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FORM 10-Q

RANGER ENERGY SERVICES, INC.

(Exact name of registrant as specified in its charter)

Delaware			81-5449572
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, $0.01 par value

RNGR

New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated Filer ☒

Smaller reporting company ☒

Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of July 22, 2020, the registrant had 8,479,668 shares of Class A Common Stock and 6,866,154 shares of Class B Common Stock outstanding.

RANGER ENERGY SERVICES, INC.

TABLE OF CONTENTS

						Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Interim Condensed Consolidated Balance Sheets						3
Unaudited Interim Condensed Consolidated Statements of Operations						4
Unaudited Interim Condensed Consolidated Statements of Stockholders’ Equity						5
Unaudited Interim Condensed Consolidated Statements of Cash Flows						6
Notes to Unaudited Interim Condensed Consolidated Financial Statements						7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations						19
Item 3. Quantitative and Qualitative Disclosures About Market Risks						33
Item 4. Controls and Procedures						33
PART II – OTHER INFORMATION
Item 1. Legal Proceedings						34
Item 1A. Risk Factors						34
Item 2. Unregistered Sales of Securities and Use of Proceeds						36
Item 6. Exhibits						38
SIGNATURES						39

						June 30, 2020						December 31, 2019
Assets
Cash and cash equivalents						$	6.0					$	6.9
Accounts receivable, net						16.0						41.5
Contract assets						1.1						1.2
Inventory						2.0						3.8
Prepaid expenses						1.8						5.3
Total current assets						26.9						58.7
Property and equipment, net						206.6						218.9
Intangible assets, net						8.9						9.3
Operating leases, right-of-use assets						5.3						6.5
Other assets						0.4						0.1
Total assets						$	248.1					$	293.5
Liabilities and Stockholders' Equity
Accounts payable						$	5.1					$	13.8
Accrued expenses						8.0						18.4
Finance lease obligations, current portion						4.0						5.1
Long-term debt, current portion						10.0						15.8
Other current liabilities						1.2						2.0
Total current liabilities						28.3						55.1
Operating leases, right-of-use obligations						4.2						4.5
Finance lease obligations						2.3						3.6
Long-term debt, net						16.8						26.6
Other long-term liabilities						1.3						0.7
Total liabilities						52.9						90.5
Commitments and contingencies (Note 12)
Stockholders' equity
Preferred stock, $0.01 per share; 50,000,000 shares authorized; no shares issued or outstanding as of June 30, 2020 and December 31, 2019						—						—
Class A Common Stock, $0.01 par value, 100,000,000 shares authorized; 9,031,495 shares issued and 8,479,668 shares outstanding as of June 30, 2020 and 8,839,788 shares issued and 8,725,851 shares outstanding as of December 31, 2019						0.1						0.1
Class B Common Stock, $0.01 par value, 100,000,000 shares authorized; 6,866,154 shares issued and outstanding as of June 30, 2020 and December 31, 2019						0.1						0.1
Less: Class A Common Stock held in treasury, at cost (551,827 shares as of June 30, 2020 and 113,937 as of December 31, 2019)						(3.8)						(0.7)
Accumulated deficit						(11.5)						(8.1)
Additional paid-in capital						121.0						121.8
Total controlling stockholders' equity						105.9						113.2
Noncontrolling interest						89.3						89.8
Total stockholders' equity						195.2						203.0
Total liabilities and stockholders' equity						$	248.1					$	293.5

						Three Months Ended																		Six Months Ended
						June 30,																		June 30,
						2020						2019						2020						2019
Revenues
High specification rigs						$	11.4					$	33.1					$	46.3					$	64.8
Completion and other services						17.7						46.3						61.0						97.9
Processing solutions						1.6						4.9						4.4						9.9
Total revenues						30.7						84.3						111.7						172.6
Operating expenses
Cost of services (exclusive of depreciation and amortization):
High specification rigs						10.1						28.7						40.0						56.1
Completion and other services						13.3						35.0						45.0						72.9
Processing solutions						0.4						1.9						1.9						4.1
Total cost of services						23.8						65.6						86.9						133.1
General and administrative						5.5						6.3						10.5						13.5
Depreciation and amortization						9.5						8.4						18.4						16.8
Total operating expenses						38.8						80.3						115.8						163.4
Operating income (loss)						(8.1)						4.0						(4.1)						9.2
Other expenses
Interest expense, net						0.8						1.9						1.9						3.2
Total other expenses						0.8						1.9						1.9						3.2
Income (loss) before income tax expense						(8.9)						2.1						(6.0)						6.0
Tax expense						—						0.3						0.1						0.6
Net income (loss)						(8.9)						1.8						(6.1)						5.4
Less: Net income (loss) attributable to noncontrolling interests						(4.0)						0.8						(2.7)						2.4
Net income (loss) attributable to Ranger Energy Services, Inc.						$	(4.9)					$	1.0					$	(3.4)					$	3.0
Earnings (loss) per common share
Basic						$	(0.58)					$	0.12					$	(0.40)					$	0.35
Diluted						$	(0.58)					$	0.10					$	(0.40)					$	0.29
Weighted average common shares outstanding
Basic						8,474,077						8,514,495						8,545,925						8,481,788
Diluted						8,474,077						15,412,431						8,545,925						15,361,162

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

			Three Months Ended June 30,																								Six Months Ended June 30,
			2020			2019			2020			2019						2020			2019			2020			2019
			Quantity									Amount												Quantity									Amount
Shares, Class A Common Stock
Balance, beginning of period			8,947,830			8,454,273			$	0.1		$	0.1					8,839,788			8,448,527			$	0.1		$	0.1
Issuance of shares under share-based compensation plans			117,502			93,621			—			—						270,135			101,621			—			—
Shares withheld for taxes on equity transactions			(33,837)			(37,765)			—			—						(78,428)			(40,019)			—			—
Issuance of Class A Common Stock to related party			—			206,897			—			—						—			206,897			—			—
Balance, end of period			9,031,495			8,717,026			$	0.1		$	0.1					9,031,495			8,717,026			$	0.1		$	0.1
Shares, Class B Common Stock
Balance, beginning of period			6,866,154			6,866,154			$	0.1		$	0.1					6,866,154			6,866,154			$	0.1		$	0.1
Balance, end of period			6,866,154			6,866,154			$	0.1		$	0.1					6,866,154			6,866,154			$	0.1		$	0.1
Treasury Stock
Balance, beginning of period			(551,827)			—			$	(3.8)		$	—					(113,937)			—			$	(0.7)		$	—
Repurchase of Class A Common Stock			—			—			—			—						(437,890)			—			(3.1)			—
Balance, end of period			(551,827)			—			$	(3.8)		$	—					(551,827)			—			$	(3.8)		$	—
Accumulated deficit
Balance, beginning of period									$	(6.6)		$	(7.9)											$	(8.1)		$	(9.9)
Net income (loss) attributable to controlling interest									(4.9)			1.0												(3.4)			3.0
Balance, end of period									$	(11.5)		$	(6.9)											$	(11.5)		$	(6.9)
Additional paid-in capital
Balance, beginning of period									$	120.2		$	112.2											$	121.8		$	111.6
Equity based compensation amortization									0.9			0.8												1.6			1.4
Shares withheld for taxes on equity transactions									(0.2)			(0.4)												(0.3)			(0.4)
Issuance of Class A Common Stock to related party									—			3.0												—			3.0
Benefit from reversal of valuation allowance									—			0.6												—			0.6
Impact of transactions affecting noncontrolling interest												0.1			3.7												(2.1)			3.7
Balance, end of period									$	121.0		$	119.9											$	121.0		$	119.9
Total controlling interest shareholders’ equity
Balance, beginning of period									$	110.0		$	104.5											$	113.2		$	101.9
Net income (loss) attributable to controlling interest												(4.9)			1.0												(3.4)			3.0
Equity based compensation amortization									0.9			0.8												1.6			1.4
Shares withheld for taxes on equity transactions									(0.2)			(0.4)												(0.3)			(0.4)
Issuance of Class A Common Stock to related party									—			3.0												—			3.0
Benefit from reversal of valuation allowance									—			0.6												—			0.6
Repurchase of Class A Common Stock									—			—												(3.1)			—
Impact of transactions affecting noncontrolling interest												0.1			3.7												(2.1)			3.7
Balance, end of period									$	105.9		$	113.2											$	105.9		$	113.2
Noncontrolling interest
Balance, beginning of period									$	93.4		$	91.7											$	89.8		$	90.1
Net income (loss) attributable to noncontrolling interest												(4.0)			0.8												(2.7)			2.4
Equity based compensation amortization									—			0.1												0.1			0.1
Impact of transactions affecting noncontrolling interest												(0.1)			(3.7)												2.1			(3.7)
Balance, end of period									$	89.3		$	88.9											$	89.3		$	88.9
Total Stockholders' Equity
Balance, beginning of period									$	203.4		$	196.2											$	203.0		$	192.0
Net income (loss)									(8.9)			1.8												(6.1)			5.4
Equity based compensation amortization									0.9			0.9												1.7			1.5
Shares withheld for taxes on equity transactions									(0.2)			(0.4)												(0.3)			(0.4)
Issuance of Class A Common Stock to related party									—			3.0												—			3.0
Benefit from reversal of valuation allowance									—			0.6												—			0.6
Repurchase of Class A Common Stock									—			—												(3.1)			—
Balance, end of period									$	195.2		$	202.1											$	195.2		$	202.1

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

						Six Months Ended June 30,
						2020						2019
Cash Flows from Operating Activities
Net income (loss)						$	(6.1)					$	5.4
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization						18.4						16.8
Equity based compensation						1.7						1.5
Gain on debt retirement						(2.1)						—
Other costs, net						1.8						—
Changes in operating assets and liabilities
Accounts receivable						25.4						(8.6)
Contract assets						0.1						(2.9)
Inventory						1.4						(2.8)
Prepaid expenses						3.5						1.4
Other assets						(0.2)						0.9
Accounts payable						(8.7)						(0.6)
Accrued expenses						(10.4)						2.0
Operating lease, right-of-use obligations						(1.1)						—
Other long-term liabilities						0.5						1.1
Net cash provided by operating activities						24.2						14.2
Cash Flows from Investing Activities
Purchase of property and equipment						(5.8)						(16.0)
Proceeds from disposal of property and equipment						0.3						0.5
Net cash used in investing activities						(5.5)						(15.5)
Cash Flows from Financing Activities
Borrowings under Credit Facility						32.6						25.1
Principal payments on Credit Facility						(37.6)						(17.3)
Principal payments on Encina Master Financing Agreement						(5.0)						(4.8)
Principal payments on ESCO Note Payable						(3.6)						—
Principal payments on financing lease obligations						(2.6)						(2.2)
Repurchase of Class A Common Stock						(3.1)						—
Shares withheld on equity transactions						(0.3)						(0.4)
Net cash (used in) provided by financing activities						(19.6)						0.4
Decrease in Cash and Cash equivalents						(0.9)						(0.9)
Cash and Cash Equivalents, Beginning of Period						6.9						2.6
Cash and Cash Equivalents, End of Period						$	6.0					$	1.7
Supplemental Cash Flow Information
Interest paid						$	1.7					$	2.3
Supplemental Disclosure of Non-cash Investing and Financing Activities
Capital expenditures						$	0.1					$	(2.3)
Additions to fixed assets through financing leases						$	(1.0)					$	(0.8)
Early termination of financing leases						$	0.7					$	—
Initial operating lease right-of-use asset additions						$	—					$	(8.3)
Issuance of Class A Common Stock to related party						$	—					$	3.0

Ranger Energy Services, Inc. (“Ranger, Inc.,” “Ranger,” or the “Company”) is a provider of onshore high specification (“high-spec”) well service rigs and complementary services in the United States. The Company also provides an extensive range of well site services to leading U.S. exploration and production (“E&P”) companies that are fundamental to establishing and maintaining the flow of oil and natural gas throughout the productive life of a well.

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

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

•Completion and Other Services. Provider of wireline completion services necessary to bring a well on production and other ancillary services often utilized in conjunction with the high-spec rig services to enhance the production of a well.

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

The Company’s operations take place 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.

Ranger, Inc. was incorporated as a Delaware corporation in February 2017. Ranger, Inc. is a holding company, the sole material assets of which consist of membership interests in RNGR Energy Services, LLC, a Delaware limited liability company (“Ranger LLC”). Ranger LLC owns all of the outstanding equity interests in Ranger Energy Services, LLC (“Ranger Services”) and Torrent Energy Services, LLC (“Torrent Services”), the subsidiaries through which it operates its assets. Ranger LLC is the sole managing member of Ranger Services and Torrent Services, and is responsible for all operational, management and administrative decisions relating to Ranger Services and Torrent Services’ business and consolidates the financial results of Ranger Services and Torrent Services and their subsidiaries.

Recent Events

The outbreak of the novel coronavirus (“COVID-19”) has spread across the globe and has been declared a public health emergency by the World Health Organization and a National Emergency by the President of the United States. The COVID-19 pandemic has resulted, and is likely to continue to result, in significant economic disruption and has, and is likely to 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 to minimize impacts to their populations and economies. Various containment measures, which includes the quarantining of cities, regions and countries, while aiding in the prevention of further outbreak, have resulted in a severe drop 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 extent of the COVID-19 outbreak on the Company’s operational and financial performance will continue to 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 effect at the close of the first quarter ended March 31, 2020, and continued through the issuance of these condensed consolidated financial statements. 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 condensed consolidated financial statements is uncertain. At the time of this filing, cases of COVID-19 in the U.S. were increasing rapidly, particularly in Texas, where we conduct significant operations.

The severe drop in economic activity, travel restrictions and other restrictions due to COVID-19 have had a significant negative impact on the demand for oil and gas. In addition to the impact of the COVID-19 outbreak, in March 2020, OPEC, Russia and certain other oil producing states, commonly referred to as “OPEC Plus,” failed to agree on a plan to cut production of oil and natural gas. Subsequently, Saudi Arabia announced plans to increase production to record levels and reduce the prices at which they sell oil and, in turn, Russia responded with threats to also increase production. Collectively, these events created an unprecedented global oil and natural gas supply and demand imbalance, reduced global oil and natural gas storage capacity, caused oil prices to decline significantly and resulted in continued volatility in oil, natural gas and NGLs prices into the second

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 the Company’s customers’ production may be limited or completely unavailable in the future, which may further negatively impact the price of oil.

The Company 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 or may negatively impact sales, liquidity and gross margins in the future include, but are not limited to: limitations on the ability of the Company’s customers to conduct business, which would result in a decrease in demand for services and lower utilization of the Company’s assets; limitations on the ability of suppliers to provide materials or equipment, limitations on the ability of the Company’s 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; and limitations on the ability of customers to pay us on a timely basis. If prolonged, such factors may also negatively affect the carrying values of the Company’s property and equipment and intangible assets. At the close of the first quarter, the Company initiated cost reductions throughout the organization, including a reduction in the workforce and salary reductions. Additionally, various other operational, travel and organizational expense reductions will continue to manage costs to preserve liquidity through the downturn. We believe these actions will provide sufficient liquidity to finance our operations for twelve months post issuance of these consolidated financial statements. We will continue to actively monitor the situation and may take further actions that alter business operations as may be required by federal, state or local authorities, or that we determine are in the best interests of the Company’s employees, customers and stakeholders.

On March 12, 2020, the Company received a non-binding offer from CSL Capital Management, L.P. (“CSL”) and Bayou Holdings, proposing to acquire all of the outstanding shares of common stock of the Company not owned by CSL, Bayou Holdings and T. Rowe Price Associates, Inc. in a cash merger transaction for $6.00 per share (the “Take Private Proposal”). On May 11, 2020, CSL announced their decision to not pursue the possible acquisition of shares outstanding of Ranger at this time and abandoned the Take Private Proposal.

The consolidated balance sheet as of December 31, 2019 has been derived from audited financial statements and the unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”) for interim financial information and the Securities and Exchange Commission’s (the “SEC”) instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain notes and other information have been condensed or omitted. The unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the results of operations for the interim periods. These interim financial statements should be read in conjunction with the consolidated financial statements and related notes for the years ended December 31, 2019 and 2018, included in the Annual Report filed on Form 10-K for the year ended December 31, 2019 (the “Annual Report”). Interim results for the periods presented may not be indicative of results that will be realized for future periods.

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in Note 2 — Summary of Significant Accounting Policies of the Annual Report. There have been no changes in such policies or the application of such policies during the six months ended June 30, 2020.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management uses historical and other pertinent information to determine these estimates. Actual results could differ from such estimates. Areas where critical accounting estimates are made by management include:

•Depreciation and amortization of property and equipment and intangible assets;

•Impairment of property and equipment and intangible assets;

•Revenue recognition;

•Income taxes; and

•Equity-based compensation.

Emerging Growth Company Status and Smaller Reporting Company Status

The Company is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The Company will remain an emerging growth company until the earlier of (1) the last day of its fiscal year (a) following the fifth anniversary of the completion of its initial public offering (“IPO”), (b) in which its total annual gross revenue is at least $1.07 billion, or (c) in which the Company is deemed to be a large accelerated filer, which means the market value of the Company’s common stock that is held by non-affiliates exceeds $700.0 million as of the last business day of its most recently completed second fiscal quarter, or (2) the date on which the Company has issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. The Company has irrevocably opted out of the extended transition period and, as a result, the Company will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

The Company is also a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act. Smaller reporting company means an issuer that is not an investment company, an asset-back issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company and that 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.

New Accounting Pronouncements

Recently Issued Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses, which replaces the incurred loss impairment methodology to reflect expected credit losses. The amendment requires the measurement of all expected credit losses for financial assets held at the reporting date to be performed based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2022, with early adoption permitted. The Company is evaluating the effect of this accounting standard on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for accounting contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships and other transactions that reference the London Interbank Offering Rate (“LIBOR”) or another reference rate expected to be discontinued due to the reference rate reform. ASU 2020-04 became effective as of March 12, 2020 and can be applied through December 31, 2022. The Company has not made any contract modifications as of the date of this report to transition to a different reference rate, however it will consider this guidance as future modifications are made.

With the exception of the standards above, there have been no new accounting pronouncements not yet effective that have significance, or potential significance, to the Company’s condensed consolidated financial statements.

						Estimated Useful Life (years)						June 30, 2020						December 31, 2019
High specification rigs						20						$	128.2					$	127.2
High specification rigs machinery and equipment						5 - 10						40.7						38.3
Completion and other services machinery and equipment						5 - 10						56.5						55.8
Processing solutions machinery and equipment						3 - 30						45.9						40.8
Vehicles						3 - 15						23.0						25.9
Other property and equipment						5 - 25						10.6						10.1
Property and equipment												304.9						298.1
Less: accumulated depreciation												(100.3)						(85.5)
Construction in progress												2.0						6.3
Property and equipment, net												$	206.6					$	218.9

Depreciation expense was $9.3 million and $8.2 million for the three months ended June 30, 2020 and 2019, respectively, and $18.0 million and $16.5 million for the six months ended June 30, 2020 and 2019, respectively.

During the three and six months ended June 30, 2020, the Company noted a sustained decline in stock price due to the reduced demand and oversupply of oil and natural gas, which was an indication that the fair value of the Company’s long-lived assets could have fallen below their carrying values. As a result, an impairment analysis was performed and it was determined that no impairment existed. Please see “Note 1 — Organization and Business Operations—Recent Events” for additional information regarding reduced demand and oversupply of oil and “Part I, Item 8. Financial Statements and Supplementary Data — Note 2 — Summary of Significant Accounting Policies — Significant Accounting Policies — Long-Lived Asset Impairment” of the Annual Report for the policy of testing long-lived assets for impairment.

Definite lived intangible assets are comprised of the following (in millions):

						Estimated Useful Life (years)						June 30, 2020						December 31, 2019
Customer relationships						10-18						$	11.4					$	11.4
Less: accumulated amortization												(2.5)						(2.1)
Intangible assets, net												$	8.9					$	9.3

Amortization expense was $0.2 million and $0.2 million for the three months ended June 30, 2020 and 2019, respectively and $0.4 million and $0.3 million for the six months ended June 30, 2020 and 2019, respectively. Amortization expense for the future periods is expected to be as follows (in millions):

For the twelve months ending June 30,						Amount
2021						$	0.7
2022						0.7
2023						0.7
2024						0.7
2025						0.8
Thereafter						5.3
Total						$	8.9

Accrued expenses include the following (in millions):

						June 30, 2020						December 31, 2019
Accrued payables						$	1.9					$	8.3
Accrued compensation						4.3						6.3
Accrued taxes						1.6						1.8
Accrued insurance						0.2						2.0
Accrued expenses						$	8.0					$	18.4

Operating Leases

The Company has operating leases, primarily for real estate and equipment, with terms that vary from 12 months to seven years, included in operating lease costs in the table below. The operating leases are included in operating leases, right-of-use assets, other current liabilities and operating leases, right-of-use obligations in the Condensed Consolidated Balance Sheets.

Lease costs associated with yard and field offices are included in cost of services and executive offices are included in General and administrative costs in the Condensed Consolidated Statements of Operations. Lease costs and other information related to operating leases for the three and six months ended June 30, 2020 and 2019, are as follows (in millions):

						Three Months Ended June 30,																		Six Months Ended June 30,
						2020						2019						2020						2019
Short-term lease costs						$	0.6					$	1.1					$	1.4					$	3.3
Operating lease cost						$	0.7					$	0.6					$	1.4					$	1.3
Operating cash outflows from operating leases						$	0.7					$	0.6					$	1.4					$	1.4
Weighted average remaining lease term																		6.0 years						5.7 years
Weighted average discount rate																		9.3		%				9.4		%

Aggregate future minimum lease payments under operating leases are as follows (in millions):

For the twelve months ending June 30,						Total
2021						$	1.7
2022						1.0
2023						0.8
2024						0.8
2025						0.8
Thereafter						2.0
Total future minimum lease payments						7.1
Less: amount representing interest						(1.7)
Present value of future minimum lease payments						5.4
Less: current portion of operating lease obligations						(1.2)
Long-term portion of operating lease obligations						$	4.2

Finance Leases

The Company leases certain assets, primarily automobiles, under finance leases with terms that are generally three to four years. The assets and liabilities under finance leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are amortized over the shorter of the estimated useful lives or over the lease term. The finance leases are included in Property and equipment, net, Finance lease obligations, current portion and Finance lease obligations in the Condensed Consolidated Balance Sheets.

						Three Months Ended June 30,																		Six Months Ended June 30,
						2020						2019						2020						2019
Amortization of finance leases						$	1.4					$	1.2					$	2.8					$	2.5
Interest on lease liabilities						$	0.1					$	0.2					$	0.3					$	0.4
Financing cash outflows from finance leases						$	1.4					$	1.2					$	2.6					$	2.2
Weighted average remaining lease term																		1.5 years						1.8 years
Weighted average discount rate																		4.0		%				4.5		%

Aggregate future minimum lease payments under finance leases are as follows (in millions):

For the twelve months ending June 30,						Total
2021						$	4.3
2022						1.6
2023						0.6
2024						0.1
Total future minimum lease payments						6.6
Less: amount representing interest						(0.3)
Present value of future minimum lease payments						6.3
Less: current portion of finance lease obligations						(4.0)
Long-term portion of finance lease obligations						$	2.3

The aggregate carrying amounts, net of issuance costs, of the Company’s debt consists of the following (in millions):

						June 30, 2020						December 31, 2019
ESCO Notes Payable						$	—					$	5.8
Credit Facility						4.6						9.5
Encina Master Financing Agreement						22.2						27.1
Total Debt						26.8						42.4
Current portion of long-term debt						(10.0)						(15.8)
Long term-debt, net						$	16.8					$	26.6

ESCO Notes Payable

In connection with the IPO and the ESCO Leasing, LLC (“ESCO”) acquisition, both of which occurred on August 16, 2017, the Company issued $7.0 million of Seller’s Notes as partial consideration for the ESCO acquisition. These notes included a note for $1.2 million, which was paid in August 2018 and a note for $5.8 million, which was settled during the six months ended June 30, 2020. Both of these notes bore interest at 5.0%, payable quarterly until their respective maturity dates.

During the year ended December 31, 2018, the Company provided notice to ESCO that the Company sought to be indemnified for breach of contract. The Company exercised its right to stop payments of the remaining principal balance of $5.8 million on the Seller’s Notes and any unpaid interest, pending resolution of certain indemnification claims. Interest on the outstanding principal balance was accrued through the maturity date of the Note Payable. During the six months ended June 30, 2020, the Company paid $3.8 million to settle the note and any unpaid interest, in full, and recognized a gain on the retirement of debt of $2.1 million, which is included in the Condensed Consolidated Statement of Operations within General and administrative expenses. Please see Note 12 — Commitments and Contingencies for further details.

Credit Facility

On August 16, 2017, Ranger Energy Services, LLC, (“Ranger, LLC”) entered into a $50.0 million senior unsecured revolving credit facility (the “Credit Facility”) by and among certain of Ranger’s subsidiaries, as borrowers, each of the lenders party thereto and Wells Fargo Bank, N.A., as administrative agent (the “Administrative Agent”). The Credit Facility is subject to a borrowing base that is calculated based upon a percentage of the value of the Company’s eligible accounts receivable less certain reserves. Such calculation is submitted, in the form of a borrowing base certificate, to the Administrative Agent within ten business days of the preceding month end. The Credit Facility includes cash dominion provisions that permits the Administrative Agent to sweep cash daily from the Company’s bank accounts into an account of the Administrative Agent to repay the Company’s obligations under the Credit Facility. Such dominion is triggered when excess availability is less than the greater of $6.25 million and 12.5% of the lesser of (x) the maximum revolver amount and (y) the borrowing base as of such date of determination. When the Company is subject to dominion, for 30 consecutive days it is required to either (a) maintain excess availability in excess of the greater of $6.25 million and 12.5% of the lesser of (x) the maximum revolver amount and (y) the borrowing base as of such date of determination and no event of default has occurred and is continuing or (b) have no revolver drawings and available cash of at least $20.0 million for dominion to revert back to the Company. During the three months ended March 31, 2020, the Company borrowed against the Credit Facility causing dominion to revert to the Administrative Agent, however after the 30 consecutive day period, as defined above, dominion reverted back to the Company in April 2020. The borrowings under the Credit Facility, and related issuance costs, were included in long-term debt, net in the Condensed Consolidated Balance Sheets as of June 30, 2020, as the Company was not subject to dominion. The Credit Facility is scheduled to mature on August 16, 2022.

Under the Credit Facility, the total loan capacity was $15.8 million, which was based on a borrowing base certificate in effect as of June 30, 2020. The Company had outstanding borrowings of $5.0 million under the Credit Facility, leaving a residual $10.8 million available for borrowings as of June 30, 2020. The Company made a cash payment of $5.0 million on the Credit Facility in July 2020, such that there were no borrowings under the Credit Facility as of July 22, 2020. The Company was in compliance with the Credit Facility covenants as of June 30, 2020. The Company capitalized fees of $0.7 million associated with the Credit Facility, which are included in the Condensed Consolidated Balance Sheets as a discount to the Credit Facility. Such fees will be amortized through maturity and are included in Interest Expense, net on the Condensed Consolidated Statement of Operations. Unamortized debt issuance costs as of June 30, 2020 was $0.4 million.

Encina Master Financing and Security Agreement (“Financing Agreement”)

On June 22, 2018, the Company entered into a Financing Agreement with Encina Equipment Finance SPV, LLC (the “Lender”). The amount available to be provided by the Lender to the Company under the Financing Agreement was contemplated to be not less than $35.0 million, and not to exceed $40.0 million. The first financing was required to be in an amount up to $22.0 million, which was used by the Company to acquire certain capital equipment. Subsequent to the first financing, the Company borrowed an additional $17.8 million, net of expenses and in two tranches, under the Financing Agreement. The Company utilized the additional net proceeds to acquire certain capital equipment. The Financing Agreement is secured by a lien on certain high-spec rig assets. As of June 30, 2020, the aggregate principal balance outstanding under the Financing Agreement was $22.7 million. The total borrowings under the Financing Agreement were borrowed in three tranches, where the amounts outstanding are payable ratably over 48 months from the time of each borrowing. The three tranches mature in July 2022, November 2022 and January 2023.

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 June 30, 2020. Under the terms of the Financing Agreement, in no event will LIBOR fall below 1.5% and it requires the Company to maintain a leverage ratio of 2.5 to 1.0. The Company was in compliance with the covenants under the Financing Agreement as of June 30, 2020.

The Company capitalized fees of $0.9 million associated with the Financing Agreement, which are included in the Condensed Consolidated Balance Sheets as a discount to the long term debt. Such fees will be amortized through maturity and are included in Interest Expense, net in the Condensed Consolidated Statements of Operations. Unamortized debt issuance costs as of June 30, 2020 was $0.5 million.

As of June 30, 2020, aggregate future principal payments of total debt are as follows (in millions):

For the twelve months ending June 30,						Total
2021						$	10.0
2022						15.0
2023						2.7
Total						$	27.7

Equity-Based Compensation

In 2017, the Company adopted the Ranger Energy Services, Inc. 2017 Long Term Incentive Plan (the “2017 Plan”). The Company has granted shares of restricted stock (“restricted shares”) and performance-based restricted stock units (“performance stock units”) under the 2017 Plan.

Restricted Stock Awards

During the three and six months ended June 30, 2020, the Company granted 465,304 restricted shares with an aggregate value of $2.0 million. During the six months ended June 30, 2019, the Company granted 495,750 restricted shares with an aggregate value of $3.9 million. As of June 30, 2020, there was an aggregate $4.5 million of unrecognized expense related to restricted shares issued which is expected to be recognized over a weighted average period of 2.0 years.

Performance Stock Units

The performance criteria applicable to performance stock units that have been granted by the Company are based on relative total shareholder return, which measures the Company’s total shareholder return as compared to the total shareholder return of a designated peer group, and absolute total shareholder return. Generally, the performance stock units are subject to a three-year performance period.

During the three and six months ended June 30, 2020, the Company granted 121,262 target shares of market based performance stock units at a relative and absolute grant date fair value of approximately $6.33 per share and $3.62 per share, respectively, which are expected to vest on April 3, 2023. During the six months ended June 30, 2019, the Company granted 105,920 target shares of market based performance stock units at a relative and absolute grant date fair value of approximately $11.96 per share and $9.50 per share, respectively, which are expected to vest on March 21, 2022.

As of June 30, 2020, there was an aggregate $1.3 million of unrecognized compensation cost related to performance stock units which is expected to be recognized over a weighted average period of 1.9 years.

Share Repurchases

During the six months ended June 30, 2020, the Company repurchased 344,827 shares of the Company’s Class A Common Stock for an aggregate $2.4 million in a privately negotiated transaction with ESCO. Please see Note 12 — Commitments and Contingencies for further details.

In June 2019, the Board of Directors approved a share repurchase program, authorizing the Company to purchase up to 10% of the outstanding Class A Common Stock held by non-affiliates, not to exceed 580,000 shares or $5.0 million in aggregate value. Share repurchases may take place from time to time on the open market or through privately negotiated transactions. The duration of the share repurchase program was 12 months and could have been accelerated, suspended or discontinued at any time without notice. During the six months ended June 30, 2020, the Company repurchased 93,063 shares of the Company’s Class A Common Stock for an aggregate $0.7 million. Refer to “Part II, Item 2. Unregistered Sales of Securities” for further information.

For the three months ended June 30, 2020, two customers, EOG Resources and Concho Resources, Inc., accounted for 23% and 18%, respectively, of the Company’s consolidated revenues. For the six months ended June 30, 2020, the same two customers each accounted for 19% of the Company’s consolidated revenues. As of June 30, 2020, approximately 18% of the accounts receivable balance was due from these customers.

For the three months ended June 30, 2019, two customers, EOG Resources and Concho Resources, Inc., accounted for 17% and 15%, respectively, of the Company’s consolidated revenues. For the six months ended June 30, 2019, two customers, EOG Resources and Concho Resources, Inc., accounted for 17% and 14%, respectively, of the Company’s consolidated revenues. As of June 30, 2019, approximately 19% of the accounts receivable balance was due from these customers.

The Company is a corporation and is subject to U.S. federal income tax. The effective U.S. federal income tax rate applicable to the Company for the six months ended June 30, 2020 and 2019 was 0.0% and 11.3%, respectively. The Company is subject to the Texas Margin Tax that requires tax payments at a maximum statutory effective rate of 0.75% on the taxable margin of each taxable entity that does business in Texas.

As a result of the IPO and subsequent reorganization, the Company recorded a deferred tax asset; however, a full valuation allowance has been recorded to reduce the Company’s net 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.

Total income tax expense for the three and six months ended June 30, 2020 and 2019 differed from amounts computed by applying the U.S. federal statutory tax rates to pre-tax income or loss primarily due to changes in the valuation allowance related to pre-tax book income or loss and the impact of permanent differences between book and taxable income or loss attributable to noncontrolling interest. The effective tax rate includes a rate benefit attributable to the fact that Ranger LLC operates as a limited liability company treated as a partnership for federal and state income tax purposes and as such, is not subject to federal and state income taxes, except for the State of Texas for which Ranger LLC files with the Company. Accordingly, the portion of earnings attributable to noncontrolling interest is subject to tax when reported as a component of the noncontrolling interest’s taxable income.

The Company is subject to the following material taxing jurisdictions: the United States and Texas. As of June 30, 2020, the Company has no current tax years under audit. The Company remains subject to examination for federal income taxes and state income taxes for tax years 2018, 2017 and 2016.

The Company has evaluated all tax positions for which the statute of limitations remains open and believes that the material positions taken would more likely than not be sustained upon examination. Therefore, as of June 30, 2020, the Company had not established any reserves for, nor recorded any unrecognized benefits related to, uncertain tax positions.

The Coronavirus, Aid, Relief and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020 in the U.S., includes measures to assist companies, including temporary changes to income and non-income-based tax laws. For the three and six months ended June 30, 2020, there were no material tax impacts to the condensed consolidated financial statements as it relates to COVID-19 measures, although, the Company has deferred payroll tax payments through December 31, 2020. The Company will continue to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and others.

Earnings (loss) per share is based on the amount of net income (loss) allocated to the shareholders and the weighted average number of shares outstanding during the period for each class of Common Stock. The numerator and denominator used to compute earnings (loss) per share were as follows (in millions, except share and per share data):

						Three Months Ended June 30,																		Six Months Ended June 30,
						2020						2019						2020						2019
Income (loss) (numerator):
Basic:
Net income (loss) attributable to Ranger Energy Services, Inc.						$	(4.9)					$	1.0					$	(3.4)					$	3.0
Net income (loss) attributable to Class A Common Stock						$	(4.9)					$	1.0					$	(3.4)					$	3.0
Diluted:
Net income (loss) attributable to Ranger Energy Services, Inc.						$	(4.9)					$	1.0					$	(3.4)					$	3.0
Effect of noncontrolling interest, net of tax						—						0.5						—						1.4
Net income (loss) attributable to Class A Common Stock						$	(4.9)					$	1.5					$	(3.4)					$	4.4
Weighted average shares (denominator):
Weighted average number of shares - basic						8,474,077						8,514,495						8,545,925						8,481,788
Effect of share-based awards						—						31,782						—						13,220
Effect of noncontrolling interest, net of tax						—						6,866,154						—						6,866,154
Weighted average number of shares - diluted						8,474,077						15,412,431						8,545,925						15,361,162
Basic income (loss) per share						$	(0.58)					$	0.12					$	(0.40)					$	0.35
Diluted income (loss) per share						$	(0.58)					$	0.10					$	(0.40)					$	0.29

During the three and six months ended June 30, 2020, the Company excluded 0.9 million of equity-based awards and 6.9 million shares of Common Stock issuable upon conversion of the Company’s Class B Common Stock in calculating diluted loss per share, as the effect was anti-dilutive.

Legal Matters

From time to time, the Company is involved in various legal matters arising in the normal course of business. The Company does not believe that the ultimate resolution of these currently pending matters will have a material adverse effect on its condensed consolidated financial position or results of operations.

During the year ended December 31, 2018, the Company provided notice to ESCO that the Company sought to be indemnified for breach of contract. The Company exercised its right to stop payments of the remaining principal balance of $5.8 million on the Seller's Notes and any unpaid interest, pending resolution of certain indemnification claims. During the six months ended June 30, 2020, the Company paid an aggregate of $6.2 million to ESCO, of which $3.8 million was paid to settle the Seller’s Note, and any unpaid interest, and $2.4 million was paid to repurchase shares of the Company’s Class A Common Stock. Please see “Note 7 — Debt” and “Note 8 — Equity” for further details of the debt and equity settlements.

The Company’s operations are all located in the United States and organized into three reportable segments: High Specification Rigs, Completion and Other Services and Processing Solutions. The reportable segments comprise the structure used by the Chief Operating Decision Maker (“CODM”) to make key operating decisions and assess performance during the years presented in the accompanying condensed consolidated financial statements. The CODM evaluates the segments’ operating performance based on multiple measures including Operating income, Adjusted EBITDA, rig hours and rig utilization. The tables below present the operating income measurement, as the Company believes this is most consistent with the principals used in measuring the condensed consolidated financial statements.

The following is a description of each operating segment:

High Specification Rigs.  The Company’s High Specification Rigs facilitate operations throughout the lifecycle of a well, including (i) completion, (ii) workover, (iii) well maintenance and (iv) decommissioning. The Company provides these advanced well services to E&P companies, particularly to those operating in unconventional oil and natural gas reservoirs and requiring technically and operationally advanced services. The Company’s high-spec rigs are designed to support growing U.S. horizontal well demands. In addition to the core well service rig operations, the Company offers a suite of complementary services.

Completion and Other Services.  The Completion and Other Services segment provides wireline completion services necessary to bring a well on production and other ancillary services often utilized in conjunction with the high-spec rig services to enhance the production of a well.

Processing Solutions.  The Company provides a range of proprietary, modular equipment for the processing of rich natural gas streams at the wellhead or central gathering points in basins where drilling and completion activity has outpaced the development of permanent processing infrastructure.

Other. The Company incurs costs, indicated as Other, that are not allocable to any of the operating segments or lines of business and include corporate general and administrative expenses as well as depreciation of office furniture and fixtures and other corporate assets.

Segment information as of June 30, 2020 and December 31, 2019 and for the three and six months ended June 30, 2020 and 2019 is as follows (in millions):

						High Specification Rigs						Completion and Other Services						Processing Solutions						Other						Total
						Three Months Ended June 30, 2020
Revenues						$	11.4					$	17.7					$	1.6					$	—					$	30.7
Cost of services						10.1						13.3						0.4						—						23.8
Depreciation and amortization						5.2						2.6						1.3						0.4						9.5
Operating income (loss)						(3.9)						1.8						(0.1)						(5.9)						(8.1)
Interest expense, net						—						—						—						0.8						0.8
Net income (loss)						(3.9)						1.8						(0.1)						(6.7)						(8.9)
Capital expenditures						$	(0.3)					$	0.5					$	0.2					$	0.3					$	0.7
						Six Months Ended June 30, 2020
Revenues						$	46.3					$	61.0					$	4.4					$	—					$	111.7
Cost of services						40.0						45.0						1.9						—						86.9
Depreciation and amortization						10.5						5.3						1.9						0.7						18.4
Operating income (loss)						(4.2)						10.7						0.6						(11.2)						(4.1)
Interest expense, net						—						—						—						1.9						1.9
Net income (loss)						(4.2)						10.7						0.6						(13.2)						(6.1)
Capital expenditures						$	4.3					$	1.7					$	0.4					$	0.3					$	6.7
						As of June 30, 2020
Property and equipment, net						$	125.7					$	36.6					$	38.9					$	5.4					$	206.6
Total assets						$	155.9					$	45.4					$	40.1					$	6.7					$	248.1

						High Specification Rigs						Completion and Other Services						Processing Solutions						Other						Total
						Three Months Ended June 30, 2019
Revenues						$	33.1					$	46.3					$	4.9					$	—					$	84.3
Cost of services						28.7						35.0						1.9						—						65.6
Depreciation and amortization						4.8						2.9						0.5						0.2						8.4
Operating income (loss)						(0.4)						8.4						2.5						(6.5)						4.0
Interest expense, net						—						—						—						1.9						1.9
Net income (loss)						(0.4)						8.4						2.5						(8.7)						1.8
Capital expenditures						$	1.2					$	1.8					$	2.4					$	—					$	5.4
						Six Months Ended June 30, 2019
Revenues						$	64.8					$	97.9					$	9.9					$	—					$	172.6
Cost of services						56.1						72.9						4.1						—						133.1
Depreciation and amortization						9.6						5.7						1.0						0.5						16.8
Operating income (loss)						(0.9)						19.3						4.8						(14.0)						9.2
Interest expense, net						—						—						—						3.2						3.2
Net income (loss)						(0.9)						19.3						4.8						(17.8)						5.4
Capital expenditures						$	4.0					$	3.6					$	6.5					$	0.5					$	14.6
						As of December 31, 2019
Property and equipment, net						$	132.2					$	40.8					$	40.5					$	5.4					$	218.9
Total assets						$	186.1					$	57.4					$	42.6					$	7.4					$	293.5

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. We assume no obligation to update any of these forward-looking statements.

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

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

•Processing Solutions. Provider of 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”) has spread across the globe and has been declared a public health emergency by the World Health Organization (“WHO”) and a National Emergency by the President of the United States. The COVID-19 pandemic has resulted, and is likely to continue to result, in significant economic disruption and has, and will likely continue to, adversely affect the operations of the Company’s business, as the significantly reduced global and national economic activity has resulted in reduced demand for oil and natural gas. Federal, state and local governments mobilized to implement containment mechanisms and minimize impacts to their populations and economies. Various containment measures, which included the quarantining of cities, regions and countries, while aiding in the prevention of further outbreak, have resulted in a severe decline in general economic activity and a resulting decrease in energy demand. In addition, the global economy has experienced a significant disruption to global supply chains. The risks associated with the COVID-19 pandemic have impacted our workforce and the way we meet our business objectives. The extent of the COVID-19 outbreak on the Company’s operational and financial performance will significantly depend on certain developments, including the duration and spread of the outbreak and its continued impact on customer activity and third-party providers. The direct impact to the Company’s operations began to take affect at the close of the first quarter ended March 31, 2020 and continued through the close of the second quarter ended June 30, 2020; however the full extent to which the COVID-19 outbreak may affect the Company’s financial conditions, results of operations or liquidity subsequent to the issuance of these financial statements is uncertain. At the time of this filing, cases of COVID-19 in the U.S. were increasing rapidly, particularly in Texas, where we conduct significant operations.

COVID-19 and numerous public and political responses thereto have contributed to equity market volatility and potentially the risk of a global recession. We expect this global equity market volatility experienced in the first and second quarters of 2020 to continue at least until the outbreak of COVID-19 stabilizes, if not longer. The response to the COVID-19 outbreak (such as stay-at-home orders, closures of restaurants and banning of group gatherings) and slowing of the global economy has contributed to increased unemployment rates.

The severe drop in economic activity, travel restrictions and other restrictions due to COVID-19 have had a significant negative impact on the demand for oil and gas. In addition to the impact of the COVID-19 outbreak, in March 2020, OPEC, Russia and certain other oil producing states, commonly referred to as “OPEC Plus,” failed to agree on a plan to cut production of oil and natural gas. Subsequently, Saudi Arabia announced plans to increase production to record levels and reduce the prices at which they sell oil and, in turn, Russia responded with threats to also increase production. Collectively, these events created

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 or may 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. As of the date of this report, the Company has initiated cost reductions throughout the organization, including a reduction in workforce of approximately 60% and salary reductions across the Company’s organizational structure, which has reduced payroll expense by greater than 70% since the beginning of 2020. Additionally, we have made various other operational, travel and organizational expense reductions and will continue to manage costs to preserve liquidity through this downturn. 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. Currently, we expect to have sufficient liquidity to operate our business and remain in compliance with the financial covenants under our Credit Facility agreement.

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. Although we qualified for limited aid under the CARES Act related to the deferment of certain employer taxes, the Company is currently evaluating whether it can meet the conditions of and benefit from the Main Street Lending Program.

On March 12, 2020, the Company received a non-binding offer from CSL Capital Management, L.P. and Bayou Holdings, proposing to acquire all of the outstanding shares of common stock of the Company not owned by CSL, Bayou Holdings and T. Rowe Price Associates, Inc. in a cash merger transaction for $6.00 per share (the “Take Private Proposal”). On May 11, 2020, CSL announced their decision to not pursue the possible acquisition of shares outstanding of Ranger at this time and abandon the Take Private Proposal.

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.

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. During the six months ended June 30, 2020, the Company significantly reduced the workforce due to the impacts of the COVID-19 and geopolitical events that have recently taken place. Additionally, we implemented salary reductions across our organizational structure. The combined impact of the workforce reduction and salary reductions has resulted in payroll expense decreasing by greater than 70% since the beginning of 2020. We will continue to actively manage costs and take further actions as necessary. See “—Recent Events and Outlook” above.

How We Evaluate Our Operations

Management uses a variety of metrics to analyze our operating results and profitability, which include operating revenues, operating income (loss) and adjusted EBITDA, among others. Within our High Specification Rig segment, management uses additional metrics to analyze our activity levels and profitability, including, rig hours and rig utilization.

Revenues

We analyze our revenues by comparing actual revenues to our internal projections for a given period and to prior periods to assess our performance. We believe that revenues are a meaningful indicator of the demand and pricing for our services.

Operating Income (Loss)

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 non-GAAP financial measure, 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 GAAP.

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.

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

Results of Operations

Three Months Ended June 30, 2020 compared to Three Months Ended June 30, 2019

The following table presents the operating results for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.