# Ranger Energy Services, Inc. (RNGR) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Ranger Energy Services, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1699039/000169903923000016/rngr-20221231.htm
Accession: 0001699039-23-000016
Filing date: 2023-03-13
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/RNGR/
All MD&A years: /company/RNGR/mda/
Previous year: /company/RNGR/mda/fy2021/ (FY 2021)
Next year: /company/RNGR/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the historical financial statements and related notes included elsewhere in this Annual 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

33

read Cautionary Statement Regarding Forward‑Looking Statements. 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.

2022 Business Update

Acquisitions and Integrations

During the years ended December 31, 2022 and 2021, the Company integrated the businesses, operations and assets acquired from each of the acquisitions, described below, into current business processes. Through the integration, Ranger continued to refine business strategies and processes to focus on the performance of the Company. Please see “—Results of Operations” below and “Part II—Item 8—Note 3 — Business Combinations” for further information on each of the acquisitions.

On September 15, 2021, Ranger Energy Acquisition, LLC, entered into an Asset Purchase Agreement for certain assets of Basic and certain of its subsidiaries, which closed on October 1, 2021. As consideration for the assets acquired, the Company paid $36.7 million in cash, where such cash was generated through the issuance of Series A Preferred Stock. Ranger Energy Acquisitions, LLC (“Ranger Acquisitions”) purchased assets associated with Basic’s well servicing, fishing and rental, coiled tubing operations, and rolling stock assets required to support the operating assets being purchased and real property locations inclusive of, but not limited to, real property owned in New Mexico, North Dakota, Oklahoma and Texas. The operating results of Basic are included within the High Specification Rigs and Processing Solutions and Ancillary Services segments.

On July 8, 2021, the Company acquired the assets of PerfX, a provider of wireline services that operate in Williston, North Dakota and Midland, Texas. Following the acquisition of PerfX, the Company significantly expanded its scale and scope of the existing wireline business. The aggregate consideration was $20.1 million, which included 1.1 million shares of Class A Common Stock and a Secured Promissory Note of $11.4 million. The financial results of PerfX are included in the Wireline Services reporting segment.

On May 14, 2021, the Company acquired all of the outstanding stock of Patriot, a provider of wireline evaluation and intervention services that operate in the Permian, Denver-Julesburg and Powder River Basins and Bakken Shale. As consideration for the Patriot Acquisition, the Company paid an aggregate of $11.0 million, which included 1.3 million shares of Class A Common Stock and cash payments of $3.3 million, net of cash acquired. The financial results of Patriot are included in the Wireline Services reporting segment.

COVID-19

During the year ended December 31, 2022 and through the issuance of these financial statements, significant progress has been made to combat COVID-19 and its multiple variants. The extent of and future impacts of COVID-19 on the Company’s operational and financial performance will significantly depend on further developments, including the severity, duration, spread of the disease and continued impact on our personnel, customer activity and third-party providers.

The U.S. government implemented a number of programs in the early 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 $0.9 million as of December 31, 2022 under the CARES Act. The deferred payroll tax payment was paid in January 2023.

Internal Controls and Procedures

We and our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting as of December 31, 2022. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Based on its assessment, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2022 due to material weaknesses in our control environment whereby the Company did not maintain (1) adequate controls over segregation of duties related to the review of manual journal entries and account reconciliations. Specifically, certain personnel had the ability to both (a) create and post journal entries within our general ledger system, and (b) review account reconciliations; (2) adequate information technology general controls related to administrative user access to the Company’s information systems that are relevant to the preparation of financial statements to ensure appropriate segregation of duties and to adequately restrict access to financial applications and data; and (3) the material weakness previously reported in 2021 Annual Report pertaining to ineffective controls over the accounting for complex transactions continued to exist as of

34

December 31, 2022. The Company’s management has (1) implemented a remediation plan to update its design and implementation of controls to remediate these deficiencies and enhance the Company’s internal control environment. The material weaknesses did not result in any adjustments to the Consolidated Financial Statements; (2) initiated a remediation plan to improve information technology general controls related to administrative user access by restricting privileged access, implementing change monitoring controls and improving segregation of duties within information technology environments based on roles and responsibilities; and (3) been enhancing processes and designing and implementing additional internal controls to properly account for complex transactions. Additionally, the Company has hired additional accounting personnel and implementing training of new and existing personnel on proper execution of designed control procedures.

We can give no assurance that these actions will remediate these deficiencies in internal control or that additional material weaknesses or significant deficiencies in our internal control over financial reporting will not be identified in the future. Our failure to implement and maintain effective internal control over financial reporting could result in errors in our financial statements that could result in a restatement of our financial statements and cause us to fail to meet our reporting obligations.

We are required to comply with the SEC's rules implementing Section 302 of Sarbanes-Oxley, which requires our management to certify financial and other information in our quarterly and Annual Reports. We are required to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting under Section 404 beginning with this Annual Report due to our ceasing to be an "emerging growth company" within the meaning of Section 2(a)(19) of the Securities Act.

Business Outlook

We are a provider of onshore high specification (“high-spec”) well service rigs and complementary services in the United States. We provide an extensive range of well site services to leading U.S. exploration and production (“E&P”) companies that are fundamental to establishing and enhancing the flow of oil and natural gas throughout the productive life of a well. See discussion below for a description of our reporting segments.

We operate in most of the active oil and natural gas basins in the United States, including the Permian Basin, Denver-Julesburg Basin, Bakken Shale, Eagle Ford Shale, Haynesville Shale, Gulf Coast, South Central Oklahoma Oil Province and Sooner Trend Anadarko Basin Canadian and Kingfisher Counties plays.

Looking forward to 2023, we expect business opportunities and financial results to show mild increases as the global economy continues to slowly stabilize and improve. The International Energy Agency stated that global oil demand is set to rise by 1.9 million barrels per day in 2023 where the U.S. ranks as the world’s leading source of supply growth. Commodity pricing reached over $130 per barrel with a low of $70 per barrel during 2022 and is expected to remain at approximately $85 per barrel during 2023 as global oil inventories increase. However, we believe the geopolitical events will continue to have an impact on the macroeconomic backdrop of our industry, specifically surrounding China as COVID-19 restrictions are lifted and uncertainty regarding Russia’s oil supply while under sanctions.

How We Evaluate Our Operations

We provide services within the United States that are organized into three reporting segments, which include: High Specification Rigs, Wireline Services, and Processing Solutions and Ancillary Services, which are described below. The reportable segments have been categorized based on the nature of services provided within each line of business.

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

•High Specification Rigs. Provides high-spec well service rigs to facilitate operations throughout the life cycle of a well.

•Wireline Services. Provides services necessary to bring and maintain a well on production and consists of our completion, production and pump down service lines.

•Processing Solutions and Ancillary Services. Provides complimentary services often utilized in conjunction with our High Specification Rigs and Wireline Services segments. The services primarily include equipment rentals, coil tubing, plug and abandonment, snubbing and processing solutions.

•Other. Other represents costs not allocable to the reporting segments and includes corporate general and administrative expense and depreciation of corporate furniture and fixtures, amortization, impairments, debt retirements and other items similar in nature.

35

For additional financial information regarding our segments, please see “Part II—Item 8—Note 17 — Segment Reporting.”

Financial Metrics

How we Generate Revenue

Rig hours and stage counts, as it relates to our High Specification Rigs and Wireline Services segments, respectively, are important indicators of our activity levels and profitability. The stage count metric has become increasingly important with the update in our external reporting segments. Rig hours represent the aggregate number of hours that our well service rigs actively worked, whereas stage counts represent the number of completed stages during the periods presented. Generally, during the period our services are being provided, our customers are billed on an hourly basis for our high-spec rig services or, as it relates to our wireline services, they are billed upon the earlier of the completion of the well or on a monthly basis. The rates for which the customer is billed is generally predetermined based upon a contractual agreement.

Costs of Conducting Our Business

The principal costs associated with conducting our business are personnel, repairs and maintenance, general and administrative, and depreciation expense.

Cost of Services. Our primary costs associated with our cost of services are related to personnel expenses, repairs and maintenance of our fixed assets and, as it relates to our Wireline Services segment, perforating and gun costs. A significant portion of these expenses are variable, and therefore typically managed based on industry conditions and demand for our services. Further, there is generally a correlation between our revenue generated and personnel and repairs and maintenance costs, which are dependent upon the operational activity.

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 field crews and is partly variable based on the requirements of specific customers. A key component of personnel costs relates to the ongoing training of our employees, which improves safety rates and reduces attrition.

General & Administrative. As described above, general and administrative expenses are corporate in nature and are included within Other. These costs are not attributable to any of our lines of businesses nor reporting segments.

Operating Income or Loss

We analyze our operating income or loss by segment, which we have defined as revenue less cost of services and depreciation expense. We believe this is a key financial metric as it provides insight on profitability and operational performance based on the historical cost basis of our assets.

Adjusted EBITDA

We view Adjusted EBITDA, which is a non‑GAAP financial measure, as an important indicator of performance. We define Adjusted EBITDA as net income or loss before net interest expense, income tax expense (benefit), depreciation and amortization, equity‑based compensation, acquisition‑related and severance costs, gain or loss on disposal of assets, legal fees and settlements, and other non‑cash and certain other items that we do not view as indicative of our ongoing performance. 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.

36

Results of Operations

The Year Ended December 31, 2022 compared to the Year Ended December 31, 2021

The following is an analysis of our operating results. See “—How We Evaluate Our Operations” for further details explaining how operating results are measured and key performance indicators used. The significant increases in operational activity, across all segments, as well as corporate-related expenses, are related to the business combinations that took place, coupled with increased crude oil pricing and demand for our services, as described in “—Recent Events and Outlook.”

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","Variance"],["","","2022","","2021","","$","","%"],["Revenue"],["High specification rigs","","$","293.2","","","$","140.1","","","$","153.1","","","109","%"],["Wireline Services","","197.0","","","117.9","","","79.1","","","67","%"],["Processing Solutions and Ancillary Services","","118.3","","","35.1","","","83.2","","","237","%"],["Total revenue","","608.5","","","293.1","","","315.4","","","108","%"],["Operating expenses"],["Cost of services (exclusive of depreciation and amortization):"],["High specification rigs","","232.7","","","118.8","","","113.9","","","96","%"],["Wireline Services","","178.4","","","115.6","","","62.8","","","54","%"],["Processing Solutions and Ancillary Services","","92.8","","","28.9","","","63.9","","","221","%"],["Total cost of services","","503.9","","","263.3","","","240.6","","","91","%"],["General and administrative","","39.9","","","34.6","","","5.3","","","15","%"],["Depreciation and amortization","","44.4","","","36.8","","","7.6","","","21","%"],["Impairment of fixed assets","","1.3","","","\u2014","","","1.3","","","100","%"],["Gain on sale of assets","","(0.7)","","","(1.1)","","","0.4","","","(36)","%"],["Total operating expenses","","588.8","","","333.6","","","255.2","","","76","%"],["Operating income (loss)","","19.7","","","(40.5)","","","60.2","","","149","%"],["Other income and expenses"],["Interest expense, net","","7.3","","","5.0","","","2.3","","","46","%"],["Gain on bargain purchase, net of tax","","(3.6)","","","(37.2)","","","33.6","","","(90)","%"],["Total other income and expenses","","3.7","","","(32.2)","","","35.9","","","(111)","%"],["Income (loss) before income tax expense (benefit)","","16.0","","","(8.3)","","","24.3","","","293","%"],["Income tax expense (benefit)","","0.9","","","(6.2)","","","7.1","","","115","%"],["Net income (loss)","","$","15.1","","","$","(2.1)","","","$","17.2","","","819","%"]]
[[/GREPCENT_TABLE]]

Revenue. Revenue increased $315.4 million, or 108%, to $608.5 million for the year ended December 31, 2022 from $293.1 million for the year ended December 31, 2021. The change in revenue by segment was as follows:

High Specification Rigs. High Specification Rig revenue increased $153.1 million, or 109%, to $293.2 million for the year ended December 31, 2022 from $140.1 million for the year ended December 31, 2021. The increased rig services revenue included an 82% increase in total rig hours to 469,000 for the year ended December 31, 2022 from 257,900 for the year ended December 31, 2021. The average revenue per rig hour increased 15% to $625 compared to $543 for the year ended December 31, 2021. Of the total segment revenue increase, $119.4 million is attributable to the assets acquired in the Basic Acquisition.

Wireline Services. Wireline Services revenue increased $79.1 million, or 67%, to $197.0 million for the year ended December 31, 2022 from $117.9 million for the year ended December 31, 2021. The increased wireline services revenue was primarily attributable to completion services which accounted for $44.3 million of the segment revenue increase and included a 15% increase in completed stage count to 31,400 for the year ended December 31, 2022 from 27,200 for the year ended December 31, 2021. Additionally, the increase was attributable to the production and pump down services which accounted for $25.2 million and $9.6 million of the segment increase, respectively. The increase in wireline services revenue included a 79% increase in average active wireline units to 41 units from 23 units for the year ended December 31, 2021. Of the segment revenue increase, $63.8 million and $34.9 million is attributable to the assets acquired in the PerfX and Patriot Acquisitions, respectively.

37

Processing Solutions and Ancillary Services. Processing Solutions and Ancillary Services revenue increased $83.2 million, or 237%, to $118.3 million for the year ended December 31, 2022 from $35.1 million for the year ended December 31, 2021. The increase in processing solutions and ancillary services revenue is primarily attributable to our coil tubing, rentals and plugging and abandonment services which accounted for $32.9 million, $28.5 million and $21.2 million of the segment increase, respectively. Of the total segment revenue increase, $53.9 million is attributable to the Basic Acquisition.

Cost of services. Cost of services (exclusive of depreciation and amortization) increased $240.6 million, or 91%, to $503.9 million for the year ended December 31, 2022 from $263.3 million for the year ended December 31, 2021. As a percentage of revenue, cost of services was approximately 83% and 89% for the years ended December 31, 2022 and 2021, respectively. The change in cost of services by segment was as follows:

High Specification Rigs. High Specification Rig cost of services increased $113.9 million, or 96%, to $232.7 million for the year ended December 31, 2022 from $118.8 million for the year ended December 31, 2021. The increase was primarily attributable to an increase in variable expenses, notably employee-related labor costs, fuel and repair and maintenance costs of $69.0 million, $10.9 million and $10.4 million, respectively. Additionally, the increased costs correspond with the increase in rig hours and revenue. Of the segment cost of services increase, $94.6 million is attributable to the Basic Acquisition.

Wireline Services. Wireline Services cost of services increased $62.8 million, or 54%, to $178.4 million for the year ended December 31, 2022 from $115.6 million for the year ended December 31, 2021. The increase was primarily attributable to the completion and production service lines which accounted for $41.0 million and $16.0 million of the segment increase. Across all service lines, the increase was attributable to increased variable expenses, notably employee-related labor costs of $28.1 million. Of the total segment cost of services increase, $87.4 million and $29.1 million is attributable to the assets acquired in the PerfX and Patriot Acquisitions, respectively.

Processing Solutions and Ancillary Services. Processing Solutions and Ancillary Services cost of services increased $63.9 million, or 221%, to $92.8 million for the year ended December 31, 2022 from $28.9 million for the year ended December 31, 2021. The increase in processing solutions and ancillary services is primarily attributable to our coil tubing, rentals and plugging and abandonment services which accounted for $25.6 million, $18.2 million and $18.4 million of the segment increase, respectively, and aligns with the increased revenue. Of the total segment cost of services increase, $46.1 million is attributable to the Basic Acquisition.

General and administrative. General and administrative expenses increased $5.3 million, or 15%, to $39.9 million for the year ended December 31, 2022 from $34.6 million for the year ended December 31, 2021. The increase in general and administrative expenses is primarily due to corporate employee costs added subsequent to the Basic Acquisition, coupled with legal and professional fees incurred during the latter half of the year ended December 31, 2022.

Depreciation and amortization. Depreciation and amortization increased $7.6 million, or 21%, to $44.4 million for the year ended December 31, 2022 from $36.8 million for the year ended December 31, 2021. The increase was attributable to assets acquired through the business combinations during the latter half of the year ended December 31, 2021. This was partially offset by depreciation expense related to fixed assets disposed of during the year ended December 31, 2022.

Interest expense, net. Net interest expense increased $2.3 million, or 46%, to $7.3 million for the year ended December 31, 2022 from $5.0 million for the year ended December 31, 2021. The increase to net interest expense was attributable to higher interest rates on each tranche of the Eclipse Loan and Security Agreement that closed on September 27, 2021, partially offset by the decreased principal balances on the debt instruments.

Income tax expense (benefit). Income tax expense increased $7.1 million, or 115%, to an expense of $0.9 million for the year ended December 31, 2022 from a tax benefit of $6.2 million for the year ended December 31, 2021. The increase in income tax expense was attributable to the increased operational activity during the year ended December 31, 2022.

Note Regarding Non‑GAAP Financial Measure

Adjusted EBITDA is not a financial measure determined in accordance with generally accepted accounting principles in the United States (“US GAAP”). We define Adjusted EBITDA as net income or loss before net interest expense, income tax expense (benefit), depreciation and amortization, equity‑based compensation, gain or loss on disposal of assets, legal fees and settlements, and other non-cash 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 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

38

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) to Adjusted EBITDA, our most directly comparable financial measure calculated and presented in accordance with US GAAP. 

The Year Ended December 31, 2022 compared to The Year Ended December 31, 2021

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2022"],["","","High Specification Rigs","","Wireline Services","","Processing Solutions and Ancillary Services","","Other","","Total"],["","","(in millions)"],["Net income (loss)","","$","34.3","","","$","7.6","","","$","20.2","","","$","(47.0)","","","$","15.1"],["Interest expense, net","","\u2014","","","\u2014","","","\u2014","","","7.3","","","7.3"],["Tax expense (benefit)","","\u2014","","","\u2014","","","\u2014","","","0.9","","","0.9"],["Depreciation and amortization","","26.2","","","11.0","","","5.3","","","1.9","","","44.4"],["Equity based compensation","","\u2014","","","\u2014","","","\u2014","","","3.8","","","3.8"],["Gain on disposal of property and equipment","","\u2014","","","\u2014","","","\u2014","","","(0.7)","","","(0.7)"],["Severance and reorganization costs","","\u2014","","","\u2014","","","\u2014","","","1.6","","","1.6"],["Acquisition related costs","","\u2014","","","\u2014","","","\u2014","","","7.9","","","7.9"],["Legal fees and settlements","","\u2014","","","\u2014","","","\u2014","","","1.5","","","1.5"],["Impairment of fixed assets","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","","1.3","","","1.3"],["Gain on bargain purchase, net of tax","","\u2014","","","\u2014","","","\u2014","","","(3.6)","","","(3.6)"],["TRA termination expense","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Allowance for AR write-off","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Adjusted EBITDA","","$","60.5","","","$","18.6","","","$","25.5","","","$","(25.1)","","","$","79.5"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2021"],["","","High Specification Rigs","","Wireline Services","","Processing Solutions and Ancillary Services","","Other","","Total"],["","","(in millions)"],["Net income (loss)","","$","37.0","","","$","(5.8)","","","$","0.3","","","$","(33.6)","","","$","(2.1)"],["Interest expense, net","","\u2014","","","\u2014","","","\u2014","","","5.0","","","5.0"],["Tax expense (benefit)","","\u2014","","","\u2014","","","\u2014","","","(6.2)","","","(6.2)"],["Depreciation and amortization","","21.5","","","8.1","","","5.9","","","1.3","","","36.8"],["Equity based compensation","","\u2014","","","\u2014","","","\u2014","","","3.2","","","3.2"],["Gain on disposal of property and equipment","","\u2014","","","\u2014","","","\u2014","","","(1.1)","","","(1.1)"],["Severance and reorganization costs","","\u2014","","","\u2014","","","\u2014","","","(0.4)","","","(0.4)"],["Acquisition related costs","","\u2014","","","\u2014","","","\u2014","","","8.6","","","8.6"],["Legal fees and settlements","","\u2014","","","\u2014","","","\u2014","","","0.9","","","0.9"],["Impairment of fixed assets","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Gain on bargain purchase, net of tax","","(37.2)","","","\u2014","","","\u2014","","","\u2014","","","(37.2)"],["TRA termination expense","","\u2014","","","\u2014","","","\u2014","","","3.8","","","3.8"],["Allowance for AR write-off","","\u2014","","","\u2014","","","\u2014","","","1.5","","","1.5"],["Adjusted EBITDA","","$","21.3","","","$","2.3","","","$","6.2","","","$","(17.0)","","","$","12.8"]]
[[/GREPCENT_TABLE]]

39

[[GREPCENT_TABLE]]
[["","","$ Variance"],["","","High Specification Rigs","","Wireline Services","","Processing Solutions and Ancillary Services","","Other","","Total"],["","","(in millions)"],["Net income (loss)","","$","(2.7)","","","$","13.4","","","$","19.9","","","$","(13.4)","","","$","17.2"],["Interest expense, net","","\u2014","","","\u2014","","","\u2014","","","2.3","","","2.3"],["Tax expense (benefit)","","\u2014","","","\u2014","","","\u2014","","","7.1","","","7.1"],["Depreciation and amortization","","4.7","","","2.9","","","(0.6)","","","0.6","","","7.6"],["Equity based compensation","","\u2014","","","\u2014","","","\u2014","","","0.6","","","0.6"],["Gain on disposal of property and equipment","","\u2014","","","\u2014","","","\u2014","","","0.4","","","0.4"],["Severance and reorganization costs","","\u2014","","","\u2014","","","\u2014","","","2.0","","","2.0"],["Acquisition related costs","","\u2014","","","\u2014","","","\u2014","","","(0.7)","","","(0.7)"],["Legal fees and settlements","","\u2014","","","\u2014","","","\u2014","","","0.6","","","0.6"],["Impairment of fixed assets","","\u2014","","","\u2014","","","\u2014","","","1.3","","","1.3"],["Gain on bargain purchase, net of tax","","37.2","","","\u2014","","","\u2014","","","(3.6)","","","33.6"],["TRA termination expense","","\u2014","","","\u2014","","","\u2014","","","(3.8)","","","(3.8)"],["Allowance for AR write-off","","\u2014","","","\u2014","","","\u2014","","","(1.5)","","","(1.5)"],["Adjusted EBITDA","","$","39.2","","","$","16.3","","","$","19.3","","","$","(8.1)","","","$","66.7"]]
[[/GREPCENT_TABLE]]

Adjusted EBITDA for the year ended December 31, 2022 increased $66.7 million to $79.5 million from $12.8 million for the year ended December 31, 2021. The change by segment was as follows:

High Specification Rigs. High Specification Rigs Adjusted EBITDA increased $39.2 million to $60.5 million from $21.3 million primarily due to an increase in revenue of $153.1 million partially offset by a corresponding increase in cost of services of $113.9 million.

Wireline Services. Wireline Services Adjusted EBITDA increased $16.3 million to $18.6 million from $2.3 million due to an increase in revenue of $79.1 million partially offset by a corresponding increase in cost of services of $62.8 million.

Processing Solutions and Ancillary Services. Processing Solutions and Ancillary Services Adjusted EBITDA increased $19.3 million to $25.5 million from $6.2 million due to an increase in revenue of $83.2 million partially offset by a corresponding increase in cost of services of $63.9 million.

Other.  Other Adjusted EBITDA decreased $8.1 million for the year ended December 31, 2022 to a loss of $25.1 million from a loss of $17.0 million due to increased general and administrative expenses, which was related to increased employee costs and professional fees. The balances included in Other reflect other general and administrative costs, which are not directly attributable to High Specification Rigs, Wireline Services or Processing Solutions and Ancillary Services.

Liquidity and Capital Resources

Overview

We require capital to fund ongoing operations, including maintenance expenditures on our existing fleet, organic growth initiatives, investments and acquisitions. Our primary sources of liquidity have historically been cash generated from operations and borrowings under our EBC Credit Facility. As of December 31, 2022, we had total liquidity of $61.0 million, consisting of $3.7 million of cash on hand and availability under our Revolving Credit Facility of $57.3 million.

As of December 31, 2022, our borrowing base under the Revolving Credit Facility was $60.3 million compared to $45.0 million as of December 31, 2021, as a result of increased 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 short and long term liquidity requirements and comply with our covenants of our debt agreements. For further details, see “—Our Debt Obligations.”

40

Cash Flows

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","Variance"],["","","2022","","2021","","$","","%"],["","","(in millions)"],["Net cash provided by (used in) operating activities","","$","44.5","","","$","(39.4)","","","$","83.9","","","213","%"],["Net cash provided by (used in) investing activities","","11.3","","","(36.4)","","","47.7","","","131","%"],["Net cash provided by (used in) financing activities","","(52.7)","","","73.6","","","(126.3)","","","(172)","%"],["Net change in cash","","$","3.1","","","$","(2.2)","","","$","5.3","","","241","%"]]
[[/GREPCENT_TABLE]]

Operating Activities

Net cash flows from operating activities increased $83.9 million to cash generated of $44.5 million for the year ended December 31, 2022 compared to cash used of $39.4 million for the year ended December 31, 2021. The change in cash flows provided by operating activities is attributable to increased operational activity and efficiencies. Cash used from working capital decreased to $19.1 million for the year ended December 31, 2022 from cash used of $38.6 million for the year ended December 31, 2021 which was due to increased cash receipts on outstanding accounts receivable.

Investing Activities

Net cash flows from investing activities increased $47.7 million to cash generated of $11.3 million for the year ended December 31, 2022 compared to cash used of $36.4 million for the year ended December 31, 2021. The change in cash flows generated by investing activities is attributable to the cash outlay for the Basic Acquisition that took place during the year ended December 31, 2021, partially offset by significant asset sales during the year ended December 31, 2022.

Financing Activities

Net cash flows from financing activities decreased $126.3 million, or 172%, to cash used of $52.7 million for the year ended December 31, 2022 compared to cash provided of $73.6 million for the year ended December 31, 2021. The change in cash flow is attributable to the utilization of cash generated from operations and asset sales to pay debt outstanding. During the year ended December 31, 2022 the Company paid $25.6 million, net to the Credit Facility and paid $12.4 million to retire Term Loan B.

Supplemental Cash Flow Disclosures

During the year ended December 31, 2022, the Company added fixed assets of $5.5 million which were finance leased arrangements across all operating segments. Additionally, the Company paid approximately $1.2 million in interest related to debt and finance leased assets.

Working Capital

Our working capital, which we define as total current assets less total current liabilities, was $65.6 million and $2.5 million as of December 31, 2022 and 2021, respectively. The increased accounts receivable and contract assets and assets considered to be held for sale, coupled with efforts to pay down debt, led to the working capital increase.

Our Debt Agreements

Eclipse Loan and Security Agreement

On September 27, 2021, the Company entered into a loan and security agreement with Eclipse Business Capital LLC (“EBC”) and Eclipse Business Capital SPV, LLC, as administrative agent providing the Company with a senior secured credit facility in an aggregate principal amount of $77.5 million (the “EBC Credit Facility”), consisting of (i) a revolving credit facility in an aggregate principal amount of up to $50.0 million (the “Revolving Credit Facility”), (ii) a machinery and equipment term loan facility in an aggregate principal amount of up to $12.5 million (the “M&E Term Loan Facility”) and (iii) a term loan B facility in an aggregate principal amount of up to $15.0 million (the “Term Loan B Facility”). The Company was in compliance with the Eclipse Loan and Security Agreement covenants as of December 31, 2022.

41

On January 7, 2022, the Company entered into the First Amendment to Loan and Security Agreement with EBC and Eclipse Business Capital SPV, LLC (collectively, the “EBC Lenders”), which increased the Maximum Revolving Credit Facility Amount (as defined in the Amended Loan Agreement (as defined below)) to $65 million, among other things.

On September 23, 2022, the Company entered into the Fourth Amendment to Loan and Security Agreement with the EBC Lenders, which, among other things, designated the change in reference rates from LIBOR to SOFR, and designated a Letter of Credit in the amount of $1.6 million to be utilized for working capital and general corporate purposes, as needed.

Revolving Credit Facility

The Revolving Credit Facility was drawn, in part, on September 27, 2021, to repay the indebtedness under the existing Credit Facility, which was terminated in connection with such repayment, and to pay for the fees, costs and expenses incurred in connection with the EBC Credit Facility. The undrawn portion of the Revolving Credit Facility is available to fund working capital and other general corporate expenses and for other-permitted uses, including the financing of permitted investments and restricted payments. The Revolving Credit Facility is subject to a borrowing base that is calculated based upon a percentage of the Company’s eligible accounts receivable less certain reserves. The Company’s eligible accounts receivable serves as collateral for the borrowings under the Revolving Credit Facility and is scheduled to mature in September 2025. The Revolving Credit Facility includes a subjective acceleration clause and cash dominion provisions that permits the administrative agent to sweep cash daily from certain bank accounts into an account of the administrative agent to repay the Company’s obligations under the Revolving Credit Facility. The borrowings of the Revolving Credit Facility, therefore, are classified as current maturities of long-term debt on the Consolidated Balance Sheet.

Under the Revolving Credit Facility, the maximum borrowing capacity was $60.3 million, which was based on a borrowing base certificate in effect as of December 31, 2022. The Company had outstanding borrowings of $1.4 million under the Revolving Credit Facility and a $1.6 million Letter of Credit, leaving a residual $57.3 million available for borrowings as of December 31, 2022. Borrowings under the Revolving Credit Facility bear interest at a rate per annum ranging from 4.5% to 5.0% in excess of SOFR and 3.5% to 4.0% in excess of the Base Rate, dependent on the fixed cost coverage ratio, through January 1, 2023. The weighted average applicable margin for the loan was 6.6% for the year ended December 31, 2022. The weighted average applicable margin for the loan was 9.0% for the period ended February 28, 2023.

M&E Term Loan Facility

Under the M&E Term Loan Facility, the Company had outstanding borrowings of $10.4 million where the monthly installments of $0.2 million commenced on March 1, 2022. Borrowings under the M&E Term Loan Facility bear interest at a rate per annum equal to 8% in excess of SOFR and 7% in excess of the Base Rate. The weighted average interest rate for the loan was 9.9% for the year ended December 31, 2022. The weighted average applicable margin for the loan was 12.6% for the period ended February 28, 2023. The M&E Term Loan Facility is secured by a lien on certain high-spec rig assets and is scheduled to mature in September 2025. Principal amounts repaid are not available to be reborrowed.

Term Loan B

On October 1, 2021, Term Loan B was finalized in connection with the closing of the Basic Acquisition. Borrowings under Term Loan B bore interest at a rate per annum equal to 12% in excess of the LIBOR Rate and 11% in excess of the Base Rate. The weighted average interest rate for Term Loan B was 13.0% through the maturity date of August 16, 2022. On August 16, 2022, the remaining balance of the loan was $0.3 million, which was paid utilizing funds from the Revolving Credit Facility. At the time, the Company had capitalized fees associated with Term Loan B of $0.1 million, which was charged to interest expense on the Consolidated Statement of Operations.

Secured Promissory Note

In connection with the PerfX Acquisition, on July 8, 2021, Bravo Wireline, LLC, a wholly owned subsidiary of Ranger Services, entered into a security agreement with Chief Investments, LLC, as administrative agent, for the financing of certain assets acquired. Certain of the assets acquired serve as collateral under the Secured Promissory Note. As of December 31, 2022, the aggregate principal balance outstanding was $6.1 million. Borrowings under the Secured Promissory Note bear interest at a rate of 8.5% per annum and is scheduled to mature in January 2024.

42

Other Installment Purchases

During the year ended December 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 December 31, 2022, the aggregate principal balance outstanding under the Installment Agreements was $0.5 million and is payable ratably over 36 months from the time of each purchase. The monthly installment payments contain an imputed interest rate that is consistent with the Company’s incremental borrowing rate and is not significant to the Company.

Future Cash Obligations

Our operating cash requirements, scheduled debt and finance lease repayments and interest payments for the fiscal year 2023 are expected to be funded through current cash and cash to be provided from operating activities. We will obtain additional funding from our Revolving Credit Facility on an as needed basis. The table below presents our current significant cash requirements over the next five years.

[[GREPCENT_TABLE]]
[["","","Total","","2023","","2024","","2025","","2026","","2027"],["","","(in millions)"],["Debt obligations (1)","","$","20.1","","","$","7.5","","","$","6.7","","","$","5.9","","","$","\u2014","","","$","\u2014"],["Finance lease obligations (1)","","12.9","","","5.2","","","3.2","","","2.2","","","1.2","","","1.1"],["Operating lease obligations(2)","","15.1","","","4.0","","","3.2","","","3.2","","","2.8","","","1.9"],["Total","","$","48.1","","","$","16.7","","","$","13.1","","","$","11.3","","","$","4.0","","","$","3.0"]]
[[/GREPCENT_TABLE]]

_________________________

(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 from contracts with terms of less than 12 months.

Capital Returns Program

On March 1, 2023, the Board of Directors authorized a $35 million share repurchase program that can be utilized for up to 36 months. Additionally, the Board of Directors has approved a quarterly dividend of $0.05 per share, which will be initiated once the Company achieves its goal of being net debt zero. The Company believes that a share repurchase and dividend framework provides the best overall value creation potential for investors and intends to return at least 25% of annual cash flows to investors going forward.

Critical Accounting Estimates and Policies

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

Our significant accounting policies are discussed in our audited Consolidated Financial Statements included elsewhere in this Annual Report. Management believes that the following accounting estimates are those most critical to fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.

43

Property and Equipment

Policy description

Property and equipment is stated at cost or estimated fair market value at the acquisition date less accumulated depreciation. Depreciation is charged to expense on the straight‑line basis over the estimated useful life of each asset, with estimated useful lives reviewed by management on an annual basis. Expenditures for major renewals and betterments are capitalized while expenditures for maintenance and repairs are charged to expenses as incurred. 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. Once placed in service, depreciation on property and equipment continues while being repaired, refurbished or between periods of deployment.

Judgments and assumptions

Accounting for our property and equipment requires us to estimate the expected useful lives of our fleet and related equipment and any related salvage value. The range of estimated useful lives is based on overall size and specifications of the fleet, expected utilization along with continuous repairs and maintenance that may or may not extend the estimated useful lives. To the extent the expenditures extends the expected useful life, these expenditures are capitalized and depreciated over the extended useful life.

Assets Acquired and Liabilities Assumed in Business Combinations

Policy description

The Company accounts for its business combinations under the provisions of Accounting Standards Codification Topic 805-10, Business Combinations ("ASC 805-10"), which requires that the purchase method of accounting be used for all business combinations. Assets acquired and liabilities assumed are recorded at the date of acquisition at their respective fair values. For transactions that are business combinations, the Company evaluates the existence of goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. ASC 805-10 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred.

Judgments and assumptions

The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed are based on various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount rates and the number of years on which to base the cash flow projections, as well as other assumptions and estimates used to determine the cash inflows and outflows. Management determines discount rates based on the risk inherent in the acquired assets, specific risks, industry beta and capital structure of guideline companies. The valuation of an acquired business is based on available information at the acquisition date and assumptions that are believed to be reasonable. However, a change in facts and circumstances as of the acquisition date can result in subsequent adjustments during the measurement period, but no later than one year from the acquisition date.

Long‑lived Asset Impairment

Policy description

We evaluate the recoverability of the carrying value of long‑lived assets, including property and equipment and intangible assets, whenever events or circumstances indicate the carrying amount may not be recoverable. If a long‑lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long‑lived asset exceeds its fair value.

Judgments and assumptions

Our impairment analysis requires us to apply judgment in identifying impairment indicators and estimating future undiscounted cash flows of our fleets. If actual results are not consistent with our assumptions and estimates or our assumptions and estimates change due to new information, we may be exposed to an impairment charge. 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.

44

Revenue Recognition

Policy description

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: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (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.

We satisfy our performance obligation over time as the services are performed. The Company believes the output method is a reasonable measure of progress for the satisfaction of our performance obligations, which are satisfied over time, as it provides a faithful depiction of (i) our performance toward complete satisfaction of the performance obligation under the contract and (ii) the value transferred to the customer of the services performed under the contract. The Company has elected the right to invoice practical expedient for recognizing revenue. The Company invoices customers upon completion of the specified services and collection generally occurs within the payment terms agreed with customers. Accordingly, there is no financing component to our arrangements with customers.

Judgments and assumptions

Recording revenue involves the use of estimates and management judgment. 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.

Income Taxes

Policy description

The Company provides for income tax expense based on the liability method of accounting for income taxes. Deferred tax assets and liabilities are recorded based upon differences between the tax basis of assets and liabilities and their carrying values for financial reporting purposes and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. 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. 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 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

Policy description

We record equity‑based payments at fair value on the date of the grant, and expense the value of these awards in compensation expense over the applicable vesting periods.

Judgments and assumptions

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.

45

Recent Accounting Pronouncements

For information regarding new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements, please refer to Recent Accounting Pronouncements included in “Item 8. Financial Statements and Supplementary Data—Note 2 — Summary of Significant Accounting Policies”

Smaller Reporting Company Status

The Company is 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 revenue 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.