Ranger Energy Services, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the historical financial statements and related notes included in Part I, Item 1. Financial Statements of this Quarterly Report on Form 10-Q (the “Quarterly Report”). 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. Factors that could cause or contribute to such differences include, but are not limited to, market prices for oil and natural gas, capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed below and elsewhere in this report. Please read Cautionary Note Regarding Forward-Looking Statements. Also, please read the risk factors and other cautionary statements described under Part II, Item 1A.-“Risk Factors” included elsewhere in this Quarterly Report and in our Annual Report filed on Form 10-K for the year ended December 31, 2019 (our “Annual Report”). We assume no obligation to update any of these forward-looking statements. Except as otherwise indicated or required by the context, all references in this Quarterly Report to the “Company,” “Ranger,” “we,” “us,” or “our” relate to Ranger Energy Services, Inc. (“Ranger, Inc.”) and its consolidated subsidiaries. Overview 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 . Provides high-specification (“high-spec”) well service rigs and complementary equipment and services to facilitate operations throughout the lifecycle of a well. • Completion and Other Services . 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 . Provides proprietary, modular equipment for the processing of natural gas. For additional financial information about our segments, please see “Item 1. Financial Information — Note 13 — Segment Reporting.” 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 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 has continued through the first quarter ended March 31, 2021; 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. COVID-19 and numerous public and political responses thereto have contributed to equity market volatility and potentially the risk of a global recession. While commodity prices, as well as our stock price, have improved with the rollout of COVID-19 vaccines, we expect this global equity market volatility to continue at least until the outbreak of COVID-19 stabilizes, if not longer. Additionally, increased activity during 2021 can be attributed to stay-at-home orders and other restrictions being lifted in certain geographical areas, however any future containment measures could curtail such growth. 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 17 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 (“MBbls/d”) in May and June 2020; however, on July 15, 2020 OPEC Plus agreed to increase production by 1.6 MBbls/d starting in August 2020. On December 3, 2020, OPEC Plus agreed to further increase production by an additional 1.0 MBbls/d in January 2021, resulting in total production cuts of 7.1 MBbls/d by the end of February 2021. Currently, OPEC Plus estimates that global oil demand will increase by 5.6 MBbls/d. 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. The U.S. 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 March 31, 2021 under the CARES Act. How We Evaluate Our Operations Management uses a variety of metrics to analyze our operating results and profitability, which include operating revenues, cost 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 We currently generate revenues through the provision of a variety of oilfield services. These services are performed under a variety of contract structures, including a long term take-or-pay contract and various master service agreements, as supplemented by statements of work, pricing agreements and specific quotes. A portion of our master services agreements include provisions that establish pricing arrangements for a period of up to one year in length. However, the majority of those agreements provide for pricing adjustments based on market conditions. 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. Rig Hours Within our High Specification Rig 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 for our well services 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. 18 Rig Utilization Within our High Specification Rig 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-spec rigs in our fleet during such period, as aggregated on a monthly basis utilizing a mid-month convention whereby a high-spec rig added to our fleet during a month, meaning that we have taken delivery of such high-spec rig and it is ready for service, 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 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 excessive, rig availability to meet such demand. Costs of Conducting Our Business The principal expenses involved in conducting our business are personnel, repairs and maintenance costs as well as other direct material costs, general and administrative, depreciation and amortization and interest expense. We manage the level of our expenses, except depreciation and amortization and interest expense, based on several factors, including industry conditions and expected demand for our services. In addition, a significant portion of the costs we incur in our business is variable based on the quantities of specific services provided and the requirements of such services. Direct cost of services and general and administrative expenses include the following major cost categories: (i) personnel costs; and (ii) equipment costs, including repair and maintenance. Personnel costs associated with our operational employees represent a significant cost of our business. A substantial portion of our labor costs is attributable to our crews and is partly variable based on the requirements of specific customers and operations. A key component of personnel costs relate to the ongoing training of our employees, which improves safety rates and reduces attrition. We also incur costs to employ personnel to support our services and perform maintenance on our assets. Costs for these employees are not directly tied to our level of business activity. Operating Income (Loss) We analyze our operating income (loss), which we define as revenues less cost of services, general and administrative expenses, depreciation and amortization, impairment and other operating expenses, to measure our financial performance. We believe operating income (loss) is a meaningful metric because it provides insight on profitability and true operating performance based on the historical cost basis of our assets. We also compare operating income (loss) to our internal projections for a given period and to prior periods. Adjusted EBITDA We view Adjusted EBITDA, which is a financial measure not determined in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), as an important indicator of performance. We define Adjusted EBITDA as net income (loss) before net interest expense, income tax provision or benefit, depreciation and amortization, equity-based compensation, acquisition-related and severance costs, gain or loss on disposal of assets and other non-cash and certain items that we do not view as indicative of our ongoing performance. See “Results of Operations—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 U.S. GAAP. 19 Results of Operations Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020 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 since March 2020, primarily due to the effects of COVID-19, as described in “—Recent Events and Outlook.” Three Months Ended March 31, Change 2021 2020 $ % Revenues High specification rigs $ 21.7 $ 34.9 $ (13.2) (38) % Completion and other services 15.5 43.3 (27.8) (64) % Processing solutions 1.1 2.8 (1.7) (61) % Total revenues 38.3 81.0 (42.7) (53) % Operating expenses Cost of services (exclusive of depreciation and amortization): High specification rigs 19.0 29.9 (10.9) (36) % Completion and other services 14.6 31.7 (17.1) (54) % Processing solutions 0.5 1.5 (1.0) (67) % Total cost of services 34.1 63.1 (29.0) (46) % General and administrative 3.5 5.0 (1.5) (30) % Depreciation and amortization 8.0 8.9 (0.9) (10) % Total operating expenses 45.6 77.0 (31.4) (41) % Operating income (loss) (7.3) 4.0 (11.3) (283) % Other expenses Interest expense, net 0.6 1.1 (0.5) (45) % Total other expenses 0.6 1.1 (0.5) (45) % Income (loss) before income tax expense (7.9) 2.9 (10.8) (372) % Tax expense 0.4 0.1 0.3 300 % Net income (loss) $ (8.3) $ 2.8 $ (11.1) (396) % Revenues. Revenues for the three months ended March 31, 2021 decreased $42.7 million, or 53%, to $38.3 million from $81.0 million for the three months ended March 31, 2020. The change in revenues by segment was as follows: High Specification Rigs. High Specification Rig revenues for the three months ended March 31, 2021 decreased $13.2 million, or 38%, to $21.7 million from $34.9 million for the three months ended March 31, 2020. The decrease in rig services revenue included a 31% decrease in total rig hours to 43,200 for the three months ended March 31, 2021 from 62,400 for the three months ended March 31, 2020. The decreased rig hours attributed to a 29% reduction in rig utilization. The average revenue per rig hour decreased 12% to $493 from $558 for the three months ended March 31, 2020. Completion and Other Services. Completion and Other Services revenues for the three months ended March 31, 2021 decreased $27.8 million, or 64%, to $15.5 million from $43.3 million for the three months ended March 31, 2020. The decrease was primarily attributable to our wireline business, which accounted for approximately $23.2 million, or 84%, of the segment revenue decrease. The decrease in wireline services revenue included a 45% decrease in average active wireline units to six units for the three months ended March 31, 2021 from eleven units for the three months ended March 31, 2020. All other service lines also had comparable revenue reductions. Processing Solutions. Processing Solutions revenues for the three months ended March 31, 2021 decreased $1.7 million, or 61%, to $1.1 million from $2.8 million for the three months ended March 31, 2020. The decrease was primarily attributable to a decline in mobilization and maintenance revenue related to our Mechanical Refrigeration Units (“MRU”), which was attributable to a decline in MRU utilization. Our average MRU utilization for the three months ended March 31, 2021 and 2020, was nine percent and 17%, respectively. The MRU utilization decrease was due to certain of our customer contracts that terminated during the first quarter of 2020, as scheduled, without renewal. 20 Cost of services (excluding depreciation and amortization). Cost of services for the three months ended March 31, 2021 decreased $29.0 million, or 46%, to $34.1 million from $63.1 million for the three months ended March 31, 2020. As a percentage of revenue, cost of services was 89% and 78% for the three months ended March 31, 2021 and 2020, respectively. The change in cost of services by segment was as follows: High Specification Rigs. High Specification Rig cost of services for the three months ended March 31, 2021 decreased $10.9 million, or 36% to $19.0 million from $29.9 million for the three months ended March 31, 2020. 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 for the three months ended March 31, 2021 decreased $17.1 million, or 54%, to $14.6 million from $31.7 million for the three months ended March 31, 2020. The decrease was primarily attributable to a reduction in the wireline business, which accounted for approximately $14.2 million, or 83%, of the segment cost of sales decrease. The decrease was primarily 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 for the three months ended March 31, 2021 decreased $1.0 million, or 67%, to $0.5 million from $1.5 million for the three months ended March 31, 2020. The decrease was primarily attributable to a reduction in employee costs and costs associated with ancillary equipment rentals, corresponding with a decrease in revenue. General & Administrative. General and administrative expenses for the three months ended March 31, 2021 decreased $1.5 million, or 30%, to $3.5 million from $5.0 million. During the three months ended March 31, 2020, general and administrative expenses included a gain on debt retirement of $2.1 million related to the settlement of the ESCO Seller’s Notes. The decrease during the three months ended March 31, 2021 is attributable to lower employee costs, which is related to our reduction in workforce in 2020, and lower professional fees. Depreciation and Amortization. Depreciation and amortization for the three months ended March 31, 2021 decreased $0.9 million, or 10%, to $8.0 million from $8.9 million for the three months ended March 31, 2020. The decrease is attributable to depreciation expense for fixed assets that were retired and disposed of during the trailing 12 months. Interest Expense, net. Interest expense, net for the three months ended March 31, 2021 decreased $0.5 million, or 45%, to $0.6 million from $1.1 million for the three months ended March 31, 2020. The decrease to net interest expense was attributable to the reduction of the principal balances on our Encina Master Financing Agreement and Credit Facility, coupled with a decrease in London Interbank Offering Rate (“LIBOR”). Note Regarding Non-GAAP Financial Measure Adjusted EBITDA is not a financial measure determined in accordance with U.S. GAAP. We define Adjusted EBITDA as net income (loss) before interest expense, net, income tax provision (benefit), depreciation and amortization, equity-based compensation, acquisition-related, severance and reorganization costs, impairment of goodwill, gain or loss on disposal of assets and certain other 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 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 determined in accordance with U.S. 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) to Adjusted EBITDA, our most directly comparable financial measure calculated and presented in accordance with U.S. GAAP. 21 Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020 The following is an analysis of our Adjusted EBITDA. See “Item 1. Financial Information—Note 13—Segment Reporting” and “—Results of Operations” for further details. Three Months Ended March 31, 2021 High Specification Rigs Completion and Other Services Processing Solutions Other Total (in millions) Net income (loss) $ (2.1) $ (1.3) $ — $ (4.9) $ (8.3) Interest expense, net — — — 0.6 0.6 Income Tax expense — — — 0.4 0.4 Depreciation and amortization 4.8 2.2 0.6 0.4 8.0 Equity based compensation — — — 0.9 0.9 Gain on retirement of debt — — — — — Gain on disposal of property and equipment — — — (0.4) (0.4) Severance and reorganization costs — — — (1.4) (1.4) Adjusted EBITDA $ 2.7 $ 0.9 $ 0.6 $ (4.4) $ (0.2) Three Months Ended March 31, 2020 High Specification Rigs Completion and Other Services Processing Solutions Other Total (in millions) Net income (loss) $ (0.3) $ 8.9 $ 0.7 $ (6.5) $ 2.8 Interest expense, net — — — 1.1 1.1 Income Tax expense — — — 0.1 0.1 Depreciation and amortization 5.3 2.7 0.6 0.3 8.9 Equity based compensation — — — 0.8 0.8 Gain on retirement of debt — — — (2.1) (2.1) Gain on disposal of property and equipment — — — (0.2) (0.2) Severance and reorganization costs — — — — — Adjusted EBITDA $ 5.0 $ 11.6 $ 1.3 $ (6.5) $ 11.4 Change $ High Specification Rigs Completion and Other Services Processing Solutions Other Total (in millions) Net income (loss) $ (1.8) $ (10.2) $ (0.7) $ 1.6 $ (11.1) Interest expense, net — — — (0.5) (0.5) Income Tax expense — — — 0.3 0.3 Depreciation and amortization (0.5) (0.5) — 0.1 (0.9) Equity based compensation — — — 0.1 0.1 Gain on retirement of debt — — — 2.1 2.1 Gain on disposal of property and equipment — — — (0.2) (0.2) Severance and reorganization costs — — — (1.4) — Adjusted EBITDA $ (2.3) $ (10.7) $ (0.7) $ 2.1 $ (11.6) Adjusted EBITDA for the three months ended March 31, 2021 decreased $11.6 million to a loss of $0.2 million from $11.4 million for the three months ended March 31, 2020. The change by segment was as follows: High Specification Rigs . High Specification Rigs Adjusted EBITDA for the three months ended March 31, 2021 decreased $2.3 million to $2.7 million from $5.0 million for the three months ended March 31, 2020, due to decreased revenues of $13.2 million, partially offset by a corresponding decrease in cost of services of $10.9 million. 22 Completion and Other Services. Completion and Other Services Adjusted EBITDA for the three months ended March 31, 2021 decreased $10.7 million to $0.9 million from $11.6 million for the three months ended March 31, 2020, due to decreased revenues of $27.8 million, partially offset by a corresponding decrease in cost of services of $17.1 million. Processing Solutions . Processing Solutions Adjusted EBITDA for the three months ended March 31, 2021 decreased $0.7 million to $0.6 million from $1.3 million for the three months ended March 31, 2020, due to decreased revenues of $1.7 million, partially offset by a corresponding decrease in cost of services of $1.0 million. Other . Other Adjusted EBITDA for the three months ended March 31, 2021 decreased $2.1 million to a loss of $4.4 million from a loss of $6.5 million for the three months ended March 31, 2020. The balances included in Other reflect other general and administrative costs, which are not directly attributable to High Specification Rigs, Completion and Other Services or Processing Solutions. The increase was primarily due to a reduction in the Company’s general and administrative costs. Liquidity and Capital Resources Overview 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 are cash generated from operations and borrowings under our Credit Facility. As of March 31, 2021, we had total liquidity of $12.7 million, consisting of $1.5 million of cash on hand and availability under our Revolving Credit Facility of $11.2 million. As of March 31, 2021, our borrowing base under the Credit Facility was reduced to $19.8 million compared to $31.5 million and $20.7 million as of March 31, 2020 and December 31, 2020, respectively, as a result of decreased operational activity and accounts receivable. 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. 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 Agreements.” Cash Flows The following table presents our cash flows for the periods indicated: Three Months Ended March 31, Change 2021 2020 $ % (in millions) Net cash (used in) provided by operating activities $ (1.9) $ 8.5 $ (10.4) (122) % Net cash used in investing activities — (4.6) 4.6 100 % Net cash provided by financing activities 0.6 0.6 — — % Net change in cash $ (1.3) $ 4.5 $ (5.8) (129) % Operating Activities Net cash used in operating activities increased $10.4 million to cash used of $1.9 million for three months ended March 31, 2021 compared to cash provided of $8.5 million for the three months ended March 31, 2020. The change in cash flows from operating activities is primarily attributable to a decrease in gross margins and operating income for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The use of working capital cash increased $0.3 million, or 15%, to a use of $2.3 million for the three months ended March 31, 2021, compared to a use of $2.0 million for the three months ended March 31, 2020. Investing Activities Net cash used in investing activities decreased $4.6 million from a use of cash of $4.6 million for the three months ended March 31, 2020. The change in cash flows from investing activities is attributable to a significant reduction in capital expenditures during the trailing twelve months due to the economic events that have taken place in the industry. Financing Activities Net cash provided by financing activities remained flat at $0.6 million for both the three months ended March 31, 2021 and 2020. During the three months ended March 31, 2020, we had increased borrowings under the Credit Facility that were partially offset by the settlement of the ESCO Seller’s Notes and repurchases of Class A Common Stock. During the three months ended March 31, 2021, we entered into a sale-leaseback transaction with certain of our fixed assets, coupled with net borrowings under the Credit Facility. 23 Supplemental Disclosures We added fixed assets of $0.2 million that were non-cash additions. Additionally, we entered into installment agreements, thereby increasing our current and long-term obligations by $0.6 million that were also non-cash additions. Working Capital Our working capital, which we define as total current assets less total current liabilities, was $2.1 million as of March 31, 2021 compared to $2.7 million as of December 31, 2020. The reduction in the Company’s operational activity, due to the current macroeconomic environment, is the primary reason for this decrease in working capital. Our Debt Agreements 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 the 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 our average excess availability under the Credit Facility. The applicable margins for each of the loans are re-determined as of the first day of each calendar quarter. The applicable margins for the LIBOR and Base Rate loans were 2.1% and 4.3%, respectively, as of March 31, 2021. The weighted average interest rate for the borrowings under the Credit Facility was 2.5% during the three months ended March 31, 2021. Under the Credit Facility, the total loan capacity is $19.8 million, which was based on a borrowing base certificate in effect as of March 31, 2021. The Company had outstanding borrowings of $8.6 million under the Credit Facility, leaving a residual $11.2 million available for borrowings as of March 31, 2021. The Company was in compliance with the Credit Facility covenants as of March 31, 2021. As of May 5, 2021, the Company did not have any borrowings under the Credit Facility and had a borrowing base of $20.4 million. Covenants and Other Restrictions 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 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. We are not subject to a fixed charge coverage ratio if we have no drawings under the Credit Facility and have at least $20.0 million of qualified cash. The Credit Facility contains events of default customary for facilities of this nature, including, but not limited, to: • events of default resulting from our failure or the failure of any guarantors to comply with covenants and financial ratios; • the occurrence of a change of control; • the institution of insolvency or similar proceedings against us or any guarantor; and • the occurrence of a default under any other material indebtedness we or any guarantor may have. 24 Upon the occurrence and during the continuation of an event of default, subject to the terms and conditions of the Credit Facility, the lenders are able to declare any outstanding principal of our Credit Facility debt, together with accrued and unpaid interest, to be immediately due and payable and exercise other remedies. Encina Master Financing and Security Agreement In June 2018, we entered into a Master Financing and Security Agreement (“Financing Agreement”) with Encina Equipment Finance SPV, LLC (the “Lender”). The amount available to be provided by the Lender to us under the Financing Agreement was contemplated to be not less than $35.0 million, and not to exceed $40.0 million. The first financing was required to be in an amount up to $22.0 million, which was used to acquire certain capital equipment. Subsequent to the first financing, we borrowed an additional $17.8 million, net of expenses and in two tranches, under the Financing Agreement. As of March 31, 2021, the aggregate principal balance outstanding under the Financing Agreement was $15.2 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 of our high specification rig assets. Borrowings under the Financing Agreement bear interest at a rate per annum equal to the sum of 8.0% plus LIBOR, which was 1.5% as of March 31, 2021. In no event will LIBOR fall below 1.5%. The Financing Agreement requires that the Company maintain leverage ratios of 2.5 to 1.0. The Company was in compliance with the covenants under the Financing Agreement as of March 31, 2021. Other Installment Purchases During the three months ended March 31, 2021, the Company entered into various Installment and Security Agreements (collectively, the “Installment Agreements”) in connection with the purchase of certain ancillary equipment, where such assets are being held as collateral. As of March 31, 2021, the aggregate principal balance outstanding under the Installment Agreements was $0.8 million and each balance is payable ratably over 36 months from the time of each purchase. The monthly installment payments contain an imputed interest rate that are consistent with the Company’s incremental borrowing rate and is not significant to the Company. Sale-Leaseback Transaction In April 2021, the Company entered into a sale-leaseback agreement for operational facilities in Colorado. The sales price of the facility was $13.0 million and the cash proceeds from the transaction have provided the Company with additional liquidity. The lease has a 15 year term with a two percent annual escalation in rental payments. TRA With respect to obligations we expect to incur under our TRA (except in cases where we elect to terminate the TRA early, the TRA is terminated early due to certain mergers, asset sales, other forms of business combination or other changes of control or we have available cash but fail to make payments when due), generally we may elect to defer payments due under the TRA if we do not have available cash to satisfy our payment obligations under the TRA or if our contractual obligations limit our ability to make these payments. Any such deferred payments under the TRA generally will accrue interest. In certain cases, payments under the TRA may be accelerated and/or significantly exceed the actual benefits, if any, we realize in respect of the tax attributes subject to the TRA. We intend to account for any amounts payable under the TRA in accordance with ASC 450, Contingencies. Further, we intend to account for the effect of increases in tax basis and payments for such increases under the TRA arising from future redemptions as follows: • when future sales or redemptions occur, we will record a deferred tax asset for the gross amount of the income tax effect along with an offset of 85% of this as a liability payable under the TRA; the remaining difference between the deferred tax asset and tax receivable agreement liability will be recorded as additional paid-in-capital; and • to the extent we have recorded a deferred tax asset for an increase in tax basis to which a benefit is no longer expected to be realized due to lower future taxable income, we will reduce the deferred tax asset with a valuation allowance. Critical Accounting Policies and Estimates Our significant accounting policies are discussed in our Annual Report and have not materially changed since December 31, 2020. Off-Balance Sheet Arrangements We currently have no material off-balance sheet arrangements. 25 Emerging Growth Company Status and Smaller Reporting Company Status We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012. 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 IPO, (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, or (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. The Company is also a “smaller reporting company” as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (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 has (i) market value of common stock held by non-affiliates of less than $250 million; or (ii) 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. 26 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS The information in this Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act, as amended and Section 21E of the Exchange Act. All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements included in our Annual Report. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events. Forward-looking statements may include statements about: • our business strategy; • our operating cash flows, the availability of capital and our liquidity; • our future revenue, income and operating performance; • the volatility in global crude oil demand and crude oil prices for an uncertain period of time that may lead to a significant reduction of domestic crude oil and natural gas production; • global or national health concerns, including pandemics such as the outbreak of COVID-19; • uncertainty regarding future actions of foreign oil producers, such as Saudi Arabia and Russia, and the risk that they take actions that will cause an over-supply of crude oil; • our ability to sustain and improve our utilization, revenues and margins; • our ability to maintain acceptable pricing for our services; • our future capital expenditures; • our ability to finance equipment, working capital and capital expenditures; • competition and government regulations, including new and proposed legislation by the Biden Administration aimed at reducing the impact of climate change; • our ability to obtain permits and governmental approvals; • pending legal or environmental matters; • marketing of oil and natural gas; • business or asset acquisitions; • general economic conditions; • credit markets; • our ability to successfully develop our research and technology capabilities and implement technological developments and enhancements; • uncertainty regarding our future operating results; and • plans, objectives, expectations and intentions contained in this report that are not historical. We caution you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, the risks described under “Risk Factors” in our Annual Report previously filed. Should one or more of the risks or uncertainties described occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Quarterly Report. 27