What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-02-28 · 189 added, 141 removed, 220 unchanged (60% of the section changed)

6 unchanged sentences

Also, please read the risk factors and other cautionary statements described under “Part I, Item 1A.-Risk Factors.” We assume no obligation to update any of these forward‑looking statements, except as required by applicable law.

During the fourth quarter of 2018, the Company bifurcated the legacy Well Services segment into High Specification Rigs and Completion and Other Services due to the modifications made to its internal reporting and responsibilities of those reporting to the Chief Operating Decision Maker ( “CODM” ).

As a result, the financial information being provided to the CODM was updated to align with the internal organization, which resulted in a new reportable segment discussed further below.

Recent Events and Outlook

The outbreak of the novel coronavirus (“COVID-19”) in the first quarter of 2020 and its continued spread across the globe during 2020 has resulted, and is likely to continue to result, in significant economic disruption and has, and will likely continue to, adversely affect the operations of the Company’s business, as the significantly reduced global and national economic activity has resulted in reduced demand for oil and natural gas.

Federal, state and local governments mobilized to implement containment mechanisms and minimize impacts to their populations and economies.

Various containment measures, which included the quarantining of cities, regions and countries, while aiding in the prevention of further outbreak, have resulted in a severe decline in general economic activity and a resulting decrease in energy demand.

In addition, the global economy has experienced a significant disruption to global supply chains.

The risks associated with the COVID-19 pandemic have impacted our workforce and the way we meet our business objectives.

The extent of the COVID-19 outbreak on the Company’s operational and financial performance will significantly depend on certain developments, including the duration and spread of the outbreak and its continued impact on customer activity and third-party providers.

The direct impact to the Company’s operations began to take affect at the close of the first quarter ended March 31, 2020 and continued through the year-ended December 31, 2020;

however the full extent to which the COVID-19 outbreak may affect the Company’s financial conditions, results of operations or liquidity subsequent to the issuance of these financial statements is uncertain.

At the time of this filing, cases of COVID-19 in the U.S.

remain high, including in Texas, where we conduct significant operations.

COVID-19 and numerous public and political responses thereto have contributed to equity market volatility and potentially the risk of a global recession.

We expect this global equity market volatility experienced during 2020 to continue at least until the outbreak of COVID-19 stabilizes, if not longer.

The response to the COVID-19 outbreak (such as stay-at-home orders, closures of restaurants and banning of group gatherings) and slowing of the global economy has contributed to increased unemployment rates.

The severe drop in economic activity, travel restrictions and other restrictions due to COVID-19 have had a significant negative impact on the demand for oil and gas.

In addition to the impact of the COVID-19 outbreak, in March 2020, OPEC, Russia and certain other oil producing states, commonly referred to as “OPEC Plus,” failed to agree on a plan to cut production of oil and natural gas.

Subsequently, Saudi Arabia announced plans to increase production to record levels and reduce the prices at which they sell oil and, in turn, Russia responded with threats to also increase production.

Collectively, these events created an unprecedented global oil and natural gas supply and demand imbalance, reduced global oil and natural gas storage capacity, caused oil and natural gas prices to decline significantly and resulted in continued volatility in oil, natural gas and NGLs prices through the year ended December 31, 2020.

On April 12, 2020, OPEC Plus agreed to cut oil production by 9.7 million barrels per day (“mb/d”) in May and June 2020;

however, on July 15, 2020 OPEC Plus agreed to increase production by 1.6 mb/d starting in August 2020.

On December 3, 2020, OPEC Plus agreed to increase production by an additional 1.0 mb/d in January 2021, resulting in total production cuts of 7.1 mb/d by the end of February 2021.

With the combined effects of the increased production levels earlier in 2020, the recent increase in production and the reduction in demand caused by COVID-19, the global oil and natural gas supply and demand imbalance persists and continues to have a significant adverse effect on the oil and gas industry.

Due to the significantly reduced demand for oil and natural gas as a result of the COVID-19 pandemic and the current oversupply of oil and natural gas in the market, available storage and capacity for our customers’ production may be limited or completely unavailable in the future, which may further negatively impact the price of oil.

We cannot predict whether or when the global supply and demand imbalance will be resolved or whether or when oil and natural gas production and economic activities will return to normalized levels.

In the absence of additional reductions to global production, oil, natural gas and NGLs prices could remain at current levels, or decline further, for an extended period of time.

Factors deriving from the COVID-19 response, as well as the oil oversupply, that have and may continue to negatively impact sales, liquidity and gross margins in the future include, but are not limited to:

limitations on the ability of our suppliers to provide materials or equipment, limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state or federal orders requiring employees to remain at home;

reduction of capital expenditures and discretionary spend;

limitations on the ability of our customers to conduct business;

and limitations on the ability of our customers to pay us on a timely basis.

If prolonged, such factors may also negatively affect the carrying values of our property and equipment and intangible assets.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities, or that we determine are in the best interests of our employees, customers and stakeholders.

government has implemented a number of programs in the wake of the impacts of COVID-19, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the largest relief package in U.S.

history, and the Main Street Lending Program established by the Federal Reserve.

We qualified for limited aid under the CARES Act and have deferred payroll tax payments of $1.9 million as of December 31, 2020 under the CARES Act.

Our service offerings consist of well completion support, workover, well maintenance, wireline, fluid management, other complementary services, as well as installation, commissioning and operating of modular equipment, which are conducted in three reportable segments, as follows:

• High Specification Rigs .

Provider of high-spec well service rigs and complementary equipment and services to facilitate operations throughout the lifecycle of a well.

Provides high-spec well service rigs and complementary equipment and services to facilitate operations throughout the lifecycle of a well.

• Completion and Other Services .

Provider of wireline completion services necessary to bring a well on production and other ancillary services often utilized in conjunction with our high-spec rig services to maintain the production of a well.

Provides wireline completion services necessary to bring a well on production and other ancillary services often utilized in conjunction with our high-spec rig services to enhance the production of a well.

• Processing Solutions .

Provider of proprietary, modular equipment for the processing of natural gas.

Provides proprietary, modular equipment for the processing of natural gas.

For additional financial information about our segments, please see “Part II, Item 8.

Financial and Supplementary Data —Note 15 — Segment Reporting.”

How We Evaluate Our Operations

Management uses a variety of metrics to analyze our operating results and profitability, which include operating revenues, costs of conducting our operations, operating income (loss) and adjusted EBITDA, among others.

Within our High Specification Rig segment, management uses additional metrics to analyze our activity levels and profitability, including rig hours and rig utilization.

How We Generate Revenues

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The majority of our services are priced based on prevailing market conditions and changing input costs at the time the services are provided, giving consideration to the specific requirements of the customer.

We analyze our revenues by comparing actual revenues to our internal projections for a given period and to prior periods to assess our performance.

We believe that revenues are a meaningful indicator of the demand and pricing for our services.

Within our High Specification Rigs segment, we analyze rig hours as an important indicator of our activity levels and profitability.

Rig hours represent the aggregate number of hours that our well service rigs actively worked during the periods presented.

We typically bill customers on an hourly basis during the period that a well service rig is actively working, making rig hours a useful metric for evaluating our profitability.

Rig Utilization

Within our High Specification Rigs segment, we analyze rig utilization as a further important indicator of our activity levels and profitability.

We measure rig utilization by reference to average monthly hours per rig, which is calculated by

dividing (a) the approximate, aggregate operating well service rig hours for the periods presented by (b) the aggregate number of high specification rigs in our fleet during such period, as aggregated on a monthly basis utilizing a mid-month convention whereby a high-spec rig is added to our fleet during a month, meaning that we have taken delivery of such high-spec rig and is ready for service, is assumed to be in our fleet for one half of such month.

We believe that rig utilization as measured by average monthly hours per high-spec rig is a meaningful indicator of the operational efficiency of our core revenue-producing assets, market demand for our well services and our ability to profitably capitalize on such demand.

Our evaluation of our rig utilization as measured by average monthly hours per rig may not be comparable to that of our competitors.

The primary factors that have historically impacted, and will likely continue to impact, our actual aggregate well service rig hours for any specified period are (i) customer demand, which is influenced by factors such as commodity prices, the complexity of well completion operations and technological advances in our industry, and (ii) our ability to meet such demand, which is influenced by changes in our fleet size and resulting rig availability, as well as weather, employee availability and related factors.

The primary factors that have historically impacted, and will likely continue to impact, the aggregate number of high-spec rigs in our fleet during any specified period are the extent and timing of changes in the size of our fleet to meet short-term and expected long-term demand, and our ability to successfully maintain a fleet capable of ensuring sufficient, but not excess, rig availability to meet such demand.

Costs of Conducting Our Business

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We incur significant equipment costs in connection with the operation of our business, including repair and maintenance costs, as well as direct material costs.

How We Evaluate Our Operations

Management uses a variety of metrics to analyze our operating results and profitability, which include operating revenues, operating income (loss) and adjusted EBITDA, among others.

Within our High Specification Rig segment, management uses metrics to analyze our activity levels and profitability, including rig hours and rig utilization.

We analyze our revenues by comparing actual revenues to our internal projections for a given period and to prior periods to assess our performance.

We believe that revenues are a meaningful indicator of the demand and pricing for our services.

Operating Income (Loss)

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See “—Results of Operations” and “—Note Regarding Non‑GAAP Financial Measure” for more information and reconciliations of net income (loss) to Adjusted EBITDA, the most directly comparable financial measure calculated and presented in accordance with GAAP.

Within our High Specification Rigs segment, we analyze rig hours as an important indicator of our activity levels and profitability.

Rig hours represent the aggregate number of hours that our well service rigs actively worked during the periods presented.

We typically bill customers on an hourly basis during the period that a well service rig is actively working, making rig hours a useful metric for evaluating our profitability.

Rig Utilization

Within our High Specification Rigs segment, we analyze rig utilization as a further important indicator of our activity levels and profitability.

We measure rig utilization by reference to average monthly hours per rig, which is calculated by dividing (i) the approximate, aggregate operating well service rig hours for the periods presented by (ii) the aggregate number of high specification rigs in our fleet during such period, as aggregated on a monthly basis utilizing a mid-month convention whereby a high specification rig is added to our fleet during a month, meaning that we have taken delivery of such high specification rig and is ready for service, is assumed to be in our fleet for one half of such month.

We believe that rig utilization as measured by average monthly hours per well service rig is a meaningful indicator of the operational efficiency of our core revenue-producing assets, market demand for our well services and our ability to profitably capitalize on such demand.

Our evaluation of our rig utilization as measured by average monthly hours per rig may not be comparable to that of our competitors.

For example, our competitors’ well service rig fleets are typically comprised primarily of older, lower-spec well service rigs that are not as well suited to servicing modern horizontal well designs as are high-spec well service rigs, which may result in lower average rig hours per rig for our competitors’ fleets as compared to our fleet.

The primary factors that have historically impacted, and will likely continue to impact, the aggregate number of well service rigs in our fleet during any specified period are the extent and timing of changes in the size of our well service rig fleet to meet short-term and expected long-term demand, and our ability to successfully maintain a fleet capable of ensuring sufficient, but not excess, rig availability to meet such demand.

Results of Operations

The Year Ended December 31, 2020 compared to the Year Ended December 31, 2019

The following table presents our results of operations for the year ended December 31, 2019 as compared to the year ended December 31, 2018 (in millions):

Year Ended December 31,

The following is an analysis of our operating results.

See “—How We Evaluate Our Operations” for definitions of rig hours, rig utilization and other analogous information.

The significant declines in operational activity, across all segments, as well as corporate-related expenses are related to the deterioration of crude oil pricing and significantly reduced demand for our services during the year ended December 31, 2020, as described in “—Recent Events and Outlook.” The information presented below is in millions.

Year Ended December 31, Variance

2020 2019 $ %

High specification rigs $ 82.5 $ 132.1 $ (49.6) (38) %

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Depreciation and amortization 35.0 34.8 0.2 1 %

Impairment of goodwill

Gain on debt retirement (2.1) — (2.1) (100) %

Total operating expenses 202.9 324.5 (121.6) (38) %

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Net income (loss) $ (18.5) $ 4.4 $ (22.9) (521) %

Revenues increased $33.8 million , or 11% , to $336.9 million for the year ended December 31, 2019 from $303.1 million for the year ended December 31, 2018 .

Revenues decreased $149.1 million, or 44%, to $187.8 million for the year ended December 31, 2020 from $336.9 million for the year ended December 31, 2019.

The change in revenues by segment was as follows:

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High Specification Rig revenues decreased $49.6 million, or 38%, to $82.5 million for the year ended December 31, 2020 from $132.1 million for the year ended December 31, 2019.

The decrease in rig services revenue was attributable to a 14% decline in total rig hours to 249,100 for the year ended December 31, 2019 from 290,000 for the year ended December 31, 2018 .

The decline in total rig hours was partially offset by a 3% increase in the average revenue per rig hour to 527 during 2019 compared to 512 during 2018 .

The decrease is rig hours is primarily attributable to the decline in crude oil pricing.

The decrease in rig services revenue included a 36% decline in total rig hours to 160,300 for the year ended December 31, 2020 from 249,100 for the year ended December 31, 2019.

The decreased rig hours attributed to a 35% reduction in rig utilization.

The average revenue per rig hour decreased three percent to $514 compared to $527 for the year ended December 31, 2019.

The decrease in rig hou rs, rig utilization and average revenue per rig hour is attributable t o the decline in cr ude oil pricing.

Completion and Other Services.

Completion and Other Services revenues increased $48.3 million , or 36% , to $184.3 million for the year ended December 31, 2019 from $136.0 million for the year ended December 31, 2018 .

The increase is primarily attributable to our wireline business, which accounted for approximately $43.0 million, or 89%, of the segment revenue increase.

Our wireline business commenced operations during the fourth quarter of 2017 and we continued purchasing wireline units through 2018.

Completion and Other Services revenues decreased $85.8 million, or 47%, to $98.5 million for the year ended December 31, 2020 from $184.3 million for the year ended December 31, 2019.

The decrease is primarily attributable to our wireline business, which accounted for approximately $56.0 million, or 65%, of the segment revenue decrease.

The decrease in wireline services revenue included a 36% decrease in average active wireline units to seven units for the year ended December 31, 2020, from 11 units for the year ended December 31, 2019.

All other service lines within the segment also experienced revenue declines due to the deterioration of crude oil pricing.

Processing Solutions.

Processing Solutions revenues increased $3.3 million , or 19% , to $20.5 million for the year ended December 31, 2019 from $17.2 million for the year ended December 31, 2018 .

The increase was primarily attributable to a 525% increase in gas coolers rented to 50 units as of December 31, 2019 from eight units as of December 31, 2018 .

Additionally, there were increased revenues associated with our installation of MRUs and rentals of our generators and compressors.

Processing Solutions revenues decreased $13.7 million, or 67%, to $6.8 million for the year ended December 31, 2020 from $20.5 million for the year ended December 31, 2019.

The decrease was primarily attributable

to a decline in mobilization and maintenance revenue related to our Mechanical Refrigeration Units (“MRU”).

Additionally revenues related to MRU rentals declined $5.0 million and included an 80% decrease in average MRU’s rented.

Cost of services.

Cost of services increased $26.1 million , or 11% , to $263.0 million for the year ended December 31, 2019 from $236.9 million for the year ended December 31, 2018 .

As a percentage of revenue, cost of services was 78% for both of the years ended December 31, 2019 and 2018 .

Cost of services decreased $115.1 million, or 44%, to $147.9 million for the year ended December 31, 2020 from $263.0 million for the year ended December 31, 2019.

As a percentage of revenue, cost of services was approximately 78% for both of the years ended December 31, 2020 and 2019.

The change in cost of services by segment was as follows:

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High Specification Rig cost of services decreased $43.3 million, or 38%, to $71.5 million for the year ended December 31, 2020 from $114.8 million for the year ended December 31, 2019.

The decrease was primarily attributable to a reduction in variable expenses, notably employee costs and repair and maintenance costs, and corresponds with the decrease in rig hours and revenues.

The decrease was primarily attributable to a reduction in variable expenses, notably employee costs and repair and maintenance costs.

Additionally, the reduction corresponds with the decrease in rig hours and revenues.

Completion and Other Services.

Completion and Other Services cost of services increased $38.8 million , or 39% , to $139.0 million for the year ended December 31, 2019 from $100.2 million for the year ended December 31, 2018 .

The increase was primarily attributable to an increase in expenses related to employee costs, and corresponds with increased revenues associated with our wireline business.

Completion and Other Services cost of services decreased $65.3 million, or 47%, to $73.7 million for the year ended December 31, 2020 from $139.0 million for the year ended December 31, 2019.

The decrease was primarily attributable to a reduction in our wireline business, which accounted for approximately $41.9 million, or 64%, of the segment cost of services decrease.

The decrease was attributable to a reduction in variable expenses related to employee costs and direct material costs across all service lines.

Processing Solutions.

Processing Solutions cost of services increased $1.2 million , or 15% , to $9.2 million for the year ended December 31, 2019 from $8.0 million for the year ended December 31, 2018 .

The increase was primarily attributable to increases in installation and rental costs and corresponds with additional revenues.

Processing Solutions cost of services decreased $6.5 million, or 71%, to $2.7 million for the year ended December 31, 2020 from $9.2 million for the year ended December 31, 2019.

The decrease was primarily attributable to a reduction in employee costs and costs associated with ancillary equipment rentals.

General and administrative.

General and administrative expenses decreased $4.6 million, or 17%, to $22.1 million for the year ended December 31, 2020 from $26.7 million for the year ended December 31, 2019.

The decrease in general and administrative expenses is primarily due to employee costs and professional fees.

The decrease in general and administrative expenses is primarily due to employee costs, which is related to our reduction in workforce, and lower professional fees during the year ended December 31, 2020.

Depreciation and amortization.

Depreciation and amortization increased $0.2 million, or 1%, to $35.0 million for the year ended December 31, 2020 from $34.8 million for the year ended December 31, 2019.

The increase was attributable to depreciation expense related to a full year of depreciation expense for fixed assets placed into service during the year ended December 31, 2018 , across all operating segments.

The slight increase was attributable to depreciation expense for fixed assets placed into service during the year ended December 31, 2019, across all operating segments.

Gain on debt retirement.

Gain on debt retirement increased $2.1 million, or 100%, to $2.1 million for the year ended December 31, 2020, which is attributable to the settlement of the ESCO Seller’s Notes during the year ended December 31, 2020.

Interest expense, net.

Net interest expense increased $2.1 million , or 57% , to $5.8 million for the year ended December 31, 2019 from $3.7 million for the year ended December 31, 2018 .

The increase to net interest expense was primarily attributable to the Encina Master Financing Agreement (“Financing Agreement”).

Tax expense for the year ended December 31, 2019 increase d $2.2 million , or 100% , to $2.2 million .

The increase in tax expense was attributable to the utilization of pre-IPO net operating losses, primarily resulting in a non-cash income tax provision, in accordance with ASC 740-20-45-11(c), for the year ended December 31, 2019 .

Net interest expense decreased $2.4 million, or 41%, to $3.4 million for the year ended December 31, 2020 from $5.8 million for the year ended December 31, 2019.

The decrease to net interest expense was attributable to the reduction of the principal balances on our Encina Master Financing Agreement (“Financing Agreement”) and Credit Facility.

Tax expense decreased $2.2 million, or 100% from $2.2 million for the year ended December 31, 2019.

The decrease was primarily attributable to the net loss incurred during the year ended December 31, 2020 compared to net income generated during the year ended December 31, 2019.

Note Regarding Non‑GAAP Financial Measure

Adjusted EBITDA is not a financial measure determined in accordance with GAAP.

We define Adjusted EBITDA as net income or loss before net interest expense, income tax provision or benefit, depreciation and amortization, equity‑based compensation, severance costs, impairment of goodwill and other non-cash and certain items that we do not view as indicative of our ongoing performance.

Adjusted EBITDA is not a financial measure determined in accordance with US GAAP.

We define Adjusted EBITDA as net income or loss before net interest expense, income tax provision or benefit, depreciation and amortization, equity‑based compensation, acquisition-related, severance and reorganization costs, gain or loss on disposal of assets, and certain other non-cash items that we do not view as indicative of our ongoing performance.

We believe Adjusted EBITDA is a useful performance measure because it allows for an effective evaluation of our operating performance when compared to our peers, without regard to our financing methods or capital structure.

We exclude the items listed above from net income (loss) in arriving at Adjusted EBITDA because these amounts can vary substantially within our industry depending upon accounting methods, 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 determined in accordance with GAAP.

We exclude the items listed above from net income or loss in arriving at Adjusted EBITDA because these amounts can vary substantially within our industry depending upon accounting methods, book values of assets, capital structures and the method by which the assets were acquired.

Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income or loss determined in accordance with US GAAP.

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 reflected in Adjusted EBITDA.

Our presentation of Adjusted EBITDA should not be construed as an indication that our results will be unaffected by the items excluded from Adjusted EBITDA.

Our computations of Adjusted EBITDA may not be identical to other similarly titled measures of other companies.

The following table presents reconciliations of net income (loss), our most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA.

Our computations of Adjusted EBITDA may not be identical to other similarly titled

measures of other companies.

The following table presents reconciliations of net income or loss, our most directly comparable financial measure calculated and presented in accordance with US GAAP, to Adjusted EBITDA.

The Year Ended December 31, 2020 compared to The Year Ended December 31, 2019

Year Ended December 31, 2020

High Specification Rigs

Completion and Other Services

Processing Solutions

High Specification Rigs Completion and Other Services Processing Solutions Other Total

(in millions)

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Equity based compensation — — — 3.7 3.7

Severance costs

Impairment of goodwill

Loss on disposal of property and equipment

Severance and reorganization costs 0.4 0.2 — — 0.6

Gain on retirement of debt — — — (2.1) (2.1)

(Gain) loss on disposal of property and equipment 0.6 (0.2) — (0.3) 0.1

Adjusted EBITDA $ 12.0 $ 24.8 $ 4.1 $ (18.7) $ 22.2

Year Ended December 31, 2019

High Specification Rigs

Completion and Other Services

Processing Solutions

High Specification Rigs Completion and Other Services Processing Solutions Other Total

(in millions)

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Equity based compensation — — — 3.3 3.3

Severance costs

Impairment of goodwill

Loss on disposal of property and equipment

Severance and reorganization costs 0.1 — — — 0.1

Gain on retirement of debt — — — — —

(Gain) loss on disposal of property and equipment — — — 0.2 0.2

Adjusted EBITDA $ 17.4 $ 45.3 $ 11.3 $ (23.2) $ 50.8

High Specification Rigs

Completion and Other Services

Processing Solutions

High Specification Rigs Completion and Other Services Processing Solutions Other Total

(in millions)

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Equity based compensation — — — 0.4 0.4

Severance costs

Impairment of goodwill

Loss on disposal of property and equipment

Severance and reorganization costs 0.3 0.2 — — 0.5

Gain on retirement of debt — — — (2.1) (2.1)

(Gain) loss on disposal of property and equipment 0.6 (0.2) — (0.5) (0.1)

Adjusted EBITDA $ (5.4) $ (20.5) $ (7.2) $ 4.5 $ (28.6)

Adjusted EBITDA for the year ended December 31, 2019 increased $9.7 million to $50.8 million from $41.1 million for the year ended December 31, 2018 .

Adjusted EBITDA for the year ended December 31, 2020 decreased $28.6 million to $22.2 million from $50.8 million for the year ended December 31, 2019.

The change by segment was as follows:

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Completion and Other Services.

Completion and Other Services Adjusted EBITDA increased $9.5 million to $45.3 million from $35.8 million due to an increase in revenues of $48.3 million partially offset by a corresponding increase in cost of services of $38.8 million .

Completion and Other Services Adjusted EBITDA decreased $20.5 million to $24.8 million from $45.3 million due to a decrease in revenues of $85.8 million partially offset by a corresponding decrease in cost of services of $65.3 million.

Processing Solutions.

Processing Solutions Adjusted EBITDA increased $2.1 million to $11.3 million from $9.2 million due to an increase in revenue of $3.3 million partially offset by a corresponding increase in cost of services of $1.2 million .

Processing Solutions Adjusted EBITDA decreased $7.2 million to $4.1 million from $11.3 million due to a decrease in revenue of $13.7 million partially offset by a corresponding decrease in cost of services of $6.5 million.

Other Adjusted EBITDA increased for the year ended December 31, 2020 to a loss of $18.7 million from a loss $23.2 million due to decreased general and administrative expenses, which was related to a reduction of employee costs and professional fees.

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We require capital to fund ongoing operations, including maintenance expenditures on our existing fleet and equipment, organic growth initiatives, investments and acquisitions.

Our primary sources of liquidity have been cash generated from operations and borrowings under our Credit Facility.

We expect our future source of liquidity will primarily be cash generated from operations.

Our primary sources of liquidity are cash generated from operations and borrowings under our Credit Facility.

As of December 31, 2020, we had total liquidity of $16.0 million, consisting of $2.8 million of cash on hand and availability under our Revolving Credit Facility of $13.2 million.

As of December 31, 2020, our borrowing base, under the Credit Facility, was reduced to $20.7 million, compared to $30.5 million as of December 31, 2019, as a result of decreased operational activity, and accounts receivable, during the period.

We strive to maintain financial flexibility and proactively monitor potential capital sources to meet our investment and target liquidity requirements and to permit us to manage the cyclicality associated with our business.

As of December 31, 2019 , we had total liquidity of $80.2 million, consisting of $6.9 million of cash on hand, operating cash flows of $51.9 million and availability under our Revolving Credit Facility of $20.5 million .

We therefore expect to have sufficient funds to meet the Company’s liquidity requirements for at least the next 12 months.

We currently expect to have sufficient funds to meet the Company’s liquidity requirements and comply with our covenants of our debt agreements for at least the next 12 months from the date of issuance of these financial statements.

For further details, see “—Our Debt Obligations.”

The following table presents our cash flows for the periods indicated:

Year Ended December 31,

Years Ended December 31, Variance

2020 2019 $ %

(in millions)

Net cash flows provided by operating activities

Net cash flows used in investing activities

Net cash flows (used in) provided by financing activities

Net cash provided by operating activities $ 25.5 $ 51.9 $ (26.4) (51) %

Net cash used in investing activities (5.4) (23.4) 18.0 77 %

Net cash used in financing activities (24.2) (24.2) — — %

Net change in cash $ (4.1) $ 4.3 $ (8.4) (195) %

Operating Activities

Net cash provided by operating activities increased $24.3 million to $51.9 million for the year ended December 31, 2019 compared to $27.6 million for the year ended December 31, 2018 .

The increase in cash flows provided by operating activities is attributable to an increase in working capital cash provided by operating activities to $7.4 million during 2019 from working capital cash used of $7.2 million from 2018, and increased operating income for our Completion and Other Services and Processing Solutions segments.

These increases were partially offset by a decrease in operating income from our High Specification Rig segment during the year ended December 31, 2018 .

Net cash provided by operating activities decreased $26.4 million to $25.5 million for the year ended December 31, 2020 compared to $51.9 million for the year ended December 31, 2019.

The change in cash flows provided by operating activities is attributable to cash collections related to accounts receivable, partially offset by cash payments related to our accounts payable and accrued expenses.

Cash generated from working capital decreased to $4.0 million for the year ended December 31, 2020 from $7.4 million for the year ended December 31, 2019.

Investing Activities

Net cash used in investing activities decreased $18.0 million to a use of $5.4 million for the year ended December 31, 2020 compared to $23.4 million for the year ended December 31, 2019.

The decrease in cash flows used in investing activities is attributable to fixed assets purchased during the year ended December 31, 2018 , where such assets were financed through our Credit Facility and Financing Agreement.

The change in cash flows used in investing activities is attributable to a significant reduction in capital expenditures during the current year in response to the economic events that have taken place in the industry, as all planned growth capital expenditures were eliminated in April 2020.

Additionally, there was an increased level of fixed assets acquired during the year ended December 31, 2019, relative to the corresponding period of the current year.

Financing Activities

Net cash used in financing activities increased $68.3 million to a use of $24.2 million for the year ended December 31, 2019 compared to cash provided by financing activities of $44.1 million for the year ended December 31, 2018 .

The increase in cash flows used in financing activities is attributable to increased payments and decreased borrowings on our financing arrangements during the year ended December 31, 2019.

During the year ended December 31, 2018, we utilized our financing arrangements to purchase fixed assets.

Net cash used in financing activities remained flat at a use of cash of $24.2 million for both of the years ended December 31, 2020 and 2019.

Although there was no change to net cash used in financing activities, during the year ended December 31, 2020, there were additional cash outflows related to the settlement of the ESCO Note Payable and repurchases

of Class A Common Stock, which was offset by a reduction in net cash payments on the principal balance of our Credit Facility.

Supplemental Cash Flow Disclosures

We added assets of $0.1 million that were non-cash additions in the year ended December 31, 2020 and purchased $1.0 million in finance leased assets.

As of January 1, 2019, we added right of use (“ROU”) assets and liabilities of $8.3 million related to the adoption of Accounting Standards Codification (“ASC”) 842.

See “Part II, Item 8.

Financial Statements and Supplementary Data— Note 2 — Summary of Significant Accounting Policies ” for more information related to the adoption of ASC 842.

Also, we settled a $3.0 million liability by issuing Class A Common Stock to a related party.

In addition, we early terminated certain vehicle financing leases, thereby reducing our current and long-term obligations by $1.3 million.

Working Capital

Our working capital, which we define as total current assets less total current liabilities, was $3.6 million and $2.2 million at December 31, 2019 and 2018 , respectively.

Our working capital, which we define as total current assets less total current liabilities, was $2.7 million and $3.6 million as of December 31, 2020 and 2019, respectively.

The reduction in the Company’s operational activity, due to the current macroeconomic environment, is the primary reason for the decrease in working capital.

Our Debt Agreements

ESCO Notes Payable

In August 2017, we issued $7.0 million of seller’s notes as partial consideration for the acquisition of ESCO Leasing, LLC (“ESCO”).

In connection with the initial public offering (the “Offering”) and the ESCO Leasing, LLC (“ESCO”) acquisition, both of which occurred on August 16, 2017, the Company issued $7.0 million of Seller’s Notes as partial consideration for the ESCO acquisition.

These notes included a note for $1.2 million, which was paid in August 2018 and a note for $5.8 million, which was due in February 2019.

The notes bore interest at 5.0% payable quarterly until their respective maturity dates.

During the year ended December 31, 2018 , we provided notice to ESCO that we are seeking to be indemnified for breach of contract.

We exercised the right to stop payments of the remaining principal balance of $5.8 million on the Seller’s Notes and any unpaid interest, pending resolution of certain indemnification claims.

During the year ended December 31, 2018, the Company provided notice to ESCO that the Company sought to be indemnified for breach of contract.

The Company exercised its right to stop payments of the remaining principal balance of $5.8 million on the Seller’s Notes and any unpaid interest, pending resolution of certain indemnification claims.

Interest on the outstanding principal balance was accrued through the maturity date of the Note Payable.

During the year ended December 31, 2020, the Company settled the indemnification claims, paid $3.8 million to settle the note and any unpaid interest, in full, and recognized a gain on the retirement of debt of $2.1 million.

Credit Facility

In August 2017, we entered into a $50.0 million Credit Facility by and among certain of Ranger’s subsidiaries, as borrowers, each of the lenders’ party thereto and Wells Fargo Bank, N.A., as administrative agent.

The Credit Facility is subject to a borrowing base that is calculated based upon a percentage of the value of our eligible accounts receivable less certain reserves.

The Credit Facility is scheduled to mature in August 2022.

The applicable margin for LIBOR loans ranges from 1.50% to 2.0% and the applicable margin for Base Rate loans ranges from 0.5% to 1.0% , in each case, depending on our average excess availability under the Credit Facility.

The applicable margin for the LIBOR loan was 1.8% as of December 31, 2019 .

As of December 31, 2019 the Credit Facility had an interest rate of 3.5%.

As of December 31, 2019 , under the Credit facility, we borrowed $10.0 million , with a borrowing capacity of $30.5 million , with a residual $20.5 million available for borrowing.

We are in compliance with the Credit Facility covenants as of December 31, 2019 .

We capitalized fees of $0.7 million associated with the Credit Facility and will be amortized through maturity.

Unamortized debt issuance costs as of December 31, 2019 approximated $0.5 million .

On August 16, 2017, Ranger, LLC entered into a $50.0 million senior revolving credit facility (the “Credit Facility”) by and among certain of Ranger’s subsidiaries, as borrowers, each of the lenders party thereto and Wells Fargo Bank, N.A., as administrative agent (the “Administrative Agent”).

The applicable margin for LIBOR loans ranges from 1.5% to 2.0% and the applicable margin for Base Rate loans ranges from 0.5% to 1.0%, in each case, depending on Ranger LLC’s average excess availability under the Credit Facility.

The applicable margin for the LIBOR loan was 2.2% and the Credit Facility’s interest rate was 4.3% as of December 31, 2020.

The weighted average interest rate for the borrowings under the Credit Facility was 3.2% for the year ended December 31, 2020.

Under the Credit Facility, the total loan capacity was $20.7 million, which was based on a borrowing base certificate in effect as of December 31, 2020.

The Company had outstanding borrowings of $7.5 million under the Credit Facility, leaving a residual $13.2 million available for borrowing as of December 31, 2020.

The Company was in compliance with the Credit Facility covenants as of December 31, 2020.

The Credit Facility is subject to a borrowing base that is calculated based upon a percentage of the value of the Company’s eligible accounts receivable less certain reserves.

Such calculation is submitted, in the form of a borrowing base certificate, to the Administrative Agent within ten business days of each preceding month end.

The Credit Facility includes cash dominion provisions that permit the Administrative Agent to sweep cash daily from the Company’s bank accounts into an account of the Administrative Agent to repay the Company’s obligations under the Credit Facility.

Such dominion is triggered when excess availability is less than the greater of $6.25 million and 12.5% of the lesser of (x) the maximum revolver amount and (y) the borrowing base as of such date of determination.

When the Company is subject to dominion, for 30 consecutive days it is required to either (a) maintain excess availability in excess of the greater of $6.25 million and 12.5% of the lesser of (x) the maximum revolver amount and (y) the borrowing base as of such date of determination and no event of default has occurred and is continuing or (b) have no revolver drawings and available cash of at least $20.0 million for dominion to revert back to the Company.

During the first quarter of 2020, the Company borrowed against the Credit Facility causing dominion to revert to the Administrative Agent, however after the 30 consecutive day period, as defined above, dominion reverted back to the Company in the second quarter of 2020.

The borrowings under the Credit Facility, and related issuance costs, were included in long-term debt, net in the Consolidated Balance Sheets as of December 31, 2020, as the Company was not subject to dominion and the scheduled maturity date is August 16, 2022.

In addition, the Credit Facility restricts our ability to make distributions on, or redeem or repurchase, our equity interests, except for certain distributions, including distributions of cash so long as, both at the time of the distribution and after giving effect to the distribution, no default exists under the Credit Facility and either (a) excess availability at all times during the preceding 90 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 22.5% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $10.0 million or (b) if our fixed charge coverage ratio is at least 1.0x on a pro forma basis, excess availability at all times during the preceding 90 consecutive days, on a pro forma basis and after giving effect to such distribution, is not less than the greater of (1) 17.5% of the lesser of (A) the maximum revolver amount and (B) the then-effective borrowing base and (2) $7.0 million.

If the foregoing threshold under clause (b) is met, we may not make such distributions (but may make certain other distributions, including under clause (a) above) prior to the earlier of the date that is (a) 12 months from closing or (b) the date that our fixed charge coverage ratio is at least 1.0x for two consecutive quarters.

Our Credit Facility generally permits us to make distributions required under the TRA, but a ‘‘Change of Control’’ under the TRA constitutes an event of default under our Credit Facility, and our Credit Facility does not permit us to make payments under the TRA upon acceleration of our obligations thereunder unless no event of default exists or would result therefrom and we have been in compliance with the fixed charge coverage ratio for the most recent 12-month period on a pro forma basis.

Our Credit Facility generally permits us to make distributions required under the Tax Receivable Agreement (“TRA”), but a “Change of Control” under the TRA constitutes an event of default under our Credit Facility, and our Credit Facility does not permit us to make payments under the TRA upon acceleration of our obligations thereunder unless no event of default exists or would result therefrom and we have been in compliance with the fixed charge coverage ratio for the most recent 12-month period on a pro forma basis.

Our Credit Facility also requires us to maintain a fixed charge coverage ratio of at least 1.0x if our liquidity is less than $10.0 million until our liquidity is at least $10.0 million for 30 consecutive days.

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Encina Master Financing and Security Agreement

In June 2018, the Company entered into a master financing and security agreement with Encina Equipment Finance SPV, LLC (the “Lender”) (“Financing Agreement”).

June 22, 2018, the Company entered into a Financing Agreement with Encina Equipment Finance SPV, LLC (the “Lender”).

The amount available to be provided by the Lender to the Company under the Financing Agreement was contemplated to be not less than $35.0 million, and not to exceed $40.0 million.

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Subsequent to the first financing, the Company borrowed an additional $17.8 million, net of expenses and in two tranches, under the Financing Agreement.

As of December 31, 2019 , the aggregate principal balance outstanding was $27.7 million under the Financing Agreement.

The Company utilized the additional net proceeds to acquire certain capital equipment.

The Financing Agreement is secured by a lien on certain high specification rig assets.

As of December 31, 2020, the aggregate principal balance outstanding under the Financing Agreement was $17.7 million.

The total borrowings under the Financing Agreement were borrowed in three tranches, where the amounts outstanding are payable ratably over 48 months from the time of each borrowing.

The three tranches mature in July 2022, November 2022 and January 2023.

The Financing Agreement is secured by a lien on certain high specification rig assets.

Borrowings under the Financing Agreement bear interest at a rate per annum equal to the sum of 8.0% plus the London Interbank Offered Rate (“LIBOR”), which was 1.8% as of December 31, 2019 .

The Financing Agreement requires that the Company maintain leverage ratios of 2.50 to 1.00 .

Borrowings under the Financing Agreement bear interest at a rate per annum equal to the sum of 8.0% plus the London Interbank Offered Rate (“LIBOR”), subject to a floor of 1.5%.

As of December 31, 2020, LIBOR was 1.5%.

Under the terms of the Financing Agreement, the Company is required to maintain a leverage ratio of 2.50 to 1.00.

The Company was in compliance with the covenants under the Financing Agreement as of December 31, 2020.

The Company capitalized fees of $0.9 million associated with the Financing Agreement, which are included on the Consolidated Balance Sheets as a discount to the long term debt and will be amortized through maturity.

Unamortized debt issuance costs as of December 31, 2019 approximated $0.6 million .

Contractual and Commercial Commitments

The following table summarizes our contractual obligations and commercial commitments as of December 31, 2020:

Total Less than

1 year 1 - 3 years 3 - 5 years More than

(in millions)

Debt obligations (1)

$ 27.0 $ 11.2 $ 15.6 $ 0.2 $ —

Finance lease obligations (1)

4.1 2.7 1.4 — —

Operating lease obligations (2)

7.9 1.3 2.5 2.4 1.7

Debt and finance lease obligations include interest to be paid in future periods.

Total $ 39.0 $ 15.2 $ 19.5 $ 2.6 $ 1.7

_________________________

(1) Debt and finance lease obligations include estimated interest to be paid in future periods.

(2) In addition to our right-of-use asset obligation, the operating leases include our obligations for contracts with terms of less than 12 months.

The table above does not include any obligations related to certain of our office, yard and other various leases set to expire, that are more likely than not to be renewed, during the year ending December 31, 2020.

Tax Receivable Agreement

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Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with GAAP.

Our financial statements are prepared in accordance with US GAAP.

In connection with preparing our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expense and the related disclosures.

We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time we prepare our consolidated financial statements.

On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP.

However, because future events and their effects cannot be determined with certainty, actual results could differ materially from our assumptions and estimates.

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Expenditures for major renewals and betterments are capitalized while expenditures for maintenance and repairs are charged to expenses as incurred.

Assets under capital lease obligations and leasehold improvements are amortized over the shorter of the lease term or their respective estimated useful lives.

Assets under finance lease obligations and leasehold improvements are amortized over the shorter of the lease term or their respective estimated useful lives.

Depreciation does not begin until property and equipment is placed in service.

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Key assumptions used to determine the undiscounted future cash flows include estimates of future fleet utilization and demands based on our assumptions around future commodity prices and capital expenditures of our customers.

During the first and second quarter of 2020, the Company noted a sustained decline in stock price due to the reduced demand and oversupply of oil and natural gas, which was an indication that the fair value of the Company’s long-lived assets could have fallen below their carrying values.

As a result, an impairment analysis was performed and it was determined that no impairment existed.

Revenue Recognition

Policy description

Effective January 1, 2018, the Company adopted ASC Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective method.

This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaborative arrangements and financial instruments.

Under ASC 606, an entity recognizes revenue when it transfers control of the promised goods or services to its customer, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.

If control transfers to the customer over time, an entity selects a method to measure progress that is consistent with the objective of depicting its performance.

The provisions of ASC 606 were applied to contracts not completed at January 1, 2018.

There was no impact upon adoption of ASC 606.

As a result, no disclosure of the impact for each financial statement line items is applicable.

In determining the appropriate amount of revenue to be recognized as the Company fulfills the obligations under its contracts with customers, the following steps must be performed at contract inception:

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(iii) measurement of the transaction price, including the constraint on variable consideration;

(iv) allocation of the transaction price to the performance obligations and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

(iv) allocation of the transaction price to the performance obligations;

and (v) recognition of revenue when, or as, the Company satisfies each performance obligation.

We satisfy our performance obligation over time as the services are performed.

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We must make a determination at the time our services are provided whether the customer has the ability to make payments to us.

While we do utilize past payment history, and, to the extent available for new customers, public credit information in making our assessment, the determination of whether collection of the consideration is probable is ultimately a judgment decision that must be made by management.

We have disaggregated revenue and disclosed such disaggregation in a manner that is consistent with our reporting segments and further disaggregation is not considered to be useful to investors in understanding or assessing the results of operations or business.

While we do utilize past payment

history, and, to the extent available for new customers, public credit information in making our assessment, the determination of whether collection of the consideration is probable is ultimately a judgment decision that must be made by management.

Policy description

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A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

We currently believe that it is reasonably possible for us to achieve a three-year cumulative level of profitability within the next 12 months, and as early as the first quarter of 2020 , which would enhance our ability to conclude that it is more likely than not that the deferred tax assets would be realized and support a release of a portion or substantially all of the valuation allowance.

A release of the valuation allowance would result in the recognition of an increase in deferred tax assets and an income tax benefit in the period in which the release occurs, although the exact timing and amount of the release is subject to change based on numerous factors, including our projections of future taxable income, which we continue to assess based on available information each reporting period.

A release of a valuation allowance would result in the recognition of an increase in deferred tax assets and an income tax benefit in the period in which the release occurs, although the exact timing and amount of the release is subject to change based on numerous factors, including our projections of future taxable income, which we continue to assess based on available information each reporting period.

Judgments and assumptions

The establishment of a valuation allowance requires significant judgment and is impacted by various estimates.

Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the

appropriateness of recording a valuation allowance on deferred tax assets.

Under GAAP, the valuation allowance is recorded to reduce the Company’s deferred tax assets to an amount that is more likely than not to be realized and is based upon the uncertainty of the realization of certain federal and state deferred tax assets related to net operating loss carryforwards and other tax attributes.

Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets.

Under US GAAP, the valuation allowance is recorded to reduce the Company’s deferred tax assets to an amount that is more likely than not to be realized and is based upon the uncertainty of the realization of certain federal and state deferred tax assets related to net operating loss carryforwards and other tax attributes.

Equity‑Based Compensation

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Judgments and assumptions

We estimate the fair value of our equity‑based compensation using an option pricing model that includes certain assumptions, such as volatility, dividend yield and risk free interest rate.

We estimate the fair value of our performance stock units using an option pricing model that includes certain assumptions, such as volatility, dividend yield and the risk free interest rate.

Changes in these assumptions could change the fair value of our unit based awards and associated compensation expense in our consolidated statements of operations.

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We currently have no off‑balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Jumpstart Our Business Act of 2012

We are an “emerging growth company” as defined in the JOBS Act.

We will remain an emerging growth company until the earlier of (1) the last day of our fiscal year (a) following the fifth anniversary of the completion of the Offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the last business day of our most recently completed second fiscal quarter, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies.

We have irrevocably opted out of the extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

Emerging Growth Company and Smaller Reporting Company Status

The Company is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).

The Company will remain an emerging growth company until the earlier of (1) the last day of its fiscal year (a) following the fifth anniversary of the completion of the Offering, (b) in which its total annual gross revenue is at least $1.07 billion, or (c) in which the Company is deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the last business day of its most recently completed second fiscal quarter, or (2) the date on which the Company has issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable to public companies.

The Company has irrevocably opted out of the extended transition period and, as a result, the Company will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

The Company is also a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act.

Smaller reporting company means an issuer that is not an investment company, an asset-back issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company and that (i) has a market value of common stock held by non-affiliates of less than $250 million;

or (i) has annual revenues of less than $100 million and either no common stock held by non-affiliates or a

market value of common stock held by non-affiliates of less than $700 million.

Smaller reporting company status is determined on an annual basis.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis