on long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
Goodwill. Under generally accepted accounting principles, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of one or more of our reporting units is greater than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, there is no need to perform any further testing. However, if we conclude otherwise, then we are required to perform a quantitative impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded based on that difference.
During the years ended December 31, 2021, and 2020, we recorded goodwill impairment charges of $0.9 million and $55.0 million, respectively. We did not recognize any impairment of goodwill for the year ended December 31, 2022. See Note 6 to our consolidated financial statements for details regarding the facts and circumstances that led to this impairment and how the fair value of each reporting unit was estimated, including significant assumptions used and other details.
Other Long-Lived Assets. Impairment of other long-lived assets, including property, plant and equipment and intangible assets is evaluated by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with the assets. If such evaluations indicate that the future undiscounted cash flow from the assets is not sufficient to recover the carrying value of such assets, the assets are adjusted to their estimated fair values.
During the years ended December 31, 2021, and 2020, we recorded impairment charges of other long-lived assets totaling, $1.2 million and $12.9 million, respectively. We did not recognize any impairment of other long-lived assets for the year ended December 31, 2022. See Note 6 to our consolidated financial statements for additional details.
The assumptions used in the impairment evaluation for long-lived assets are inherently uncertain and require management’s judgment. A continued period of low oil and natural gas prices or continued reductions in capital expenditures by our customers would likely have an adverse impact on our utilization and the prices that we receive for our services. This could result in the recognition of future material impairment charges on the same, or additional, property and equipment if future cash flow estimates, based upon information then available to management, indicate that their carrying values are not recoverable.
Litigation and Contingencies
As discussed in Note 19 of our consolidated financial statements, we are involved in various litigation matters arising in the ordinary course of business. Accruals for litigation and contingencies are based on our assessment, including advice of legal counsel, of the expected outcome of litigation or other dispute resolution proceedings and/or the expected resolution of contingencies. For matters in which a liability is probable and reasonably estimable, we accrue an estimate for the resolution of the matter. For matters in which a liability is not probable and reasonably estimable, we do not accrue any amounts. Significant judgment is required in both the determination of probability of loss and the determination as to whether the amount is reasonably estimable. Accruals are based on information available at the time of the assessment due to the uncertain nature of such matters. As additional information becomes available, we reassess potential liabilities related to pending claims and litigation and may revise previous estimates, which could materially affect our results of operations in a given period.
77
Item 7A. 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; demand for repair and 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.
In March and April 2020, concurrent with the COVID-19 pandemic and quarantine orders in the U.S. and worldwide, oil prices dropped sharply to below zero dollars per barrel for the first time in history due to factors including significantly reduced demand and a shortage of storage facilities. In 2021, U.S. oil production stabilized as commodity prices increased and demand for crude oil rebounded, many exploration and production companies set their operating budgets based on the prevailing prices for oil and natural gas at the time. Despite improvement in the U.S. and global economic activity, easing of the COVID-19 pandemic and related restrictions, rising energy use and improved commodity prices, the budgets for the publicly traded exploration and production companies remained relatively flat throughout 2021, with any excess cash flows used for debt repayment and shareholder returns, rather than to increase production. We saw improvements in the oilfield services industry and in both pricing and utilization of our well completion and drilling services throughout 2022 and we expect both pricing and utilization to continue at these levels throughout 2023 as a result of an increase in budgets for publicly traded exploration and production companies and elevated activity levels, driven by strong energy demand and favorable commodity prices. Strong demand in the pressure pumping industry and continuing supply chain disruptions have resulted, however, in delays of equipment and replacement parts for our and our competitors’ pressure pumping fleets. Further, the ongoing war and related humanitarian crisis in Ukraine could continue to have an adverse effect on the global supply chain and volatility of commodity prices.
Although the levels of activity in the U.S. oil and natural gas exploration and production, energy infrastructure and natural sand proppant industries continue to improve, they have historically been and continue to be volatile. We are unable to predict the ultimate impact of the COVID-19 pandemic, the volatility in commodity prices, any changes in the near-term or long-term outlook for our industries or overall macroeconomic conditions on our business, financial condition, results of operations, cash flows and stock price.
Interest Rate Risk
We had a cash and cash equivalents balance of $17.3 million at December 31, 2022. We do not enter into investments for trading or speculative purposes.
Interest under our credit facility is payable at a base rate, which can fluctuate based on multiple facts, including rates set by the U.S. Federal Reserve (which increased its benchmark interest rate by an aggregate of 4.5 percentage points throughout 2022 and 2023, and may continue to increase interest rates in an effort to counter the persistent inflation), the supply and demand for credit and general economic conditions, plus an applicable margin. The applicable margin is currently set at 4.0%, which can be reduced to 3.5% under certain circumstances specified in our credit facility. At December 31, 2022, we had outstanding borrowings under our revolving credit facility of $83.5 million with a weighted average interest rate of 11.5%. A 1% increase or decrease in the interest rate would have increased or decreased our interest expense by approximately $0.8 million per year. We do not currently hedge our interest rate exposure.
Foreign Currency Risk
Our remote accommodation business, which is included in our other services division, 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 December 31, 2022, we had $3.4 million of cash 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-
78
tax income of approximately ($0.1) million as of December 31, 2022. Conversely, a corresponding decrease in the strength of the Canadian dollar would have resulted in a comparable increase 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.
Customer Credit Risk
We are also subject to credit risk due to concentration of our receivables from several significant customers. We generally do not require our customers to post collateral. The inability, delay or failure of our customers to meet their obligations to us due to customer liquidity issues or their insolvency or liquidation may adversely affect our business, financial condition, results of operations and cash flows. This risk may be further enhanced by the COVID-19 pandemic, the volatility in commodity prices, the reduction in demand for our services and challenging macroeconomic conditions.
Specifically, we had receivables due from PREPA totaling $379.0 million as of December 31, 2022. 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 contracts is largely dependent upon funding from the FEMA or other sources. See Note 2. Summary of Significant Accounting Policies—Accounts Receivable and —Concentrations of Credit Risk and Significant Customers and Note 19. Commitments and Contingencies—Litigation of our consolidated financial statements contained elsewhere in this annual report for additional information.
Seasonality
We provide infrastructure services in the northeastern, southwestern, midwestern and western portions of the United States. We provide well completion 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 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, Kentucky, Colorado, California, Indiana and Alberta, Canada. For the years ended December 31, 2022, 2021 and 2020, we generated approximately 45%, 48% and 35%, respectively, of our revenue from our operations in Ohio, Wisconsin, Minnesota, North Dakota, Pennsylvania, West Virginia and Canada where weather conditions may be severe. As a result, our 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.
Inflation
Although the impact of inflation has been insignificant on our operations in prior years, inflation in the U.S. has been rising at its fastest rate in over 40 years, creating inflationary pressure on the cost of services, equipment and other goods in our industries and other sectors and contributing to labor and materials shortages across the supply-chain. Throughout 2022 and 2023, the Federal Reserve increased its benchmark interest rates by an aggregate of 4.5 percentage points, and may continue increasing benchmark interest rates in the future. If the efforts to control inflation are not successful and inflationary pressures persist, our business, results of operations and financial condition may be adversely affected.
Item 8. Financial Statements and Supplementary Data
The information required by this item appears beginning on page F-1 following the signature pages of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. 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 15d-15(e) 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,
79
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 December 31, 2022, 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 December 31, 2022, our disclosure controls and procedures are effective.
Changes in Internal Controls 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 December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles.
As of December 31, 2022, management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation, management did not identify any material weaknesses in our internal control over financial reporting and determined that we maintained effective internal control over financial reporting as of December 31, 2022.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Item 9B. Other Information
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
80
PART III.
Item 10. Directors, Executive Officers and Corporate Governance
Information required by Item 10 of Part III is incorporated herein by reference to the definitive Proxy Statement to be filed by us pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934 within 120 days after the close of the year ended December 31, 2022.
We have adopted a Code of Business Conduct and Ethics that applies to directors and employees, including the Chief Executive Officer, the Chief Financial Officer, controller and persons performing similar functions. The Code of Business Conduct and Ethics is posted on our website at http://ir.mammothenergy.com/corporate-governance.cfm. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the Code of Business Conduct and Ethics by posting such information on our website at the address specified above.
Item 11. Executive Compensation
The information required by Item 11 of Part III is incorporated by reference to our definitive Proxy Statement within 120 days after the close of the year ended December 31, 2022.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 of Part III is incorporated by reference to our definitive Proxy Statement within 120 days after the close of the year ended December 31, 2022.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by Item 13 of Part III is incorporated by reference to our definitive Proxy Statement within 120 days after the close of the year ended December 31, 2022.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 of Part III is incorporated by reference to our definitive Proxy Statement within 120 days after the close of the year ended December 31, 2022.
81
PART IV.
Item 15. Exhibits, Financial Statement Schedules
The following documents are filed as part of this report or incorporated by reference herein:
(1) Financial Statements
Page
Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248) 1
Consolidated Balance Sheets 3
Consolidated Statement of Comprehensive Loss 4
Consolidated Statement of Changes in Equity 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 8
(2) Financial Statement Schedules
All financial statement schedules have been omitted because they are not applicable or the required disclosure is presented in the financial statements or notes thereto.
(3) Exhibits
Exhibit Number Exhibit Description
82
21.1* List of Significant Subsidiaries of the Company.
23.1* John T. Boyd Company Consent.
95.1* Mine Safety Disclosure Exhibit.
101.INS* XBRL Instance Document.
101.SCH* XBRL Taxonomy Extension Schema Document.
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB* XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document.
* Filed herewith.
** Furnished herewith, not filed.
+ Management contract, compensatory plan or arrangement.
Item 16. Form 10-K Summary
None.
83
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: February 24, 2023 By: /s/ Mark Layton
Mark Layton
Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
Arty Straehla
Mark Layton
/s/ Arthur Amron Director (Chairman of the Board) February 24, 2023
Arthur Amron
/s/ James D. Palm Director February 24, 2023
James D. Palm
/s/ Paul Jacobi Director February 24, 2023
Paul Jacobi
/s/ Arthur Smith Director February 24, 2023
Arthur Smith
/s/ Corey Booker Director February 24, 2023
Corey Booker
84
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Mammoth Energy Services, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Mammoth Energy Services, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of comprehensive loss, changes in equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, thefinancial statements present fairly, in all material respects, the financial position of the Companyas of December 31, 2022 and 2021, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit mattercommunicated below is a matterarising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relatesto accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matterbelow, providing aseparate opinionon the critical audit matteror on the accounts or disclosures to which it relates.
Collectability of receivable balances from the Puerto Rico Electric Power Authority
As described further in Notes 2 and 19 to the consolidated financial statements, Cobra Acquisitions LLC (“Cobra”) and the Puerto Rico Electric Power Authority (“PREPA”) entered into an emergency master services agreement in October 2017 and a second master service contract in May 2018 for repairs to PREPA’s electrical grid due to damage caused by Hurricane Maria in 2017 (collectively, the “PREPA Contracts”). As of December 31, 2022, the consolidated financial statements include accounts receivable from PREPA for approximately $227.0 million for services performed as well as receivables of approximately $152.0 million of interest charges on delinquent balances in accordance with the terms of the PREPA Contracts (collectively, “PREPA receivable”). PREPA is subject to bankruptcy proceedings that are currently pending in the U.S. District Court for the District of Puerto Rico. Furthermore, on September 10, 2019, the U.S. District Court for the District of Puerto Rico unsealed an indictment that charged three individuals, including the former president of Cobra, with conspiracy, wire fraud, false statements and disaster fraud. The indictment was focused on the interactions between a former U.S. Department of Homeland Security - Federal Emergency Management Agency (“FEMA”) official and the former president of Cobra, which concluded in December 2022. The Company is cooperating with the U.S. Securities and Exchange Commission and the U.S. Department of Justice in the criminal matter and neither the Company nor any of its subsidiaries were charged in the indictment. However, adverse developments in the criminal investigation and/or related litigation may affect PREPA’s willingness or intent to remit payment to Cobra. We identified the collectability of the receivable balances associated with the PREPA Contracts as a critical audit matter.
F-1
The principal consideration for our determination that the collectability of the receivable balances from PREPA is a critical audit matter is the high degree of estimation uncertainty resulting from significant management judgment. Given that PREPA is subject to bankruptcy proceedings and as a result, its ability to meet its remaining obligations under the PREPA Contracts is largely dependent upon funding from FEMA or other sources, and given the related litigation described in Notes 2 and 19, management’s qualitative evaluation of the collectability of the PREPA receivable and the determination of PREPA’s ability and intent to remit payment required a high degree of auditor judgment and an increased extent of effort to assess the reasonableness of management’s estimates and assumptions.
Our audit procedures related to the collectability of the receivable balances from PREPA included the following, among others.
•We obtained an understanding and evaluated the design and implementation of management’s controls over the collectability of the receivable balances from PREPA.
•We evaluated the qualitative assessment performed by management by performing the following:
◦We inquired of management to gain an understanding of the relevant facts and circumstances related to the current status of FEMA’s review of invoices submitted by PREPA for reimbursement, PREPA’s appeals with FEMA on any amounts initially determined to be ineligible for federal assistance, the status of PREPA’s bankruptcy proceedings and the status of the related litigation.
◦We corroborated the facts and circumstances by obtaining and reviewing the relevant legal documents and correspondence with officials of PREPA, FEMA and the Federal Oversight and Management Board for Puerto Rico, which is involved in the oversight of PREPA.
◦We evaluated responses to inquiry letters sent to internal and external legal counsel and obtained written representations from management related to the collectability of the PREPA receivable and related litigation.
◦Through such procedures, we assessed the reasonableness of management’s conclusions regarding the collectability of the accounts receivables from PREPA and whether a loss is probable or reasonably possible.
•We assessed the sufficiency of management’s disclosures related to the PREPA receivable and related litigation, including that PREPA’s ability to meet its payment obligations is largely dependent upon funding from FEMA and that the receivable may not be collectible if PREPA (i) does not have or does not obtain the funds necessary to satisfy its obligations under the contracts, (ii) obtains the necessary funds but refuses to pay the amounts owed to the Company or (iii) otherwise does not pay amounts owed to the Company for services performed.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2012.
Oklahoma City, Oklahoma
February 24, 2023
F-2
MAMMOTH ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS December 31,
CURRENT ASSETS (in thousands)
Short-term investment — 1,762
Receivables from related parties, net 223 88
Deferred income tax asset — 8,094
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accrued expenses and other current liabilities 52,297 62,516
Current operating lease liability 5,447 5,942
Current portion of long-term debt 83,520 1,468
Long-term debt, net of current portion — 85,240
Deferred income tax liabilities 471 865
Long-term operating lease liability 4,913 5,918
COMMITMENTS AND CONTINGENCIES (Note 19)
EQUITY
Equity:
Accumulated other comprehensive loss (3,841) (2,931)
The accompanying notes are an integral part of these consolidated financial statements.
F-3
MAMMOTH ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Years Ended December 31,
REVENUE (in thousands, except per share amounts)
Product revenue - related parties — 2,145 7,500
COST AND EXPENSES
Selling, general and administrative - related parties (Note 12) — 385 758
Impairment of other long-lived assets — 1,212 12,897
OTHER INCOME (EXPENSE)
Other (expense) income, net - related parties — (515) 1,890
OTHER COMPREHENSIVE LOSS
Net loss per share (basic) (Note 15) $ (0.01) $ (2.18) $ (2.36)
Net loss per share (diluted) (Note 15) $ (0.01) $ (2.18) $ (2.36)
The accompanying notes are an integral part of these consolidated financial statements.
F-4
MAMMOTH ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Accumulated
Additional Other
Common Stock Retained Paid-In Comprehensive
Shares Amount Earnings (Deficit) Capital Loss Total
(in thousands)
Other comprehensive income — — — — 241 241
Other comprehensive income — — — — 134 134
Other comprehensive loss — — — — (910) (910)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
MAMMOTH ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
Cash flows from operating activities (in thousands)
Amortization of coil tubing strings — — 359
Amortization of debt origination costs 777 665 831
Gains from sales of equipment damaged or lost down-hole (604) (288) (696)
Impairment of other long-lived assets — 1,212 12,897
Changes in assets and liabilities:
Net cash provided by (used in) operating activities 15,266 (18,865) 6,967
Cash flows from investing activities:
Purchases of property and equipment from related parties — — (76)
Contributions to equity investee — — (490)
Purchase of short-term investment — — (1,750)
Net cash (used in) provided by investing activities (2,124) 5,507 (2,295)
Cash flows from financing activities:
Payments on sale-leaseback transaction (4,429) (2,951) (268)
Debt issuance costs — — (1,051)
Net cash (used in) provided by financing activities (5,601) 8,428 4,266
Effect of foreign exchange rate on cash (158) 7 12
Net increase (decrease) in cash and cash equivalents 7,383 (4,923) 8,950
Cash and cash equivalents at beginning of period 9,899 14,822 5,872
The accompanying notes are an integral part of these consolidated financial statements.
F-6
MAMMOTH ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
Supplemental disclosure of cash flow information: (in thousands)
Cash paid (recovered) for income taxes $ 106 $ 829 $ (617)
Supplemental disclosure of non-cash transactions:
The accompanying notes are an integral part of these consolidated financial statements.
F-7
MAMMOTH ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
The accompanying consolidated financial statements were prepared in accordance with the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments, which in the opinion of management are necessary for the fair presentation of the results.
Mammoth Energy Services, Inc. (“Mammoth Inc.”, “Mammoth” or the “Company”), 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 US territories. Mammoth Inc.’s infrastructure division provides engineering, design, construction, upgrade, maintenance and repair services to various public and private owned utilities. Its oilfield services division provides a diversified set of services to the exploration and production industry including well completion, natural sand and proppant and drilling services. Additionally, the Company provides aviation services, equipment rentals, remote accommodation services and equipment manufacturing. The Company was incorporated in Delaware in June 2016.
The following companies (“Operating Entities”) are included in these consolidated financial statements: Bison Drilling and Field Services, LLC (“Bison Drilling”), formed November 15, 2010; Bison Trucking LLC (“Bison Trucking”), formed August 9, 2013; Anaconda Rentals LLC, formerly known as White Wing Tubular Services LLC, formed July 29, 2014; Barracuda Logistics LLC (“Barracuda”), formed October 24, 2014; Mr. Inspections LLC (“MRI”), formed January 25, 2015; Panther Drilling Systems LLC (“Panther”), formed December 11, 2012; Redback Energy Services, LLC (“Redback Energy”), formed October 6, 2011; Redback Coil Tubing, LLC (“Coil Tubing”), formed May 15, 2012; Redback Pump Down Services LLC (“Pump Down”), formed January 16, 2015; Muskie Proppant LLC (“Muskie”), formed September 14, 2011; Stingray Pressure Pumping LLC (“Stingray Pressure Pumping”), acquired November 24, 2014; Silverback Energy LLC (“Silverback”), formerly known as Stingray Logistics LLC, acquired November 24, 2014; Great White Sand Tiger Lodging Ltd. (“Sand Tiger”), formed October 1, 2007; WTL Oil LLC (“WTL”), formerly known as Silverback Energy Services LLC, formed June 8, 2016; Mammoth Equipment Leasing LLC, formed November 14, 2016; Cobra Acquisitions LLC (“Cobra”), formed January 9, 2017; Lion Power Services LLC (“Lion Power”), formerly known as Cobra Energy LLC, formed January 25, 2017; Mako Acquisitions LLC (“Mako”), formed March 28, 2017; Piranha Proppant LLC (“Piranha”), formed March 28, 2017; Higher Power Electrical LLC (“Higher Power”), acquired April 21, 2017; Stingray Energy Services LLC (“SR Energy”), acquired June 5, 2017; Stingray Cementing LLC (“Cementing”), acquired June 5, 2017; Sturgeon Acquisitions LLC (“Sturgeon”), acquired June 5, 2017; Taylor Frac, LLC (“Taylor Frac”), acquired June 5, 2017; Taylor Real Estate Investments, LLC (“Taylor RE”), acquired June 5, 2017; South River Road, LLC (“South River”), acquired June 5, 2017; 5 Star Electric, LLC (“5 Star”), acquired July 1, 2017; Tiger Shark Logistics LLC (“Tiger Shark”), formed October 20, 2017; Cobra Aviation Services LLC (“Cobra Aviation”), formed January 2, 2018; Bison Sand Logistics LLC (“Bison Sand”), formed January 8, 2018; Dire Wolf Energy Services LLC (“Dire Wolf”), formed January 8, 2018; Black Mamba Energy LLC (“Black Mamba”), formed March 28, 2018; Stingray Cementing and Acidizing LLC (“Stingray Cementing and Acidizing”), formerly known as RTS Energy Services LLC (“RTS”), acquired June 15, 2018; Aquahawk Energy LLC (“Aquahawk”), formed June 28, 2018; Ivory Freight Solutions LLC (“Ivory Freight”), formed July 26, 2018; Python Equipment LLC (“Python”), formed December 5, 2018; IFX Transport LLC (“IFX”), formed December 5, 2018; Air Rescue Systems LLC (“ARS”), acquired December 21, 2018; Leopard Aviation LLC (“Leopard”), formed April 29, 2019; Predator Aviation LLC (“Predator Aviation”), formed April 19, 2019; Anaconda Manufacturing LLC (“Anaconda”), formed July 31, 2019; Aquawolf LLC (“Aquawolf”), formed September 25, 2019; and Falcon Fiber Solutions LLC (“Falcon”), formed March 3, 2021.
Operations
The Company’s well completion services include equipment and personnel used in connection with the completion and early production of oil and natural gas wells. The Company’s infrastructure services include engineering, design, construction, upgrade, maintenance and repair services to the electrical infrastructure industry as well as repair and restoration services in response to storms and other disasters. 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 drilling services provide drilling rigs and directional tools for both vertical and horizontal drilling of oil and natural gas wells. The Company also provides other services, including aviation, equipment rentals, remote accommodations and equipment manufacturing.
The Company's operations are concentrated in North America. During the periods presented, the Company has operated 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
F-8
MAMMOTH ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Northern Alberta, Canada. 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. Decreases in the commodity prices for oil and natural gas would have a material adverse effect on the Company’s results of operations and financial condition. During the periods presented in this report, the Company provided its infrastructure services primarily in the northeastern, southwestern, midwestern and western portions of the United States. The Company’s infrastructure business depends on infrastructure spending on maintenance, upgrade, expansion and repair and restoration. Any prolonged decrease in spending by electric utility companies, delays or reductions in government appropriations or the failure of customers to pay their receivables could have a material adverse effect on the Company’s results of operations and financial condition.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements are prepared in accordance with GAAP and include the accounts of the Company and its subsidiaries and the variable interest entities (“VIE”) for which the Company is the primary beneficiary. All material intercompany accounts and transactions between the entities within the Company have been eliminated.
Variable Interest Entities
The Company consolidates a VIE when it is determined to be the primary beneficiary, which is the party that has both (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. See Note 11 for more information on the Company’s VIEs.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include, but are not limited to, the Company's sand reserves and their impact on calculating depletion expense, allowance for doubtful accounts, asset retirement obligations, reserves for self-insurance, depreciation and amortization of property and equipment, amortization of intangible assets and future cash flows, fair values used to assess recoverability and impairment of long-lived assets, including goodwill, estimates of income taxes and the estimated effects of litigation and other contingencies.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. Previously, the Company included gains and losses on disposal of assets within other income (expense), net on the consolidated statement of comprehensive loss. The Company now presents gains and losses on disposal of assets as a separate line titled “Gains on disposal of assets, net”.
Cash and Cash Equivalents and Short-Term Investment
All highly liquid investments with an original maturity of three months or less are considered cash equivalents. The Company maintains its cash accounts in financial institutions that are insured by the Federal Deposit Insurance Corporation, with the exception of cash held by Sand Tiger in a Canadian financial institution. At December 31, 2022, the Company had $3.4 million, in Canadian dollars, of cash in Canadian accounts. Cash balances from time to time may exceed the insured amounts; however, the Company has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risks on such accounts. The Company’s short-term investment at December 31, 2021 consisted of a certificate of deposit with a maturity over 90 days.
F-9
MAMMOTH ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
Accounts receivable include amounts due from customers for services performed or goods sold. The Company grants credit to customers in the ordinary course of business and generally does not require collateral. Prior to granting credit to customers, the Company analyzes the potential customer’s risk profile by utilizing a credit report, analyzing macroeconomic factors and using its knowledge of the industry, among other factors. Most areas in the continental United States 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. Interest on delinquent trade accounts receivable is recognized in other income, net on the consolidated statement of comprehensive loss when chargeable and collectability is reasonably assured.
During the period October 2017 through March 2019, the Company provided infrastructure services in Puerto Rico under master services agreements entered into by Cobra, one of the Company’s subsidiaries, with the Puerto Rico Electric Power Authority (“PREPA”) to perform repairs to PREPA’s electrical grid as a result of Hurricane Maria. During the years ended December 31, 2022, 2021 and 2020, the Company charged interest on delinquent trade accounts receivable pursuant to the terms of its agreements with PREPA totaling $41.3 million, $36.6 million and $32.2 million, respectively. These amounts are included in other income, net on the consolidated statement of comprehensive loss. Included in “accounts receivable, net” on the consolidated balance sheets as of December 31, 2022 and 2021 were interest charges of $152.0 million and $110.8 million, respectively.
Allowance for Doubtful Accounts
The Company regularly reviews receivables and provides for expected 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 expects 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. If it is determined that previously reserved amounts are collectible, the Company would decrease the allowance through a credit 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 collectability.
F-10
MAMMOTH ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is a roll forward of the allowance for doubtful accounts for the years ended December 31, 2022, 2021 and 2020 (in thousands):
Additions charged to bad debt expense 22,705