UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 000-55404
 
 
C&J Energy Services, Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
81-4808566
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
3990 Rogerdale Rd.
Houston, Texas 77042
(Address of principal executive office)
(713) 325-6000
(Registrant’s telephone number, including area code)  
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   ý     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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     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
 
ý

  
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   ý
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes   ý     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
Common stock, Par value $0.01 per share
CJ
The New York Stock Exchange
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding at May 3, 2019 , was 66,058,105.
 



C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 

 
 
Page
 
 
 
 
Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018
 
Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2019 and 2018
 
 
 
 
 
Introductory Note and Overview
 
 
 
Industry Trends and Outlook
 
Liquidity and Capital Resources
 
Other Matters
 
 
 



- i -

PART I – FINANCIAL INFORMATION
I TEM  1. F INANCIAL STATEMENTS
C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
 
March 31, 2019
 
December 31, 2018
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
88,830

 
$
135,746

Accounts receivable, net of allowance of $6,052 at March 31, 2019 and $4,877 at December 31, 2018
 
355,745

 
309,104

Inventories, net
 
61,328

 
62,633

Prepaid and other current assets
 
16,749

 
22,357

Total current assets
 
522,652

 
529,840

Property, plant and equipment, net of accumulated depreciation of $375,253 at March 31, 2019 and $320,134 at December 31, 2018
 
738,590

 
737,292

Other assets:
 
 
 
 
Intangible assets, net
 
112,885

 
115,072

Deferred financing costs, net of accumulated amortization of $3,174 at March 31, 2019 and $2,932 at December 31, 2018
 
4,333

 
4,574

Right-of-use asset, net
 
27,413

 
—

Other noncurrent assets
 
18,583

 
37,676

Total assets
 
$
1,424,456

 
$
1,424,454

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
146,525

 
$
140,109

Payroll and related costs
 
40,344

 
48,873

Accrued expenses
 
52,224

 
55,430

Current portion of lease liability
 
6,834

 
—

Total current liabilities
 
245,927

 
244,412

Long-term lease liability
 
17,527

 
—

Other long-term liabilities
 
26,320

 
26,713

Total liabilities
 
289,774

 
271,125

Commitments and contingencies
 
 
 
 
Stockholders' equity
 
 
 
 
Common stock, par value of $0.01, 1,000,000,000 shares authorized, 66,052,053 and 66,120,015 issued and outstanding at March 31, 2019 and December 31, 2018, respectively
 
661

 
661

Additional paid-in capital
 
1,278,493

 
1,273,524

Accumulated other comprehensive loss
 
(191
)
 
(148
)
Retained deficit
 
(144,281
)
 
(120,708
)
Total stockholders' equity
 
1,134,682

 
1,153,329

Total liabilities and stockholders’ equity
 
$
1,424,456

 
$
1,424,454


See accompanying notes to consolidated financial statements

- 1 -


C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
( In thousands, except per share data)

 
Three Months Ended March 31,
 
2019
 
2018
 
(Unaudited)
Revenue
$
510,769

 
$
553,000

Costs and expenses:
 
 
 
Direct costs
416,339

 
418,997

Selling, general and administrative expenses
53,684

 
65,935

Research and development
1,805

 
1,872

Depreciation and amortization
59,756

 
46,343

(Gain) loss on disposal of assets
1,956

 
(489
)
Operating income (loss)
(22,771
)
 
20,342

Other income (expense):
 
 
 
Interest expense, net
(347
)
 
(428
)
Other income, net
465

 
620

Total other income (expense)
118

 
192

Income (loss) before income taxes
(22,653
)
 
20,534

Income tax expense (benefit)
920

 
(60
)
Net income (loss)
$
(23,573
)
 
$
20,594

Net income (loss) per common share:
 
 
 
Basic
$
(0.36
)
 
$
0.31

Diluted
$
(0.36
)
 
$
0.31

Weighted average common shares outstanding:
 
 
 
Basic
65,030

 
67,186

Diluted
65,030

 
67,266


See accompanying notes to consolidated financial statements


- 2 -


C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
 
Three Months Ended March 31,
 
2019
 
2018
 
(Unaudited)
Net income (loss)
$
(23,573
)
 
$
20,594

 
 
 
 
Other comprehensive (income) loss:
 
 
 
   Foreign currency translation loss, net of tax
(43
)
 
(370
)
Comprehensive income (loss)
$
(23,616
)
 
$
20,224

See accompanying notes to consolidated financial statements

- 3 -


C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
 
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Other Comprehensive Loss
 
Retained
Deficit
 
Total
Three Months Ended March 31, 2019
 
Number of Shares
 
Amount, at
$0.01 par 
value
 
Balance, December 31, 2018
 
66,120

 
$
661

 
$
1,273,524

 
$
(148
)
 
$
(120,708
)
 
$
1,153,329

Issuance of restricted stock, net of forfeitures
 
(14
)
 
—

 
—

 
—

 
—

 
—

Employee tax withholding on restricted stock vesting
 
(54
)
 
—

 
(883
)
 
—

 
—

 
(883
)
Share-based compensation
 
—

 
—

 
5,852

 
—

 
—

 
5,852

Net loss
 
—

 
—

 
—

 
—

 
(23,573
)
 
(23,573
)
Foreign currency translation loss, net of tax
 
—

 
—

 
—

 
(43
)
 
—

 
(43
)
Balance, March 31, 2019
 
66,052

 
$
661

 
$
1,278,493

 
$
(191
)
 
$
(144,281
)
 
$
1,134,682


 
 
Common Stock
 
Additional
Paid-in
Capital
 
Other Comprehensive Loss
 
Retained
Earnings
 
Total
Three Months Ended March 31, 2018
 
Number of Shares
 
Amount, at
$0.01 par 
value
 
Balance, December 31, 2017
 
68,547

 
$
686

 
$
1,298,859

 
$
(580
)
 
$
22,457

 
$
1,321,422

Cumulative effect from change in accounting principle
 
—

 
—

 
—

 
—

 
(13,160
)
 
(13,160
)
Issuance of restricted stock, net of forfeitures
 
(35
)
 
(1
)
 
1

 
—

 
—

 
—

Employee tax withholding on restricted stock vesting
 
(79
)
 
(1
)
 
(2,184
)
 
—

 
—

 
(2,185
)
Share-based compensation
 
—

 
—

 
6,526

 
—

 
—

 
6,526

Net income
 
—

 
—

 
—

 
—

 
20,594

 
20,594

Foreign currency translation loss, net of tax
 
—

 
—

 
—

 
(370
)
 
—

 
(370
)
Balance, March 31, 2018
 
68,433

 
$
684

 
$
1,303,202

 
$
(950
)
 
$
29,891

 
$
1,332,827

See accompanying notes to consolidated financial statements


- 4 -


C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
 
(Unaudited)
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
(23,573
)
 
$
20,594

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
59,756

 
46,343

Provision for doubtful accounts
 
1,173

 
1,261

(Gain) loss on disposal of assets
 
1,956

 
(489
)
Share-based compensation expense
 
5,852

 
6,526

Amortization of deferred financing costs
 
262

 
147

Right-of-use asset expense
 
2,194

 
—

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(47,773
)
 
(25,683
)
Inventories
 
1,358

 
(6,184
)
Prepaid expenses and other current assets
 
4,309

 
4,446

Accounts payable
 
12,510

 
16,088

Payroll related costs and accrued expenses
 
(14,836
)
 
(31,459
)
Income taxes
 
1,320

 
3,637

Other
 
229

 
429

Net cash provided by operating activities
 
4,737

 
35,656

Cash flows from investing activities:
 
 
 
 
Purchases of and deposits on property, plant and equipment
 
(48,341
)
 
(63,028
)
Proceeds from disposal of property, plant and equipment and non-core service lines
 
904

 
3,641

Net cash used in investing activities
 
(47,437
)
 
(59,387
)
Cash flows from financing activities:
 
 
 
 
Financing costs
 
—

 
(82
)
Employee tax withholding on restricted stock vesting
 
(883
)
 
(2,185
)
Shares repurchased and retired
 
(3,298
)
 
—

Net cash used in financing activities
 
(4,181
)
 
(2,267
)
Effect of exchange rate changes on cash
 
(35
)
 
88

Net decrease in cash and cash equivalents
 
(46,916
)
 
(25,910
)
Cash and cash equivalents, beginning of period
 
135,746

 
113,887

Cash and cash equivalents, end of period
 
$
88,830

 
$
87,977


See accompanying notes to consolidated financial statements

- 5 -


C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Organization, Nature of Business and Summary of Significant Accounting Policies
Organization and Nature of Business
C&J Energy Services, Inc., a Delaware corporation (“C&J” or the “Company”), is a leading provider of well construction, well completion, well support and other complementary oilfield services to oil and gas exploration and production ("E&P") companies throughout the continental United States. The Company offers a comprehensive suite of services throughout the life cycle of the well, including hydraulic fracturing, cased-hole wireline and pumpdown, cementing, coiled tubing, rig services, fluids management and other completion and well support services. The Company is headquartered in Houston, Texas, and operates across all active onshore basins in the continental United States.
Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation . The accompanying consolidated financial statements have not been audited by the Company’s independent registered public accounting firm, except that the consolidated balance sheet at December 31, 2018 , and the consolidated statement of changes in stockholders' equity as of December 31, 2017 , and December 31, 2018 , are derived from audited consolidated financial statements. In the opinion of management, all material adjustments, consisting of normal recurring adjustments, necessary for fair presentation have been included. These consolidated financial statements include all accounts of the Company. All significant intercompany transactions and accounts have been eliminated upon consolidation.
These consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, these consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2018 , which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
Reclassifications . Certain reclassifications have been made to prior period amounts to conform to current period financial statement presentation. These reclassifications did not affect previously reported results of operations, stockholders' equity, comprehensive income or cash flows.
Use of Estimates . The preparation of financial statements in conformity with U.S. 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 financial statements, and the reported amounts of revenue and expenses during the reporting period. Estimates are used in, but are not limited to, determining the following: allowance for doubtful accounts, valuation of long-lived assets and intangibles, useful lives used in depreciation and amortization, inventory reserves, litigation reserves, actuarial insurance reserves, income taxes, share-based compensation and right-of-use asset and lease liability. The accounting estimates used in the preparation of the consolidated financial statements may change as new events occur, as more experience is acquired, or as additional information is obtained and as the Company’s operating environment changes.
Cash and Cash Equivalents . For purposes of the consolidated statement of cash flows, cash is defined as cash on-hand, demand deposits and short-term investments with initial maturities of three months or less. The Company maintains its cash and cash equivalents in various financial institutions, which at times may exceed federally insured amounts. Management believes that this risk is not significant. Cash balances related to the Company's captive insurance subsidiaries, which totaled $13.3 million and $19.7 million at March 31, 2019 and December 31, 2018 , respectively, are included in cash and cash equivalents in the consolidated balance sheets, and the Company expects to use these cash balances to fund the day to day operations of the captive insurance subsidiaries and to settle future anticipated claims.
Accounts Receivable and Allowance for Doubtful Accounts . Accounts receivable are generally stated at the amount billed to customers. The Company provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Provisions for doubtful accounts

- 6 -

C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS
(Unaudited)


are recorded when it is deemed probable that the customer will not make the required payments at either the contractual due dates or in the future.
Inventories . Inventories are carried at the lower of cost or net realizable value using a weighted average cost flow method. Inventories for the Company consist of raw materials, work-in-process and finished goods, including equipment components, chemicals, proppants, supplies and materials for the Company's operations.
Inventories consisted of the following:
 
 
March 31, 2019
 
December 31, 2018
 
 
(In thousands)
Raw materials
 
$
2,262

 
$
2,333

Work-in-process
 
1,372

 
1,684

Finished goods
 
67,880

 
69,418

Total inventory
 
71,514

 
73,435

Inventory reserve
 
(10,186
)
 
(10,802
)
Inventory, net
 
$
61,328

 
$
62,633

Property, Plant and Equipment . Property, plant and equipment ("PP&E") are reported at cost less accumulated depreciation. Maintenance and repairs, which do not improve or extend the life of the related assets, are charged to expense when incurred. Refurbishments are capitalized when the value of the equipment is enhanced for an extended period. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operating income.
PP&E are evaluated on a quarterly basis to identify events or changes in circumstances (“triggering events”) that indicate the carrying value of certain PP&E may not be recoverable. PP&E and definite-lived intangible assets are reviewed for impairment upon the occurrence of a triggering event. An impairment loss is recorded in the period in which it is determined that the carrying amount of the assets are not recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets with such cash flows to be realized over the estimated remaining useful life of the primary asset within the asset group, excluding interest expense. The Company determined the lowest level of identifiable cash flows that are independent of other asset groups to be primarily at the service line level. The Company's asset groups consist of well support services, fracturing, cased-hole wireline and pumpdown services, cementing and coiled tubing. If the estimated undiscounted future net cash flows for a given asset group is less than the carrying amount of the related assets, an impairment loss is determined by comparing the estimated fair value with the carrying value of the related assets. The impairment loss is then allocated across the asset group's major classifications. No impairment charge was recorded for the three months ended March 31, 2019 and 2018.
Definite-Lived Intangible Assets . Definite-lived intangible assets are amortized over their estimated useful lives and are reviewed for impairment when a triggering event occurs. With the exception of the C&J trade name, these intangibles, along with PP&E, are reviewed for impairment when a triggering event indicates that the asset group may have a net book value in excess of recoverable value. In these cases, the Company performs a recoverability test on its PP&E and definite-lived intangible assets by comparing the estimated future net undiscounted cash flows expected to be generated from the use of these assets to the carrying amount of the assets for recoverability. If the estimated undiscounted cash flows exceed the carrying amount of the assets, an impairment does not exist, and a loss will not be recognized. If the undiscounted cash flows are less than the carrying amount of the assets, the assets are not recoverable, and the amount of impairment must be determined by fair valuing the assets. The C&J trade name is a corporate asset and is reviewed for impairment upon the occurrence of a triggering event by comparing the carrying amount of the corporate assets with the remaining cash flows available, after taking into consideration the lower level asset groups that benefit from the C&J trade name. See Note 5 - Definite-Lived Intangible Assets
for further discussion.
Deferred Financing Costs . Costs incurred to obtain revolver based financing are capitalized and amortized over the term of the loan using the effective interest method. Costs incurred to obtain non-revolver based debt financing are presented on the balance sheet as a direct deduction from the carrying amount of the term debt, consistent with debt discounts, and accreted over the term of the loan using the effective interest method.

- 7 -

C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS
(Unaudited)


Leases . The Company adopted Accounting Standards Update ("ASU") No. 2016-02, Leases and its related updates as codified under Accounting Standards Codification ("ASC") 842, Leases ("ASC 842") effective January 1, 2019, using the modified retrospective approach. Under this transition method, leases existing at, or entered into after the adoption date, are required to be recognized and measured. The Company has elected to use the effective date as its date of initial application. Consequently, prior period amounts have not been adjusted and continue to be reflected in accordance with historical accounting treatment. The Company elected the package of practical expedients which permits them not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected the practical expedient to not separate the nonlease components from the associated lease components for all classes of underlying assets, as well as the short-term lease recognition exemption. The Company has determined that certain of its service contracts contain lease components, and determined that the predominant component within the contract is the service component and is therefore accounted for under the guidance of ASC 606, Revenue from Contracts with Customers.
The Company determines whether an arrangement is a lease or includes a lease at contract inception. ASC 842 defines a lease as a contract, or part of a contract, that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Operating lease right-of-use ("ROU") assets and liabilities are recognized at commencement date and initially measured based on the present value of lease payments over the defined lease term. For leases that include options to extend, the Company assesses the likelihood of utilizing those options using a threshold of reasonably certain to renew. For leases where the Company is reasonably certain to renew, those option periods are included within the lease term and, therefore, within the measurement of the ROU asset and lease liability. Certain lease agreements contain provisions for future rent increases. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recognized on the balance sheet. For leases that do not provide an implicit rate, the Company uses its incremental borrowing rate based on information available at the commencement date to determine the present value of lease payments. In order to apply the incremental borrowing rate, a portfolio approach with a collateralized rate was utilized. Assets are grouped based on similar lease terms and economic environments in a manner whereby the Company reasonably expects that the application does not differ materially from a lease-by-lease approach. See Note 2 - Leases for further discussion.
Revenue Recognition . Revenue is recognized in a manner reflecting the transfer of goods or services to customers based on consideration a company expects to receive. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. To achieve this core principle, ASC 606 requires the Company to apply the following five steps: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to performance obligations in the contract, and (5) recognize revenue when or as the Company satisfies a performance obligation. The five-step model requires management to exercise judgment when evaluating contracts and recognizing revenue. See Note 3 - Revenue Recognition for further discussion.
Share-Based Compensation . The Company’s share-based compensation plan provides the ability to grant equity awards to the Company’s employees, consultants and non-employee directors. As of March 31, 2019 , only nonqualified stock options, restricted shares, performance stock and restricted share units had been granted under such plans. The fair value of restricted share grants and restricted share units is based on the closing price of C&J’s common stock on the grant date. The Company values option grants based on the grant date fair value using the Black-Scholes option-pricing model, and the Company values performance awards with market conditions based on the grant date fair value using a Monte Carlo simulation, both of which require the use of subjective assumptions. The Company recognizes share-based compensation expense on a straight-line basis over the requisite service period for the entire award and makes estimates of employee terminations and forfeiture rates which impacts the amount of compensation expense that is recorded over the requisite service period. Further information regarding the Company’s share-based compensation arrangements and the related accounting treatment can be found in Note 6 - Stockholders' Equity .
Fair Value of Financial Instruments . The Company’s financial instruments consist of cash and cash equivalents, accounts receivable and accounts payable. The recorded values of cash and cash equivalents, accounts receivable and accounts payable approximate their fair values given the short-term nature of these instruments.
Equity Method Investments . The Company has investments in joint ventures which are accounted for under the equity method of accounting as the Company has the ability to exercise significant influence over operating and financial policies of the joint venture. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors, participation in policy-making

- 8 -

C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS
(Unaudited)


decisions and material intercompany transactions. Under the equity method, original investments are recorded at cost and adjusted by the Company’s share of undistributed earnings and losses of these investments. The Company eliminates all significant intercompany transactions, including the intercompany portion of transactions with equity method investees, from the consolidated financial results.
Income Taxes . The Company is subject to income and other similar taxes in all areas in which they operate. When recording income tax expense, certain estimates are required because: (a) income tax returns are generally filed months after the close of the Company's annual accounting period; (b) tax returns are subject to audit by taxing authorities and audits can often take years to complete and settle; and (c) future events often impact the timing of when the Company recognizes income tax expenses and benefits.
The Company accounts for income taxes utilizing the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized as income or expense in the period that includes the enactment date.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In assessing the likelihood and extent that deferred tax assets will be realized, consideration is given to cumulative losses in recent years, projected future taxable income and tax planning strategies. A valuation allowance is recorded when, in the opinion of management, it is more likely than not that a portion or all of the deferred tax assets will not be realized.
The Company has federal, state and international net operating losses ("NOLs") carried forward from tax years ending before January 1, 2018 that will expire in the years 2020 through 2038. Due to U.S. tax reform, any U.S. federal income tax losses incurred for tax years beginning after December 31, 2017 can be carried forward indefinitely with no carry back available.  In addition, the taxable losses generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income generated in tax years beginning after December 31, 2017. After considering the scheduled reversal of deferred tax liabilities, projected future taxable income, the potential limitation on use of NOLs under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code") and tax planning strategies, the Company established a valuation allowance due to the uncertainty regarding the ultimate realization of the deferred tax assets associated with its NOL carryforwards.
As a result of the Company's emergence from Chapter 11 bankruptcy in 2017, the Company believes it experienced an ownership change for purposes of Section 382 of the Code because of its restructuring plan and that consequently its pre-change NOLs are subject to an annual limitation. The ownership change and resulting annual limitation on use of NOLs are not expected to result in the expiration of the Company's NOL carryforwards if it is able to generate sufficient future taxable income within the carryforward periods. However, the limitation on the amount of NOLs available to offset taxable income in a specific year may result in the payment of income taxes before all NOLs have been utilized. Additionally, a subsequent ownership change may result in further limitation on the ability to utilize existing NOLs and other tax attributes, which could cause the Company's pre-change NOL carryforwards to expire unused.
The Company recognizes the financial statement effects of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority. Previously recognized uncertain tax positions are reversed in the first period in which it is more-likely-than-not that the tax position would be sustained upon examination. Income tax related interest and penalties, if applicable, are recorded as a component of the provision for income tax expense. As of March 31, 2019 , the Company had an unrecognized tax benefit balance of $6.0 million related to a deduction for certain fees that were paid using shares of C&J common stock as part of the January 7, 2017 plan of reorganization. This uncertain tax benefit balance is netted against and reduces the Company's net operating loss carryforwards.
Earnings (Loss) Per Share . Basic earnings (loss) per share is based on the weighted average number of common shares (“common shares”) outstanding during the applicable period and excludes shares subject to outstanding stock options and shares of restricted stock. Diluted earnings per share is computed based on the weighted average number of common

- 9 -

C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS
(Unaudited)


shares outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to outstanding stock options, warrants, restricted stock and restricted share units.
The following is a reconciliation of the components of the basic and diluted earnings (loss) per share calculations for the applicable periods:
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
 
(In thousands, except per share amounts)
Numerator:
 
 
 
 
Net income (loss) attributed to common stockholders
 
$
(23,573
)
 
$
20,594

Denominator:
 
 
 
 
Weighted average common shares outstanding - basic
 
65,030

 
67,186

Effect of potentially dilutive securities:
 
 
 
 
Warrants
 
—

 
76

Restricted shares
 
—

 
4

Weighted average common shares outstanding - diluted
 
65,030

 
67,266

Net income (loss) per common share:
 
 
 
 
Basic
 
$
(0.36
)
 
$
0.31

Diluted
 
$
(0.36
)
 
$
0.31

A summary of securities excluded from the computation of basic and diluted earnings (loss) per share is presented below for the applicable periods:
 
Three Months Ended March 31,
 
2019
 
2018
 
(In thousands)
Basic earnings per share:
 
 
 
Unvested restricted shares
1,049

 
1,281

Diluted earnings per share:
 
 
 
Anti-dilutive stock options
351

 
351

Anti-dilutive warrants
3,528

 
—

Anti-dilutive restricted shares
1,049

 
1,272

Anti-dilutive restricted share units
942

 
—

Potentially dilutive securities excluded as anti-dilutive
5,870

 
1,623

Recent Accounting Pronouncements .
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends U.S. GAAP by introducing a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable. The amendments in ASU 2016-13 are effective for interim and annual reporting periods beginning after December 15, 2019, although it may be adopted one year earlier, and requires a modified retrospective transition approach. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02,  Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02") ,  which allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and requires certain disclosures about stranded tax effects. ASU 2018-02 is effective

- 10 -

C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS
(Unaudited)


for the interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company does not anticipate the adoption of this standard will have a material impact on its consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07"), which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for the interim and annual reporting periods beginning after December 15, 2018. The Company adopted this new accounting standard January 1, 2019, and there was no impact on its consolidated financial statements upon adoption.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"), which modifies the disclosure requirements for fair value measurements, such as requiring additional disclosure around changes in unrealized gains and losses included in other comprehensive income for Level 3 fair value measurements, as well as additional disclosure around the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for the interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other Internal-Use Software (Subtopic 350-50): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract ("ASU 2018-15"), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for the interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company adopted this new accounting standard effective January 1, 2019, and there was no impact on its consolidated financial statements upon adoption.
Note 2 - Leases
The Company leases certain property and equipment under non-cancelable operating leases. The Company’s leases typically have initial terms ranging from one to 10 years and often include options to extend or renew for one to five additional years, some of which may include options to terminate the leases. For those leases that include options to extend, the Company assesses the likelihood of utilizing those options using a threshold of reasonably certain to renew. Based on this threshold, for accounting purposes, the Company does not include renewal periods in the measurement of the right-of-use asset and lease liability. As of March 31, 2019 , the Company does not have any financing leases, and the Company has no pre-commencement leases that would create significant rights and obligations.
The Company determines whether an arrangement is a lease or includes a lease at contract inception. Operating lease right-of-use assets and liabilities are recognized at commencement date and initially measured based on the present value of lease payments over the defined lease term.
As most of our leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. In order to apply the incremental borrowing rate, a portfolio approach with a collateralized rate is utilized. Assets are grouped based on similar lease terms and economic environments in a manner whereby the Company reasonably expects that the application does not differ materially from a lease-by-lease approach.

- 11 -

C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS
(Unaudited)


The components of lease expense are included in direct cost and selling, general and administrative expenses on the consolidated statements of operations. The following table summarizes the components of lease expense for the quarter ended March 31, 2019 :
 
 
Three Months Ended
 
 
March 31, 2019
 
 
(In thousands)
Operating lease expense
 
$
2,568

Short-term lease expense
 
229

Total lease expense
 
$
2,797

The following table summarizes the Company's future lease payments as of March 31, 2019. In addition, the table presents the present value of the future lease payments, which are reflected in the current portion of lease liability and long-term lease liability, within the Company's consolidated balance sheet:
Years Ending December 31,
 
(In thousands)
2019
 
$
7,343

2020
 
7,250

2021
 
5,908

2022
 
5,300

2023
 
3,838

Thereafter
 
42

Total lease payments
 
$
29,681

Less: Present value discount
 
(5,320
)
Present value of lease payments
 
$
24,361

As of December 31, 2018, the Company's future minimum lease payments under non-cancelable operating leases for the five years ending December 31, 2019 through 2023 and thereafter were as follows: $9.2 million, $7.0 million, $5.7 million, $5.2 million, $3.8 million and $0.1 million, respectively.
The following table summarizes the Company's weighted average remaining lease term, weighted average discount rate and operating lease cash flow information for the three months ended March 31, 2019:
 
 
Three Months Ended
 
 
March 31, 2019
Lease Term and Discount Rate
 
 
Weighted average remaining lease term (in years):
 
 
Operating leases
 
3.9

Weighted average discount rate:
 

Operating leases
 
8.0
%
 
 
 
Cash Flows from Operating Activities
 
(In thousands)
Cash outflows from operating leases
 
$
2,736

Non-cash operating activities
 
 
Right-of-use assets in exchange for operating lease obligations
 
$
29,633

Note 3 - Revenue Recognition

- 12 -

C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS
(Unaudited)


The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. To achieve this core principle, ASC 606 requires the Company to apply the following five steps: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to performance obligations in the contract, and (5) recognize revenue when or as the Company satisfies a performance obligation. The five-step model requires management to exercise judgment when evaluating contracts and recognizing revenue.
Identify the Contract and Determine Transaction Price
The Company typically provides its services (i) under term pricing agreements; (ii) under contracts that include dedicated fleet or unit arrangements; (iii) on a spot market basis; and (iv) under term contracts that include “take-or-pay” provisions.
Under term pricing agreements, the Company and customer agree to set pricing for a specified period of time. The agreed-upon pricing is subject to periodic review, as specifically defined in the agreement, and may be adjusted upon the agreement of both parties. These agreements typically do not feature provisions obligating either party to commit to a certain utilization level. Additionally, these agreements typically allow either party to terminate the agreement for its convenience without incurring a termination penalty.
Under dedicated unit arrangements, customers typically commit to targeted utilization levels based on a specified number of fracturing stages per calendar month or fulfilling the customer's requirements, in either instance at agreed-upon pricing. These agreements typically do not feature obligations to pay for services not used by the customer. In addition, the agreed-upon pricing is typically subject to periodic review, as specifically defined in the agreement, and may be adjusted upon the agreement of both parties. These contracts also typically allow for termination for either party's convenience with a brief notice period and may feature a termination penalty in the event the customer terminates the contract for its convenience.
Rates for services performed on a spot market basis are based on an agreed-upon spot market rate unique to each service line.
Under term contracts with “take-or-pay” provisions, the Company’s customers are typically obligated to pay on a monthly basis for a specified quantity of services, whether or not those services are actually utilized. To the extent customers use more than the specified contracted minimums, the Company will charge a pre-agreed amount for the provision of such additional services, which amounts are typically subject to periodic review. In addition, these contracts typically feature a termination penalty in the event the customer terminates the contract for its convenience.
"Take-or-pay" provisions are considered stand ready performance obligations. The Company recognizes "take-or-pay" revenues using a time-based measure of progress, as the Company cannot reasonably estimate if and when the customer will require the Company to provide the services; likewise, the customer benefits as the Company is standing by to provide such services.
Identify and Satisfy the Performance Obligations
The majority of the Company’s performance obligations are satisfied over time. The Company has determined this best represents the transfer of value from its services to the customer as performance by the Company helps to enhance a customer controlled asset (e.g., unplugging a well, enabling a well to produce oil or natural gas). Measurement of the satisfaction of the performance obligation is measured using the output method, which is typically evidenced by a field ticket. A field ticket includes items such as services performed, consumables used, and man hours incurred to complete the job for the customer. Each field ticket is used to invoice customers. Payment terms for invoices issued are in accordance with a master services agreement with each customer, which typically require payment within 30 days of the invoice issuance.
A portion of the Company’s contracts contain variable consideration; however, this variable consideration is typically unknown at the time of contract inception, and is not known until the job is complete, at which time the variability is resolved. Examples of variable consideration include the number of hours that will be incurred and the amount of consumables (such as chemicals and proppants) that will be used to complete a job.

- 13 -

C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS
(Unaudited)


In the course of providing services to its customers, the Company may use consumables; for example, in the Company’s fracturing business, chemicals and proppants are used in the fracturing service for the customer. ASC 606 requires that goods or services promised to a customer be identified separately when they are distinct within the contract. However, the consumables are used to complete the service for the customer and are not beneficial to the customer on their own. As such, the consumables are not a separate performance obligation, but instead are combined with the other services within the context of the contract and accounted for as a single performance obligation.
Remaining Performance Obligations
The Company invoices its customers for the services provided at contractual rates multiplied by the applicable unit of measurement, including volume of consumables used and hours incurred. In accordance with ASC 606, the Company has elected the “Right to Invoice” practical expedient for all contracts, which allows the Company to invoice its customers in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date. With this election, the Company is not required to disclose information about the variable consideration related to its remaining performance obligations. For those contracts with a term of more than one year, the Company had approximately $19.0 million of unsatisfied performance obligations as of March 31, 2019 , which will be recognized as services are performed over the remaining contractual terms.
Contract Balances
Accounts receivable as presented on the Company’s consolidated balance sheets represent amounts due from customers for services provided. Bad debt expense of $1.2 million and $1.3 million was included as a component of direct costs on the consolidated statements of operations for the three months ended March 31, 2019 and 2018 , respectively.
The Company does not have any contracts in which it performs services for customers and payment for those services are contingent upon a future event (e.g., satisfaction of another performance obligation). As such, there are no contingent revenues or other contract assets recorded in the financial statements.
The Company does not have any significant contract costs to obtain or fulfill contracts with customers; as such, no amounts are recognized on the consolidated balance sheet.
The following is a description of the Company’s core service lines separated by reportable segments from which the Company generates its revenue. For additional detailed information regarding reportable segments, see Note 8 - Segment Information .
Completion Services Segment
Fracturing Services Revenue. Through its fracturing service line, the Company provides fracturing services (i) under term pricing agreements; (ii) under contracts that include dedicated fleet arrangements; (iii) on a spot market basis; or (iv) under term contracts that include "take-or-pay" provisions. Revenue is typically recognized, and customers are invoiced upon the completion of each job, which can consist of one or more fracturing stages. Once a job has been completed, a field ticket is generated that includes charges for the services performed and the consumables (such as chemicals and proppants) used during the course of service. The field tickets may also include charges any additional equipment used on the job and other miscellaneous consumables.
Cased-hole Wireline & Pumpdown Services Revenue. Through its cased-hole wireline & pumpdown services business, the Company provides cased-hole wireline, pumpdown, wireline logging, perforating, well site make-up and pressure testing and other complementary services, typically on a spot market basis. Jobs for these services are typically short-term in nature, lasting anywhere from a few hours to multiple days. The Company typically charges the customer for these services on a per job basis at agreed-upon spot market rates. Revenue is recognized based on a field ticket issued upon the completion of the job.
Other Completion Services Revenue. The Company generates revenue from its research and technology ("R&T") department, which is primarily engaged in the engineering and production of certain parts and components, such as perforating guns and addressable switches, which are used in the completion process. For R&T, the performance obligation is satisfied at a

- 14 -

C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS
(Unaudited)


point in time. The Company recognizes revenue at the point in time in which each order of parts and components are delivered to and accepted by the customer because the customer obtains control along with the risks and rewards of ownership of the products at such time. Once delivered, the Company has the right to invoice the customer.
Well Construction and Intervention Services Segment
Cementing Services Revenue. The Company provides cementing services on a spot market or project basis. Jobs for these services are typically short-term in nature and are generally completed in a few hours. The Company typically charges the customer for these services on a per job basis at agreed-upon spot market rates or agreed-upon job pricing for a particular project. Revenue is recognized, and customers are invoiced upon the completion of each job based on a field ticket, which includes charges for the service performed and the consumables used during the course of service.
Coiled Tubing Services Revenue. The Company provides a range of coiled tubing services primarily used for fracturing plug drill-out during completion operations and for well workover and maintenance, primarily on a spot market basis. Jobs for these services are typically short-term in nature, lasting anywhere from a few hours to multiple days. Revenue is recognized upon completion of each day’s work based upon a completed field ticket. The field ticket includes charges for the services performed and the consumables used during the course of service. The field ticket may also include charges for the mobilization and set-up of equipment, the personnel on the job, any additional equipment used on the job, and other miscellaneous consumables. The Company typically charges the customer for the services performed and resources provided on an hourly basis at agreed-upon spot market rates or pursuant to pricing agreements.
Well Support Services Segment
Rig Services Revenue. Through its rig service line, the Company provides workover and well servicing rigs that are primarily used for routine repair and maintenance of oil and gas wells, re-drilling operations and plug and abandonment operations. These services are provided on an hourly basis at prices that approximate spot market rates. Revenue is recognized, and a field ticket is generated upon the earliest of the completion of a job or at the end of each day. A rig services job can last anywhere from a few hours to multiple days depending on the type of work being performed. The field ticket includes the base hourly rate charge and, if applicable, charges for additional personnel or equipment not contemplated in the base hourly rate. The field ticket may also include charges for the mobilization and set-up of equipment.
Fluids Management Services Revenue. Through its fluids management service line, the Company primarily provides storage, transportation and disposal services for fluids used in the drilling, completion and workover of oil and gas wells. Rates for these services vary and can be on a per job, per hour, or per load basis, or on the basis of quantities sold or disposed. Revenue is recognized upon the completion of each job or load, or delivered product, based on a completed field ticket.
Other Special Well Site Services Revenue. Through its other special well site service line, the Company primarily provides fishing, contract labor and tool rental services for completion and workover of oil and gas wells. Rates for these services vary and can be on a per job, per hour or on the basis of rental days per month. Revenue is recognized based on a field ticket issued upon the completion of each job or on a monthly billing for rental services provided.

- 15 -

C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS
(Unaudited)


Disaggregation of Revenue
The following tables disaggregate revenue by the Company's reportable segments, core service lines and geography:
 
 
Three Months Ended March 31, 2019
 
 
Completion
Services
 
WC&I
 
Well Support Services
 
Total
 
 
(In thousands)
Product Service Line
 
 
 
 
 
 
 
 
Fracturing
 
$
236,041

 
$
—

 
$
—

 
$
236,041

Cased-hole Wireline & Pumpdown
 
82,637

 
—

 
—

 
82,637

Cementing
 
—

 
54,097

 
—

 
54,097

Coiled Tubing
 
—

 
24,996

 
—

 
24,996

Rig Services
 
—

 
—

 
55,398

 
55,398

Fluids Management
 
—

 
—

 
37,860

 
37,860

Other
 
8,421

 
—

 
11,319

 
19,740

 
 
$
327,099

 
$
79,093

 
$
104,577

 
$
510,769

Geography
 
 
 
 
 
 
 
 
West Texas
 
$
143,580

 
$
41,853

 
$
26,326

 
$
211,759

South Texas / South East
 
73,560

 
10,064

 
9,879

 
93,503

Rockies / Bakken
 
31,898

 
6,188

 
7,424

 
45,510

California
 
4,688

 
—

 
54,703

 
59,391

Mid-Con
 
54,949

 
7,967

 
6,245

 
69,161

North East
 
17,091

 
13,021

 
—

 
30,112

Other
 
1,333

 
—

 
—

 
1,333

 
 
$
327,099

 
$
79,093

 
$
104,577

 
$
510,769


- 16 -

C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS
(Unaudited)


 
 
Three Months Ended March 31, 2018
 
 
Completion
Services
 
WC&I
 
Well Support Services
 
Total
 
 
(In thousands)
Product Service Line
 
 
 
 
 
 
 
 
Fracturing
 
$
269,491

 
$
—

 
$
—

 
$
269,491

Cased-hole Wireline & Pumpdown
 
99,754

 
—

 
—

 
99,754

Cementing
 
—

 
61,548

 
—

 
61,548

Coiled Tubing
 
—

 
25,788

 
—

 
25,788

Rig Services
 
—

 
—

 
48,445

 
48,445

Fluids Management
 
—

 
—

 
31,795

 
31,795

Other
 
4,900

 
81

 
11,198

 
16,179

 
 
$
374,145

 
$
87,417

 
$
91,438

 
$
553,000

Geography
 
 
 
 
 
 
 
 
West Texas
 
$
178,975

 
$
48,779

 
$
23,822

 
$
251,576

South Texas / South East
 
99,184

 
12,683

 
8,777

 
120,644

Rockies / Bakken
 
39,009

 
4,982

 
9,933

 
53,924

California
 
5,048

 
—

 
39,830

 
44,878

Mid-Con
 
35,620

 
10,180

 
7,829

 
53,629

North East
 
15,036

 
10,793

 
621

 
26,450

Other
 
1,273

 
—

 
626

 
1,899

 
 
$
374,145

 
$
87,417

 
$
91,438

 
$
553,000

Note 4 - Debt
Credit Facility
The Company and certain of its subsidiaries (the “Borrowers”) are parties to an asset-based revolving credit agreement with, among other lenders, JPMorgan Chase Bank, N.A., as administrative agent (the “Agent”), which matures May 1, 2023 (the “Credit Facility”).
The Credit Facility allows the Borrowers to incur revolving loans in an aggregate amount up to the lesser of (a) $400.0 million or (b) a borrowing base (the “Loan Cap”), which borrowing base is based upon the value of the Borrowers’ accounts receivable, inventory and restricted cash, subject to eligibility criteria and customary reserves which may be modified in the Agent’s permitted discretion. The Credit Facility also provides for the issuance of letters of credit, which would further reduce borrowing capacity thereunder. As of March 31, 2019 , there were no loans outstanding under the Credit Facility, and there were $20.6 million  in letters of credit outstanding under the Credit Facility. The Company had available borrowing capacity of approximately $274.7 million as of March 31, 2019 .
The Borrowers pay a fee quarterly in arrears to the Agent on the unused portion of the Credit Facility equal to (i) 0.5% per annum if average utilization is less than or equal to 25% or (ii) 0.375% per annum if average utilization is greater than 25%.
The Borrowers’ obligations under the Credit Facility are secured by liens on a substantial portion of the Borrowers’ personal property, subject to certain exclusions and limitations. The Credit Facility contains covenants that limit the Borrowers’ ability to incur additional indebtedness, grant liens, make loans, make acquisitions or investments, make distributions, merge into or consolidate with other persons, or engage in certain asset dispositions. The Credit Facility also contains a financial covenant which requires the Company to maintain a monthly minimum fixed charge coverage ratio of 1.0:1.0 upon the occurrence of an event of default or on any date upon which the excess availability is less than the greater of (x) 12.5% of the Loan Cap and (y) $30.0 million. The fixed charge coverage ratio is generally defined in the Credit Facility as the ratio of (i) EBITDA minus certain capital expenditures and cash taxes paid to (ii) the sum of cash interest expenses, scheduled principal payments on borrowed money and certain distributions.

- 17 -

C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS
(Unaudited)


As of March 31, 2019 , the Company was in compliance with all financial covenants of the Credit Facility.
Note 5 - Definite-Lived Intangible Assets
The change in the carrying amounts of definite-lived intangible assets as of March 31, 2019 is presented as follows:
 
 
Amortization
Period
 
December 31, 2018
 
Amortization Expense
 
March 31, 2019
 
 
 
 
(In thousands)
Customer relationships
 
15 years
 
$
58,100

 
$
—

 
$
58,100

Trade name
 
15 years
 
68,300

 
—

 
68,300

Non-compete
 
5 years
 
1,600

 
—

 
1,600

 
 
 
 
128,000

 
—

 
128,000

Less: accumulated amortization
 
 
 
(12,928
)
 
(2,187
)
 
(15,115
)
Intangible assets, net
 
 
 
$
115,072

 
$
(2,187
)
 
$
112,885

Note 6 - Stockholders' Equity
Stock Repurchases
On July 31, 2018, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to $150.0 million of the Company’s common stock over a twelve month period starting August 1, 2018. Repurchases may commence or be suspended at any time without notice. The program does not obligate the Company to purchase a specified number of shares of common stock during the period or at all and may be modified or suspended at any time at the Company’s discretion.
During 2018, C&J executed $40.4 million of total stock repurchases at an average price of $16.55 per share, representing a total of approximately 2.4 million shares of the Company's common stock, of which $3.3 million of stock repurchases were settled during the three months ended March 31, 2019.
Share-Based Compensation
The Company adopted the C&J Energy Services, Inc. 2017 Management Incentive Plan (as amended from time to time, the “MIP”) as of January 6, 2017. The MIP provides for the grant of share-based awards to the Company’s employees, consultants and non-employee directors. The following types of awards are available for issuance under the MIP: incentive stock options and nonqualified stock options, share appreciation rights, restricted shares, restricted share units, dividend equivalent rights, performance awards, share awards, other share-based awards and substitute awards. As of March 31, 2019 , only nonqualified stock options, restricted shares, performance stock and restricted share units have been awarded under the MIP.
A total of approximately 8.0 million shares of common stock were originally authorized and approved for issuance under the MIP. The number of shares of common stock available for issuance under the MIP is subject to adjustment in the event of a reclassification, recapitalization, merger, consolidation, reorganization, spin-off, split-up, issuance of warrants, rights or debentures, share dividend, share split or reverse share split, cash dividend, property dividend, combination or exchange of shares, repurchase of shares, change in corporate structure or any similar corporate event or transaction. The number of shares of common stock available for issuance may also increase due to the termination of an award granted under the MIP or by expiration, forfeiture, cancellation or otherwise without the issuance of the common stock.
Restricted Share Units ("RSU")
As of March 31, 2019 , the Company had approximately 0.9 million RSU's outstanding to employees. The Company had approximately $11.2 million in unrecognized compensation cost related to RSU's to be expensed over a weighted average remaining service period of 2.71 years. During the three months ended March 31, 2019 , no RSU's were granted by the Company.

- 18 -

C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS
(Unaudited)


Stock Options
As of March 31, 2019 , the Company had approximately 0.4 million options outstanding to employees, including 0.1 million unvested options. The Company had approximately $1.7 million in unrecognized compensation cost related to stock options to be expensed over a weighted average remaining service period of 1.25 years. During the three months ended March 31, 2019 , no stock options were granted by the Company.
Restricted Stock
As of March 31, 2019 , the Company had approximately 0.6 million shares of restricted stock outstanding to employees and non-employee directors. The Company had approximately $17.2 million in unrecognized compensation cost related to restricted stock to be expensed over a weighted average remaining service period of 1.41 years. During the three months ended March 31, 2019 , no restricted stock was granted by the Company.
Performance Stock
As of March 31, 2019 , the Company had approximately 0.4 million shares of performance stock outstanding. The Company had approximately $6.8 million in unrecognized compensation cost related to performance stock to be expensed over a weighted average remaining service period of 2.44 years. During the three months ended March 31, 2019 , no performance stock was granted by the Company.
Note 7 - Commitments and Contingencies
Environmental Regulations & Liabilities
The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for the protection of the environment. These laws and regulations can change from time to time and may have retroactive effectiveness and impose new obligations on the Company. The Company continues to monitor the status of these laws and regulations. However, the Company cannot predict the future impact of such standards and requirements on its business.

Environmental risk is inherent to the Company's business and the Company maintains insurance coverage to mitigate its exposure to environmental liabilities. Currently, the Company is not aware of any environmental violations or liabilities that would have a material adverse effect upon its consolidated financial position, liquidity or capital resources. However, management does recognize that by the very nature of its business, material costs could be incurred from time to time to maintain compliance or in response to an environmental incident. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of the Company’s liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification.
Litigation
The Company is, and from time to time may be, involved in claims and litigation arising in the ordinary course of business. Because there are inherent uncertainties in the ultimate outcome of such matters, it is difficult to determine or otherwise predict with any certainty the ultimate outcome of any pending or potential claims or litigation against the Company; however, management believes that the outcome of those matters that are presently known to the Company will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
Note 8 - Segment Information
In accordance with ASC No. 280 - Segment Reporting ("ASC 280"), the Company routinely evaluates whether its separate operating and reportable segments have changed. This determination is made based on the following factors: (1) the Company’s chief operating decision maker (“CODM”) is currently managing each operating segment as a separate business and evaluating the performance of each segment and making resource allocation decisions distinctly and expects to do so for the foreseeable future, and (2) discrete financial information for each operating segment is available.

- 19 -

C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS
(Unaudited)


As of March 31, 2019 , the Company's operating and reportable segments were: (i) Completion Services, (ii) WC&I and (iii) Well Support Services. This segment structure reflects the financial information and reports used by the Company’s management, including its CODM, to make decisions regarding the Company’s business, including performance evaluation and resource allocation decisions.
The following is a brief description of the Company's reportable segments:
Completion Services
The Company’s Completion Services segment consists of the following businesses and service lines: (1) fracturing services; (2) cased-hole wireline and pumpdown services; and (3) completion support services, which includes the Company's R&T department.
Well Construction and Intervention Services
The Company’s WC&I segment consists of the following businesses and service lines: (1) cementing services and (2) coiled tubing services. During the first quarter of 2018, the Company exited its directional drilling business.
Well Support Services
The Company’s Well Support Services segment consists of the following businesses and service lines: (1) rig services; (2) fluids management services; and (3) other specialty well site services. During the first quarter of 2018, the Company decided to exit its artificial lift business.
The following table summarizes certain financial information related to the Company’s reportable segments.
 
 
Completion
Services
 
WC&I
 
Well Support Services
 
Corporate / Elimination
 
Total
 
 
(In thousands)
Three months ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
Revenue from external customers
 
$
327,099

 
$
79,093

 
$
104,577

 
$
—

 
$
510,769

Inter-segment revenues
 
60

 
—

 
43

 
(103
)
 
—

Depreciation and amortization
 
39,837

 
7,885

 
10,248

 
1,786

 
59,756

Operating income (loss)
 
10,787

 
(3,374
)
 
(4,810
)
 
(25,374
)
 
(22,771
)
Net income (loss)
 
10,603

 
(3,374
)
 
(4,468
)
 
(26,334
)
 
(23,573
)
Adjusted EBITDA
 
54,435

 
6,514

 
6,988

 
(18,380
)
 
49,557

Capital expenditures
 
31,319

 
8,755

 
5,156

 
3,111

 
48,341

As of March 31, 2019
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
754,504

 
$
246,435

 
$
228,963

 
$
194,554

 
$
1,424,456

Three months ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
Revenue from external customers
 
$
374,145

 
$
87,417

 
$
91,438

 
$
—

 
$
553,000

Inter-segment revenues
 
319

 
—

 
105

 
(424
)
 
—

Depreciation and amortization
 
22,872

 
10,037

 
12,275

 
1,159

 
46,343

Operating income (loss)
 
58,071

 
5,356

 
(8,767
)
 
(34,318
)
 
20,342

Net income (loss)
 
58,139

 
5,351

 
(8,583
)
 
(34,313
)
 
20,594

Adjusted EBITDA
 
81,773

 
16,305

 
5,613

 
(25,133
)
 
78,558

Capital expenditures
 
57,125

 
3,642

 
2,206

 
55

 
63,028

As of December 31, 2018
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
713,738

 
$
249,712

 
$
233,650

 
$
227,354

 
$
1,424,454


- 20 -

C&J ENERGY SERVICES, INC. AND SUBSIDIARIES
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS
(Unaudited)


The CODM evaluates reportable segment performance and allocates resources based on total earnings (loss) before net interest expense, income taxes, depreciation and amortization, other income (expense), net gain or (loss) on disposal of assets, acquisition-related costs, non-cash share-based compensation and non-routine items (“Adjusted EBITDA”), because Adjusted EBITDA is considered an important measure of each reportable segment’s performance. Adjusted EBITDA at the segment level is not considered to be a non-GAAP financial measure as it is the Company's segment measure of profit and loss and is required to be disclosed under GAAP pursuant to ASC 280. During the first quarter of 2019, Adjusted EBITDA, the Company's segment measure of profit and loss, was changed to exclude non-cash share-based compensation expense. Prior period amounts have been adjusted for comparability.
Management believes that the disclosure of Adjusted EBITDA on a consolidated basis allows investors to make a direct comparison to competitors, without regard to differences in capital and financing structure. Investors should be aware, however, that there are limitations inherent in using Adjusted EBITDA as a measure of overall profitability because it excludes significant expense items. An improving trend in Adjusted EBITDA may not be indicative of an improvement in the Company’s profitability. To compensate for the limitations in utilizing Adjusted EBITDA as an operating measure, management also uses U.S. GAAP measures of performance, including operating income (loss) and net income (loss), to evaluate performance, but only with respect to the Company as a whole and not on a reportable segment basis.
As required under Item 10(e) of Regulation S-K of the Exchange Act, included below is a reconciliation of consolidated Adjusted EBITDA, a non-GAAP financial measure, from net income (loss), which is the nearest comparable U.S. GAAP financial measure on a consolidated basis for the three months ended March 31, 2019 and 2018 .
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
 
(In thousands)
Net income (loss)
 
$
(23,573
)
 
$
20,594

Depreciation and amortization
 
59,756

 
46,343

(Gain) loss on disposal of assets
 
1,956

 
(489
)
Interest expense, net
 
347

 
428

Other income, net
 
(465
)
 
(620
)
Income tax expense (benefit)
 
920

 
(60
)
Severance and business divestiture costs
 
3,336

 
6,140

Restructuring costs and other
 
261

 
623

Acquisition-related and other transaction costs
 
—

 
727

Non-cash share-based compensation, excluding severance
 
5,573

 
4,372

Bad debt reserve
 
846

 
—

Legal settlements
 
600

 
500

Adjusted EBITDA
 
$
49,557

 
$
78,558

Note 9 - Supplemental Cash Flow Disclosures
Listed below are supplemental cash flow disclosures for the three months ended March 31, 2019 and 2018 :
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
 
(In thousands)
Cash paid for interest
 
$
(114
)
 
$
(305
)
Cash refunded from income taxes
 
$
328

 
$
3,718

Non-cash investing and financing activity:
 
 
 
 
Change in accrued capital expenditures
 
$
(638
)
 
$
771


- 21 -


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Quarterly Report”) includes certain statements and information that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “anticipate,” “believe,” “ensure,” “expect,” “if,” “intend,” “plan,” “estimate,” “project,” “forecasts,” “predict,” “outlook,” “will,” “could,” “should,” “potential,” “would,” “may,” “probable,” “likely,” and similar expressions that convey the uncertainty of future events or outcomes, and the negative thereof, are intended to identify forward-looking statements. Forward-looking statements, which are not generally historical in nature, include those that express a belief, expectation or intention regarding our future activities, plans and goals and our current expectations with respect to, among other things, our business strategy and our financial strategy.
Forward-looking statements are not assurances of future performance and actual results could differ materially from our historical experience and our present expectations or projections. These forward-looking statements are based on management’s current expectations and beliefs, forecasts for our existing operations, experience, expectations and perception of historical trends, current conditions, anticipated future developments and their effect on us, and other factors believed to be appropriate. Although management believes the expectations and assumptions reflected in these forward-looking statements are reasonable as and when made, no assurance can be given that these assumptions are accurate or that any of these expectations will be achieved (in full or at all). Our forward-looking statements involve significant risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. Known material factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, risks associated with the following:
•
a decline in demand for our services, including due to supply of oil and gas, declining or perceived instability of commodity prices, overcapacity of supply, constrained pipeline capacity, and other competitive factors affecting our industry;
•
the cyclical nature and volatility of the oil and gas industry, which impacts the level of drilling, completion and production activity and spending patterns by our customers;
•
a decline in, or substantial volatility of, crude oil and gas commodity prices, which generally leads to decreased spending by our customers and negatively impacts drilling, completion and production activity;
•
pressure on pricing for our services, including due to competition and industry and/or economic conditions, which may impact, among other things, our ability to implement price increases or maintain pricing and margin on our services;
•
the loss of, or interruption or delay in operations by, one or more of our significant customers;
•
the failure by one or more of our significant customers to pay amounts when due, or at all;
•
adverse weather conditions in oil or gas producing regions;
•
changes in customer requirements in the markets we serve;
•
costs, delays, compliance requirements and other difficulties in executing our short-and long-term business plans and growth strategies;
•
the effects of recent or future acquisitions or customer opportunities on our business, including our ability to successfully integrate our operations and the costs incurred in doing so and the costs and potential liabilities associated with new or expanded areas of operational risks (such as offshore or international operations);
•
business growth outpacing the capabilities of our infrastructure;
•
operating hazards inherent in our industry, including the possibility of accidents resulting in personal injury or death, property damage or environmental damage;
•
the loss of, or interruption or delay in operations by, one or more of our key suppliers, including resulting from product defects, recalls or suspensions;
•
the effect of environmental and other governmental regulations on our operations, including the risk that future changes in the regulation of hydraulic fracturing could reduce or eliminate demand for our hydraulic fracturing services;
•
the incurrence of significant costs and liabilities resulting from litigation or governmental proceedings;

- 22 -


•
the incurrence of significant costs and liabilities or severe restrictions on our operations or the inability to perform certain operations or provide certain services resulting from a failure to comply, or our compliance with, new or existing regulations;
•
the effect of new or existing regulations, industry and/or commercial conditions on the availability of and costs for raw materials, consumables and equipment;
•
the loss of, or inability to attract, key management and other competent personnel;
•
a shortage of qualified workers;
•
our ability to implement new technologies and services;
•
damage to or malfunction of equipment;
•
our ability to maintain sufficient liquidity and/or obtain adequate financing to allow us to execute our business plan; and
•
our ability to comply with covenants under our debt facilities.

For additional information regarding known material factors that could affect our operating results and performance, please read (1) “Risk Factors” in Part II, Item 1A of this Quarterly Report, as well as “Risk Factors” in Part I, Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (our “ 2018 Annual Report”); and (2) “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Quarterly Report, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our 2018 Annual Report. Should one or more of these known material risks occur, or should the underlying assumptions prove incorrect, our actual results, performance, achievements or plans could differ materially from those expressed or implied in any forward-looking statement.

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise, except as required by law.

- 23 -


I TEM  2. M ANAGEMENT ’ S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (i) the accompanying unaudited consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report, (ii) the audited consolidated financial statements and notes thereto included in our 2018 Annual Report, and (iii) Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2018 Annual Report.
This Quarterly Report contains forward-looking statements based on our current expectations, estimates and projections about our operations and the industry in which we operate. Our actual results may differ materially from those discussed in any forward-looking statement because of various risks and uncertainties, including those described in the sections titled “Cautionary Note Regarding Forward-Looking Statements” in Part I, Item 1 of this Quarterly Report and “Risk Factors” in Part II, Item 1A of this Quarterly Report.

 



- 24 -


Introductory Note and Overview
C&J Energy Services, Inc., a Delaware corporation (“C&J,” the “Company,” “we,” “us” or “our”), is a leading provider of well construction, well completion, well support and other complementary oilfield services to oil and gas exploration and production ("E&P") companies throughout the continental United States. We offer a comprehensive suite of services throughout the life cycle of the well, including hydraulic fracturing, cased-hole wireline and pumpdown, cementing, coiled tubing, rig services, fluids management and other completion and well support services.
Our revenues and profits are generated by providing services and equipment to customers who operate oil and gas properties and invest capital to drill new wells and enhance production or perform maintenance on existing wells. Our results of operations in our core service lines are driven primarily by five interrelated, fluctuating variables: (1) the drilling, completion and production activities of our customers, which is primarily driven by oil and natural gas prices and directly affects the demand for our services; (2) the price we are able to charge for our services and equipment, which is primarily driven by the level of demand for our services and the supply of equipment capacity in the market; (3) the cost of materials, supplies and labor involved in providing our services, and our ability to pass those costs on to our customers; (4) our activity, or “utilization” levels; and (5) the quality, safety and efficiency of our service execution.
Our operating strategy continues to be focused on maintaining high asset utilization levels to maximize revenue generation while controlling cost to drive returns. We monitor factors that impact our asset utilization and pricing levels; including current and expected customer activity levels. Each segment measures asset utilization as follows:
• For our Completion Services segment, we measure our asset utilization levels primarily by the total number of days that our asset base works on a monthly basis, based on the available working days per month, which excludes scheduled maintenance days. We generally consider an asset to be working such days that it is at or in transit to a job location, regardless of the number of hours worked or whether it generated any revenue during such time.
• In our Well Construction and Intervention Services segment, we measure our asset utilization levels primarily by the total number of days that our asset base works on a monthly basis, based on the available working days per month. In our coiled tubing business, we measure certain asset utilization levels by the hour to better understand measures between daylight and 24-hour operations.
• In our Well Support Services segment, we measure activity levels primarily by the number of hours our assets work on a monthly basis, based on the available working days per month.
While asset utilization is helpful for purposes of assessing our overall activity levels and customer demand, given the variance in revenue and profitability from job to job, depending on the type of service to be performed and the equipment, personnel and consumables required for the job, as well as competitive factors and market conditions in the region in which the services are performed, asset utilization is not necessarily indicative of our financial and/or operational performance and should not be given undue reliance. For additional information about factors impacting our business and results of operations, please see “Industry Trends and Outlook” in this Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
To help manage asset utilization and profitability in our operations, our management monitors revenue, Adjusted EBITDA by reportable business segment and certain operational data indicative of utilization levels, which information is provided for each of our operating segments under “Reportable Segments” in this Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Management evaluates the financial performance of our reportable business segments primarily based on such segment's Adjusted EBITDA because management believes Adjusted EBITDA provides important information about the activity and profitability of our lines of business within each reportable business segment and aids us in analytical comparisons for purposes of, among other things, efficiently allocating our assets and resources. Adjusted EBITDA at the segment level is not considered to be a non-GAAP financial measure as it is our segment measure of profit or loss and is required to be disclosed under GAAP pursuant to ASC 280. Please read Note 8 - Segment Information in Part I, Item 1 “Financial Statements” of this Quarterly Report, for the definition and calculation of Adjusted EBITDA.


- 25 -


Results of Operations
The following is a comparison of our results of operations for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 .
Results for the Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31, 2018
The following table summarizes the change in our results of operations for the three months ended March 31, 2019 when compared to the three months ended March 31, 2018 :
 
 
Three Months Ended March 31,
 
 
 
 
2019
 
2018
 
$ Change
 
 
(In thousands)
Completion Services:
 
 
 
 
 
 
Revenue
 
$
327,099

 
$
374,145

 
$
(47,046
)
Operating income
 
$
10,787

 
$
58,071

 
$
(47,284
)
 
 
 
 
 
 
 
Well Construction and Intervention Services:
 
 
 
 
 
 
Revenue
 
$
79,093

 
$
87,417

 
$
(8,324
)
Operating income (loss)
 
$
(3,374
)
 
$
5,356

 
$
(8,730
)
 
 
 
 
 
 
 
Well Support Services:
 
 
 
 
 
 
Revenue
 
$
104,577

 
$
91,438

 
$
13,139

Operating income (loss)
 
$
(4,810
)
 
$
(8,767
)
 
$
3,957

 
 
 
 
 
 
 
Corporate / Elimination:
 
 
 
 
 
 
Operating income (loss)
 
$
(25,374
)
 
$
(34,318
)
 
$
8,944

 
 
 
 
 
 
 
Combined:
 
 
 
 
 
 
Revenue
 
$
510,769

 
$
553,000

 
$
(42,231
)
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
Direct costs
 
416,339

 
418,997

 
(2,658
)
Selling, general and administrative expenses
 
53,684

 
65,935

 
(12,251
)
Research and development
 
1,805

 
1,872

 
(67
)
Depreciation and amortization
 
59,756

 
46,343

 
13,413

(Gain) loss on disposal of assets
 
1,956

 
(489
)
 
2,445

Operating income (loss)
 
(22,771
)
 
20,342

 
(43,113
)
Other income (expense):
 
 
 
 
 
 
Interest expense, net
 
(347
)
 
(428
)
 
81

Other income, net
 
465

 
620

 
(155
)
Total other income (expense)
 
118

 
192

 
(74
)
Income (loss) before income taxes
 
(22,653
)
 
20,534

 
(43,187
)
Income tax expense (benefit)
 
920

 
(60
)
 
980

Net income (loss)
 
$
(23,573
)
 
$
20,594

 
$
(44,167
)

- 26 -


Revenue
Revenue decreased $42.2 million , or 7.6% , to $510.8 million for the three months ended March 31, 2019 , as compared to $553.0 million for the three months ended March 31, 2018 . The decrease in revenue was primarily due to (i) a decrease of $47.0 million in our Completion Services segment primarily due to challenging market conditions within our fracturing service line as a result of takeaway capacity constraints in West Texas causing lower pricing and utilization, as well as pricing pressures within our wireline and pumpdown service lines, (ii) a decrease of $8.3 million in our Well Construction and Intervention Services segment as a result of decreased utilization and pricing pressure across its service lines, offset by an increase of $13.1 million in our Well Support Services segment as a result of improved pricing and activity levels across its service lines.
Direct Costs
Direct costs decreased $2.7 million , or 0.6% , to $416.3 million for the three months ended March 31, 2019 , as compared to $419.0 million for the three months ended March 31, 2018 . The decrease in direct costs was primarily due to reduced consumable and fuel costs as a result of lower activity levels.
As a percentage of revenue, direct costs increased to 81.5% for the three months ended March 31, 2019 , as compared to 75.8% for the three months ended March 31, 2018 . The increase was primarily due to challenging market conditions within our fracturing service line as a result of takeaway capacity constraints in West Texas, as well as pricing pressures across all service lines within the Completions Services and WC&I segments.
Selling, General and Administrative Expenses (“SG&A”)
SG&A decreased $12.3 million , or 18.6% , to $53.7 million for the three months ended March 31, 2019 , as compared to $65.9 million for the three months ended March 31, 2018 . The decrease in SG&A was primarily driven by (i) severance expense associated with the departure of an executive officer in the corresponding prior year period, (ii) lower labor and employee related costs from our cost reduction efforts, (iii) a reduction in integration costs related to the acquisition of O-Tex in the corresponding prior year period as well as a reduction in other general and administrative expenses.
Depreciation and Amortization Expense (“D&A”)
D&A increased $13.4 million , or 28.9% , to $59.8 million for the three months ended March 31, 2019 , as compared to $46.3 million for the three months ended March 31, 2018 . The increase in D&A was primarily the result of capital expenditures associated with equipment placed into service after the first quarter of 2018.
Income Taxes
We recorded an income tax expense of $0.9 million for the three months ended March 31, 2019 , at a negative effective rate of (4.1%), compared to an income tax benefit of $0.1 million for the comparable prior year period, at a negative effective rate of (0.3%). The decrease in the effective tax rate, and the resulting effective tax rate below the expected statutory rate, was primarily due to the existence and adjustment of our valuation allowance applied against certain deferred tax assets, including net operating loss carryforwards.
Reportable Segments
As of March 31, 2019 , our reportable business segments were:
•
Completion Services, which consists of the following businesses and service lines: (1) fracturing services; (2) cased-hole wireline and pumpdown services; and (3) completion support services, which includes our research and technology (“R&T”) department.
•
Well Construction and Intervention Services, which consists of the following businesses and service lines: (1) cementing services and (2) coiled tubing services.
•
Well Support Services, which consists of the following businesses and service lines: (1) rig services; (2) fluids management services; and (3) other specialty well site services.

- 27 -


During the first quarter of 2018, we decided to exit our directional drilling business and artificial lift business. We ceased directional drilling operations during the first quarter of 2018, and we are in the process of divesting the assets and inventory associated with that business. We completed the sale of substantially all of the assets and inventory associated with the artificial lift business during 2018.
Our reportable business segments are described in more detail below; for financial information about our reportable business segments, including revenue from external customers and total assets by reportable business segment, please see Note 8 - Segment Information in Part I, Item 1 “Financial Statements” of this Quarterly Report.
Completion Services
The core services provided through our Completion Services segment are fracturing, cased-hole wireline and pumpdown services. Our completion support services are focused on supporting the efficiency and effectiveness of our operations. Our R&T department provides in-house manufacturing capabilities that help to reduce operating cost and enable us to offer more technologically advanced and efficiency focused completion services, which we believe is a competitive differentiator. For example, through our R&T department we manufacture the data control instruments used in our fracturing operations and the perforating guns and addressable switches used in our wireline operations; these products are also sold to third-parties. The majority of revenue for this segment is generated by our fracturing business.
During the first quarter of 2019 , our fracturing business deployed, on average, approximately 660,000 hydraulic horsepower (“HHP”) out of a fleet of approximately 860,000 HHP as of March 31, 2019 . Our typical horizontal fleet size consists of 20 pumps, or approximately 40,000 HHP, and our typical vertical fleet size consists of 10 pumps, or approximately 20,000 HHP. In our cased-hole wireline and pumpdown businesses, during the first quarter of 2019 , we deployed, on average, approximately 67 wireline trucks and 81 pumpdown units. Not all of our deployed assets are utilized fully, or at all, at any given time, due to, among other things, routine scheduled maintenance and downtime.
The following table presents revenue, Adjusted EBITDA and certain operational data for our Completion Services segment for the first quarter of 2019 , the fourth quarter of 2018 , and the first quarter of 2018 . Please read Note 8 - Segment Information in Part I, Item 1 “Financial Statements” of this Quarterly Report, for the definition and calculation of Adjusted EBITDA. For additional information, please also read “Introductory Note and Overview” in this Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Three Months Ended
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
 
(In thousands)
Revenue
 
 
 
 
 
Fracturing
$
236,041

 
$
192,814

 
$
269,491

Cased-hole Wireline & Pumpdown
82,637

 
92,761

 
99,754

Other
8,421

 
7,686

 
4,900

Total revenue
$
327,099

 
$
293,261

 
$
374,145

 
 
 
 
 
 
Adjusted EBITDA
$
54,435

 
$
44,240

 
$
81,773

 
 
 
 
 
 
Average active hydraulic fracturing horsepower
660,000

 
650,000

 
630,000

Total fracturing stages
5,100

 
4,197

 
4,652

 
 
 
 
 
 
Average active wireline trucks
67

 
70

 
67

 
 
 
 
 
 
Average active pumpdown units
81

 
81

 
72

Revenue and profitability in our Completion Services segment increased sequentially due to the strong performance of our fracturing operations. The operational momentum created by the increase in our dedicated fleet count as we exited 2018, combined with improved customer activity levels and efficiencies in the first quarter, resulted in improved utilization levels and enhanced profitability in our fracturing business. In our wireline and pumpdown businesses, delayed completion activity in our largest operating area that includes the Bakken and the Rocky Mountains, inclement weather in all of

- 28 -


our core operating basins, and a more competitive pricing environment resulted in both revenue and profitability decreasing sequentially. With the challenging conditions of the first quarter of 2019, we worked to increase efficiencies and streamline costs in our wireline and pumpdown businesses, including reallocating assets to more profitable locations and closing select operating districts in line with our disciplined returns focused strategy.
Well Construction and Intervention Services
The core services provided through our Well Construction and Intervention Services segment are cementing and coiled tubing services. Although we previously provided directional drilling services through this segment, we ceased operations during the first quarter of 2018, and we are in the process of selling the related assets and inventory. The majority of revenue for this segment is generated by our cementing business.
During the first quarter of 2019 , our cementing business deployed, on average, approximately 68 cementing units; and in our coiled tubing business, we deployed, on average, approximately 14 coiled tubing units during the quarter. Our deployed assets may not be utilized fully, or at all, at any given time, due to, among other things, routine scheduled maintenance and downtime.
The following table presents revenue, Adjusted EBITDA and certain operational data for our Well Construction and Intervention Services segment for the first quarter of 2019 , the fourth quarter of 2018 , and the first quarter of 2018 . Please read Note 8 - Segment Information in Part I, Item 1 “Financial Statements” of this Quarterly Report, for the definition and calculation of Adjusted EBITDA. For additional information, please also read “Introductory Note and Overview” in this Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Three Months Ended
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
 
(In thousands)
Revenue
 
 
 
 
 
Cementing
$
54,097

 
$
63,490

 
$
61,548

Coiled Tubing
24,996

 
30,012

 
25,788

Other
—

 
—

 
81

Total revenue
$
79,093

 
$
93,502

 
$
87,417

 
 
 
 
 
 
Adjusted EBITDA
$
6,514

 
$
15,900

 
$
16,305

 
 
 
 
 
 
Average active cementing units
68

 
69

 
71

 
 
 
 
 
 
Average active coiled tubing units
14

 
17

 
17


Revenue and profitability decreased sequentially in our WC&I segment primarily due to lower customer activity levels, inclement weather and reduced asset deployment. These factors, together with the lower overall drilling rig count from smaller public and private customers in West Texas and a more competitive pricing environment in West Texas and the Mid-Continent, negatively impacted our cementing business throughout the first quarter. In our coiled tubing business, we experienced unexpected downtime with some of our large diameter units, several of which were warrantied by the manufacturer, and all but one returned to service early in the second quarter of 2019. Additionally, slower than expected completion activity levels in South Texas and the Mid-Continent resulted in lower overall utilization in our coiled tubing business during the first quarter of 2019.

Well Support Services
Our Well Support Services segment focuses on post-completion activities at the well site, including rig services, such as workover and plug and abandonment, fluids management services, and other specialty well site services. Although we previously provided artificial lift applications through this segment, we completed the sale of substantially all of the assets and inventory associated with such business on July 2, 2018. Additionally, in response to the highly competitive landscape and reflecting our returns-focused strategy, we have continued to focus on operational rightsizing measures to better align these businesses with current market conditions, which has included closing facilities and idling unproductive equipment. For

- 29 -


example, during the fourth quarter of 2017, we divested our Canadian rig services business, during the first quarter of 2018, we exited the condensate hauling business in South Texas, and late in the second quarter of 2018, we shut-down our East Texas rig services operations. The majority of revenue for this segment is generated by our rig services business, and we consider rig services and fluids management to be the core businesses within this segment.
During the first quarter of 2019 , our rig services business deployed, on average, approximately 124 workover rigs per workday. In our fluids management business, we deployed, on average, approximately 660 fluid services trucks per workday and approximately 1,307 frac tanks per workday. In our fluids management business, we own 23 private salt water disposal wells for fluids disposal purposes. However, not all of our deployed assets are utilized fully, or at all, at any given time, due to, among other things, routine scheduled maintenance and downtime.
The following table presents revenue, Adjusted EBITDA, and certain operational data for our Well Support Services segment for the first quarter of 2019 , the fourth quarter of 2018 , and the first quarter of 2018 . Please read Note 8 - Segment Information in Part I, Item 1 “Financial Statements” of this Quarterly Report, for the definition and calculation of Adjusted EBITDA. For additional information, please also read “Introductory Note and Overview” in this Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Three Months Ended
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
 
(In thousands)
Revenue
 
 
 
 
 
Rig Services
$
55,398

 
$
54,366

 
$
48,445

Fluids Management
37,860

 
37,929

 
31,795

Other Special Well Site Services
11,319

 
11,586

 
11,198

Total revenue
$
104,577

 
$
103,881

 
$
91,438

 
 
 
 
 
 
Adjusted EBITDA
$
6,988

 
$
13,130

 
$
5,613

 
 
 
 
 
 
Average active workover rigs
149

 
152

 
140

Total workover rig hours
96,208

 
92,956

 
92,428

 
 
 
 
 
 
Average active fluids management trucks
660

 
645

 
616

Total fluids management truck hours
337,306

 
336,261

 
307,002

Segment revenue was essentially flat, but segment profitability declined sequentially due to inclement weather across our operating basins and higher overall labor costs. In our rig services business, we benefited from the full quarter impact of rate increases implemented in the fourth quarter of 2018, which were offset by multiple instances of harsh weather conditions throughout the back half of the quarter, especially in our largest operating basin of California. Weather-driven delays also inhibited our ability to get equipment to location to meet continued strong customer demand for plug and abandonment services, which resulted in special services revenue and profitability decreasing sequentially. In our fluids management business, customer demand continued to improve, but weather-driven delays in our largest operating basins and higher labor costs caused profitability to decline sequentially.
Industry Trends and Outlook
We face many challenges and risks in the industry in which we operate. Although many factors contributing to these risks are beyond our ability to control, we continuously monitor these risks and have taken steps to mitigate them to the extent practicable. In addition, while we believe that we are well positioned to capitalize on available growth opportunities, we may not be able to achieve our business objectives, and consequently, our results of operations may be adversely affected. Please read the factors described in the sections titled “Cautionary Note Regarding Forward-Looking Statements” in Part I, Financial Information and “Risk Factors” in Part II, Item 1A of this Quarterly Report for additional information about the known material risks that we face.
We seek to manage our business in line with demand for services and try to make adjustments as necessary to effectively respond to changes in market conditions, customer activity levels, pricing for our services and equipment, and utilization of our equipment and personnel. Our response to the industry's persistent uncertainty is to maintain sufficient

- 30 -


liquidity and a conservative capital structure and monitor our discretionary spending. We intend to maintain a financial structure that includes little or no debt during the near term. We take a measured approach to asset deployment, balancing our view of current and expected customer activity levels with a focus on generating positive returns for our shareholders. Our priorities remain to drive revenue by maximizing utilization, to improve margins through cost controls, to protect and grow our market share by focusing on the quality, safety and efficiency of our service execution, and to ensure that we are strategically positioned to capitalize on constructive market dynamics.
Completion Services Outlook
Our strategy of increasing our dedicated fleet count with efficient, existing customers resulted in strong operating momentum throughout the first quarter of 2019, which should result in continued modest improvement in the second quarter of 2019. With that said, current market conditions remain volatile, the supply and demand balance of horsepower in the market remains unfavorable for service providers, and customers are still very price sensitive. Our primary focus remains to lower our overall cost structure and to more closely align with dedicated customers with deep inventories of work and proven track records of efficient operations, many of which we have created long-term relationships with over the past several years. In our wireline and pumpdown businesses, we expect improvement in customer activity levels in most of our core operating basins during the second quarter. Specifically, our largest customers in the Bakken and the Rocky Mountain regions commenced completion activities as we exited the first quarter, which should result in improved utilization of deployed assets in our largest operating basin.
Well Construction and Intervention Services Outlook
We currently expect that our Well Construction and Intervention Services segment will experience improved activity levels in the second quarter of 2019 primarily due to an increase in the number of drilling rigs serviced by our cementing business and the redeployment of our large diameter coiled tubing units that experienced downtime during the first quarter of 2019. Despite the recent improvements in our cementing business, market conditions remain volatile and customers remain very price sensitive. We will continue to focus on streamlining costs and deploying units with efficient customers that we already work for in several of our other core businesses. In our coiled tubing business, customer activity levels have remained strong in West Texas, and we experienced a noticeable improvement in customer demand in our other core operating basins as we exited the first quarter, which should result in improved utilization of deployed equipment throughout the second quarter of 2019.
Well Support Services Outlook
We expect improved financial results in our Well Support Services segment in the second quarter as customer demand remains strong and periods of inclement weather that are typical in the first quarter subside. We continue to experience increased demand for workover and well maintenance activities, and we will focus on deploying additional assets with steady, efficient customers in our core operating basins. In our rig services business, we will focus on increasing profitable market share primarily in California and West Texas, and we should benefit from further cost savings associated with district consolidation and the elimination of certain product lines in select basins. In our fluids management business, we will focus on areas with improving fluids logistics and disposal demand, but potential growth opportunities will be dependent upon asset availability and the easing of labor constraints that we continue to experience in select basins. With that said, we continue to explore potential strategic opportunities for our Well Support Services segment that would enable us to focus more on growing our new well focused businesses.
Regulations
The discussion set forth under Item 1. "Business - Government Regulations and Environmental, Health and Safety Matters" in our 2018 Annual Report is incorporated herein by reference.
On March 8, 2018, the President issued two Proclamations directing the imposition, effective March 23, 2018, of ad valorem tariffs of 25% on certain imported steel products and 10% on certain imported aluminum products from all countries, with the exception of Canada and Mexico. Subsequently, on March 22, 2018, the President issued two additional Proclamations that exempted, in addition to Canada and Mexico, several additional countries from the remedial tariff measures, as follows: (i) Argentina; (ii) Australia; (iii) Brazil; (iv) the 28 member countries of the European Union; and (v) South Korea. In Proclamations issued on April 30, 2018, the President: (i) permanently exempted South Korea from the imposition of tariffs on imported steel, while allowing tariffs to be imposed on imported aluminum; (ii) extended the steel and aluminum tariff exemptions for Argentina, Australia, and Brazil indefinitely to allow for continued negotiations; and (iii) extended the steel and aluminum tariff exemptions for Canada, Mexico, and the 28 member countries of the European Union to allow for continued

- 31 -


negotiations, but only through May 31, 2018. In addition to possible country-based exemptions, the United States has established a protocol whereby individuals or entities using any of the affected steel or aluminum products in business activities, such as manufacturing, may request the exclusion of individual products from the imposition of tariffs. On May 31, 2018, the U.S. announced that it would also impose steel and aluminum tariffs on Canada, Mexico, and the 28 member countries of the European Union. In addition, Argentina, Australia, Brazil, and South Korea implemented measures to address the impairment to U.S. national security attributable to steel and aluminum imports that were deemed satisfactory to the United States. As a result, imports of steel and/or aluminum from these countries have been exempted from the imposition of tariff-based remedies, but, with the exception of Australia, the United States has implemented quantitative restrictions in the form of absolute quotas, meaning that imports in excess of the allotted quota will be disallowed.
Our R&T department is primarily engaged in the engineering and production of certain parts and components, such as perforating guns and addressable switches, which are used in the completion process. Certain of these items, particularly perforating guns used in our wireline operations, are manufactured using imported steel tubing, which is subject to a 25% tariff. We expect that, depending on the ultimate outcome of the country exemption and product exclusion processes described above, our raw material costs will increase and result in corresponding increases in the price of our finished goods. Further, in addition to the products manufactured by our R&T department, we expect that the costs of other high steel content products used in conjunction with our fracturing and coiled tubing operations, specifically power ends, fluid ends, treating iron and coiled tubing strings, will also increase as we expect the manufacturers of such goods to pass along the net effect the tariffs have on the cost of manufacturing such goods.
For additional information, please see “Liquidity and Capital Resources” and “Reportable Segments” in this Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in addition to “Cautionary Note Regarding Forward-Looking Statements” in Part I, Financial Information and “Risk Factors” in Part II, Item 1A of this Quarterly Report.
Liquidity and Capital Resources
Sources and Uses of Liquidity and Capital Resources
Our primary sources of liquidity have historically included, and we have funded our capital expenditures with, cash flows from operations, proceeds from public offerings of our common stock and borrowings under debt facilities. Our ability to generate future cash flows is subject to a number of variables, many of which are outside of our control, including the drilling, completion and production activity by our customers, which is highly dependent on oil and gas prices. See Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Industry Trends and Outlook” for additional discussion of certain factors that impact our results and the market challenges within our industry. Please also read “Financial Condition and Cash Flows” below for information about net cash provided by or used in our operating, investing and financing activities.
Our financial performance and condition has remained strong during the three months ended March 31, 2019 , and we have maintained a strong balance sheet and a conservative capital structure. As of March 31, 2019 , we had a cash balance of $88.8 million and no borrowings drawn on our asset-based revolving credit agreement with, among other lenders, JPMorgan Chase Bank, N.A., as administrative agent, which matures May 1, 2023 (the “Credit Facility"), which had $274.7 million of available borrowing capacity after taking into consideration outstanding letters of credit totaling $20.6 million . This resulted in total liquidity of $363.5 million as of March 31, 2019 . As of May 3, 2019 , we had a cash balance of approximately $106.6 million and no borrowings drawn on our Credit Facility, which had $274.7 million of available borrowing capacity after taking into consideration our current outstanding letters of credit totaling $31.0 million , resulting in total liquidity of approximately $381.4 million . Under the terms of our Credit Facility, the borrowing base is subject to monthly adjustments based on current levels of accounts receivable and inventory. For additional information about the Credit Facility, please see  Note 4 - Debt in Part I, Item 1 “Financial Statements” of this Quarterly Report.
Our primary uses of cash are for operating costs, capital expenditures and other expenditures. The oilfield services business is capital-intensive, requiring significant investment to maintain, upgrade and purchase equipment to meet our customers’ needs and industry demand. Our capital expenditures consist primarily of:
•
growth capital expenditures, which are capital expenditures made to acquire additional equipment and other assets, increase our service lines, or advance other strategic initiatives for the purpose of growing our business; and

- 32 -


•
maintenance capital expenditures, which are capital expenditures related to our existing equipment, such as refurbishment and other activities to extend the useful life of partially or fully depreciated assets.
Capital expenditures totaled $48.3 million in the first quarter of 2019 , primarily pertaining to maintenance capital expenditures for deployed equipment. Based on current market conditions and assumptions on future customer demand, we expect our 2019 capital expenditure budget to range between $140.0 million and $180.0 million. We expect to fund our 2019 capital expenditure program primarily with cash flows from operations and potential borrowings under our Credit Facility. The amount of indebtedness we have outstanding at any time could limit our ability to finance future growth and could adversely affect our operations and financial condition. Based on our existing operating performance, we currently believe that our cash flows from operations, cash on hand and borrowings under our Credit Facility will be sufficient to meet our operational and capital expenditure requirements over the next twelve months.
On July 31, 2018, the Company's Board of Directors approved a stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to $150.0 million of the Company’s common stock over the twelve month period starting August 1, 2018, in open market or in privately negotiated transactions, subject to U.S. Securities and Exchange Commission regulations, stock market conditions, capital needs of the business, and other factors. Repurchases may be commenced or suspended at any time without notice. In 2018, the Company executed the repurchase of approximately $40.4 million of the Company's common stock. No repurchases were made in the first quarter of 2019.
Financial Condition and Cash Flows
The net cash provided by or used in our operating, investing and financing activities is summarized below:
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
 
(In thousands)
Cash provided by (used in):
 
 
 
 
Operating activities
 
$
4,737

 
$
35,656

Investing activities
 
(47,437
)
 
(59,387
)
Financing activities
 
(4,181
)
 
(2,267
)
Effect of exchange rate on cash
 
(35
)
 
88

Change in cash and cash equivalents
 
$
(46,916
)
 
$
(25,910
)
Cash Provided by Operating Activities
Net cash provided by operating activities was $4.7 million for the three months ended March 31, 2019 . The inflow of cash was primarily from adjustments for non-cash items of $71.2 million offset by $42.9 million of increased investment in working capital related to changes in operating assets and liabilities as a result of sequential increased utilization within our fracturing service line and a net loss of $23.6 million .
Net cash provided by operating activities was $35.7 million for the three months ended March 31, 2018. The inflow of cash was primarily related to net income of $20.6 million, adjustments for non-cash items of $53.8 million, $3.6 million related to a federal income tax refund and positive changes in other operating assets and liabilities primarily related to prepaid expenses and accounts payable. These cash inflows were offset by $63.3 million of increased investment in working capital (accounts receivable, inventory and payroll related costs and accrued expenses) as a result of the increase in demand for our services primarily from our Completion Services segment for the first three months of 2018.
Cash Used in Investing Activities
Net cash used in investing activities was $47.4 million for the three months ended March 31, 2019 . The use of cash was primarily related to $48.3 million of capital expenditures mostly for the maintenance of deployed equipment, offset by $0.9 million of proceeds from the disposal of property, plant and equipment and non-core service lines.
Net cash used in investing activities was $59.4 million for the three months ended March 31, 2018. The use of cash was related to $63.0 million of capital expenditures primarily pertaining to the refurbishment of stacked equipment and the construction of new-build frac pumps and refurbished ancillary equipment, partially offset by $3.6 million of proceeds from the disposal of property, plant and equipment and the divestiture of our non-core service lines.

- 33 -


Cash Used in Financing Activities
Net cash used in financing activities was $4.2 million for the three months ended March 31, 2019 . The cash used was related to $3.3 million for the settlement of share repurchases in connection with our stock repurchase program and $0.9 million of employee tax withholding on restricted stock vesting.
Net cash used in financing activities was $2.3 million for the three months ended March 31, 2018. The cash used was primarily related to $2.2 million of employee tax withholding on restricted stock vesting.
Other Matters
Contractual Obligations
Our contractual obligations at March 31, 2019 , did not change materially from those disclosed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations” of our 2018 Annual Report. 
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, as of March 31, 2019 .
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends U.S. GAAP by introducing a new impairment model for financial instruments that is based on expected credit losses rather than incurred credit losses. The new impairment model applies to most financial assets, including trade accounts receivable. The amendments in ASU 2016-13 are effective for interim and annual reporting periods beginning after December 15, 2019, although it may be adopted one year earlier, and requires a modified retrospective transition approach. We are currently evaluating the impact this standard will have on our consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02,  Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02") ,  which allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and requires certain disclosures about stranded tax effects. ASU 2018-02 is effective for the interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. We do not anticipate the adoption of this standard to have a material impact on our consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07"), which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for the interim and annual reporting periods beginning after December 15, 2018. We adopted this new accounting standard January 1, 2019, and there was no impact on our consolidated financial statements upon adoption.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"), which modifies the disclosure requirements for fair value measurements, such as requiring additional disclosure around changes in unrealized gains and losses included in other comprehensive income for Level 3 fair value measurements, as well as additional disclosure around the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for the interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.

- 34 -


In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other Internal-Use Software (Subtopic 350-50): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract ("ASU 2018-15"), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for the interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. We adopted this new accounting standard effective January 1, 2019, and there was no impact to our consolidated financial statements upon adoption.

- 35 -


I TEM  3. Q UANTITATIVE AND Q UALITATIVE D ISCLOSURES A BOUT M ARKET R ISK
As of March 31, 2019 , there have been no material changes in market risk from the information provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” or “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A in our 2018 Annual Report.
I TEM  4. C ONTROLS AND P ROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to provide reasonable assurance that the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives.
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to accomplish their objectives at a reasonable assurance level as of March 31, 2019 .
Changes in Internal Controls Over Financial Reporting
Effective January 1, 2019, we adopted ASU No. 2016-02, Leases, and its related amendments. During this implementation and upon adoption of the new standard, we assessed and modified our internal controls in order to facilitate adoption of the new lease accounting standard, primarily related to the implementation of a new lease accounting system and modifications to the related payment and accounting processes.
There were no other changes in our system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarterly period ended March 31, 2019 , that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


- 36 -


PART II – OTHER INFORMATION
I TEM  1. L EGAL P ROCEEDINGS
We are, and from time to time may be, subject to various legal proceedings and claims incidental to or arising in the ordinary course of our business. Our management does not presently expect the outcome of those matters that are presently known to the Company, individually or collectively, to have a material adverse effect on our consolidated financial condition or results of operations. Please also see Note 7 - Commitments and Contingencies - Litigation in Part I, Item 1 “Financial Statements” of this Quarterly Report.
U.S. Department of Justice Criminal Investigation into Pre-Merger Incident
There is a pending criminal investigation led by the Department of Justice in connection with a fatality that occurred at a facility we now own in Williston, North Dakota. The fatality occurred on October 3, 2014, prior to our acquisition of such facility and the ongoing business in connection with the Nabors Merger. We are cooperating fully, and efforts to resolve this matter are underway.
I TEM  1A. R ISK F ACTORS
In addition to the information set forth in this Quarterly Report, including under the section titled “Cautionary Note Regarding Forward-Looking Statements,” you should carefully consider the information set forth in Item 1A “Risk Factors” in our 2018 Annual Report, which is incorporated by reference herein, for a detailed discussion of known material factors which could materially affect our business, financial condition or future results.
I TEM  2. U NREGISTERED S ALES OF E QUITY S ECURITIES AND U SE OF P ROCEEDS
No equity securities of the Company were sold during the period covered by this Quarterly Report that were not registered under the Securities Act.
The following table summarizes share repurchase activity by the Company for the three months ended March 31, 2019 (in thousands, except average price paid per share):
Period
 
Total Number
of Shares
Purchased (b)
 
Average
Price
Paid Per
Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Program (a)
 
Maximum Number (or approximate dollar value) of Shares that may yet
be Purchased Under Such Program
January 1 - January 31
 
298

—

$
14.94

 
—

 
$
109,650

February 1 - February 28
 
51,480

 
$
16.78

 
—

 
$
109,650

March 1 - March 31
 
2,294

 
$
15.24

 
—

 
$
109,650

(a) On July 31, 2018, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to $150.0 million of the Company’s common stock, inclusive of commissions, over a twelve month period starting August 1, 2018. Repurchases may commence or be suspended at any time without notice. The program does not obligate the Company to purchase a specified number of shares of common stock during the period or at all and may be modified or suspended at any time at the Company’s discretion. No assurance can be given that shares will be repurchased in the future.
(b) Includes 54,072 shares that were withheld by us to satisfy tax withholding obligations of employees that arose upon the vesting of restricted shares. The value of such shares is based on the closing price of our common shares on the vesting date.
I TEM  3. D EFAULTS U PON S ENIOR S ECURITIES
None.

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I TEM  4. M INE S AFETY D ISCLOSURES
Not applicable.
I TEM  5. O THER I NFORMATION
None.

- 38 -


I TEM  6. E XHIBITS
The exhibits required to be filed or furnished by Item 601 of Regulation S-K are listed below.
Exhibit No.
  
Description of Exhibit.
 
 
 
 
 
  
 
 
*10.1
 

* 31.1
 
* 31.2
 
** 32.1
 
** 32.2
 
*§101.INS
 
XBRL Instance Document
*§101.SCH
 
XBRL Taxonomy Extension Schema Document
* §101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
* §101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
* §101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
* §101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
*
Filed herewith
**
Furnished herewith in accordance with Item 601(b) (32) of Regulation S-K.
 
 

- 39 -


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
 
 
 
 
 
 
  C&J Energy Services, Inc.
 
 
 
 
 
 
 
 
Date:
May 7, 2019
By:
 
/s/ Donald J. Gawick
 
 
 
 
 
 
 
 
Donald J. Gawick
 
 
 
 
 
 
Chief Executive Officer, President and Director
 
 
 
 
 
 
(Principal Executive Officer)
 
 
 
 
 
 
 
 
 
 
By:
 
/s/ Jan Kees van Gaalen
 
 
 
 
 
 
 
 
Jan Kees van Gaalen
 
 
 
 
 
 
Chief Financial Officer
 
 
 
 
 
 
(Principal Financial Officer)

- 40 -
EXECUTION COPY



EMPLOYMENT AGREEMENT
This Employment Agreement (this “ Agreement ”) is entered into effective as of April 15, 2019 (the “ Effective Date ”), by and between C&J Spec-Rent Services, Inc., an Indiana company (the “ Company ”), and Sharon Paul (“ Executive ”).
RECITALS
WHEREAS , the Company desires to retain the experience, abilities and service of Executive;
WHEREAS , Executive wishes to be employed by the Company under the conditions of employment specified in this Agreement; and
WHEREAS , both the Company and Executive have read and understood the terms of this Agreement, and have been afforded a reasonable opportunity to review this Agreement with their respective legal counsel.
NOW, THEREFORE , in consideration of the mutual promises and covenants contained in this Agreement, the parties hereto agree as follows, effective as of the Effective Date:
Article I
DEFINITIONS
1.1      Certain Definitions. For purposes of this Agreement, the following terms shall have the meanings specified or referred to in this Section 1.1 :
(a)      “ Accrued Obligation ” shall mean (i) Executive’s Base Salary earned but unpaid through the Date of Termination and (ii) any unreimbursed business expenses properly incurred by Executive prior to the Date of Termination so long as Executive timely submitted all documentation for reimbursement as required by applicable Company policies.
(b)      “ Board ” shall mean the Board of Directors of C&J Energy Services, Inc., a Delaware corporation (the “ Parent ”), and the parent company of the Company.
(c)      “ Business ” shall mean (i) any business in which any member of the Company Group is engaged during the Term and for which Executive has (or has had) responsibilities or about which Executive has obtained Confidential Information; provided, however, the definition of “Business” shall not include any business in which the Company Group no longer engages or has any plans to engage in as of the end of the Term; and (ii) any other business in which any member of the Company Group has undertaken material steps to engage within the twelve (12) month period prior to the end of the Term, so long as Executive had material responsibility for, or Confidential Information about, such anticipated business. Without limiting the foregoing, the definition of “Business” shall be deemed to include the Company Group’s core businesses: well construction and intervention services (including cementing and coiled tubing services), well completion services (including hydraulic fracturing and related stimulation services, cased-hole wireline, pressure pumping and pump-down, perforating, pressure testing, and logging services), and well support services (including

1


workover, plug and abandonment and other related and specialty rig services, and fluid hauling, storage and disposal services).
(d)      “ Cause ” shall mean Executive’s (i) willful and continued failure to substantially perform, without proper legal justification (and not due to Permanent Disability), the duties and responsibilities required hereunder or under any other written agreement between Executive and the Company or any other member of the Company Group, or otherwise reasonably required by the Board to be undertaken; (ii) any material breach of this Agreement or any other material written agreement between Executive and the Company or any other member of the Company Group, including the representations and covenants set forth herein; (iii) any material violation of any law applicable to the workplace or employment relationship or material failure to abide by lawful and material instructions, policies, codes of conduct or workplace rules established by any member of the Company Group and applicable to Executive; (iv) any conduct in connection with Executive’s employment duties or responsibilities that is (A) unlawful or grossly negligent and has a material adverse effect on any member of the Company Group or its business, or (B) fraudulent or dishonest and results, or is intended to result, in personal gain or enrichment at the material expense of any member of the Company Group; or (v) commission of, or indictment, conviction, admission or plea of guilty or nolo contendere for or to a charge of any felony (or state law equivalent) or any crime involving moral turpitude.
(e)      “ Change of Control ” shall mean the occurrence of any of the following events:
(i)      any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)), other than a Permitted Holder (as defined in Section 1.1(l) ), acquires “beneficial ownership” (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Parent representing more than fifty percent (50%) of the combined voting power of the Parent’s then outstanding securities; provided , however , that if the Company engages in a merger or consolidation in which the Company or surviving entity in such merger or consolidation becomes a subsidiary of another entity, then references to the Company’s then outstanding securities shall be deemed to refer to the outstanding securities of such parent entity;
(ii)      a change in the composition of the Board such that the “Continuing Directors” cease for any reason, other than due to ordinary course retirement, death, disability, term limit or any director refreshment or similar policy, to constitute at least seventy percent (70%) of the Board. The “ Continuing Directors ” shall mean those members of the Board who either: (A) were directors on the Effective Date; or (B) were subsequently elected by, or on the nomination or recommendation of, at least a three-quarters (3/4) majority (consisting of at least four (4) directors) of the Board who were or become Continuing Directors;
(iii)      the consummation of a merger, reorganization or consolidation of the Parent with any corporation, including a reverse or forward triangular merger, where the Parent’s shareholders immediately prior to such transaction

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own less than a majority of the voting securities of the surviving or resulting corporation or entity after the transaction;
(iv)      the consummation or a transaction that implements in whole or in part a resolution of the Parent’s shareholders authorizing a complete liquidation or dissolution of the Parent; or
(v)      the sale or disposition (other than a pledge or similar encumbrance) by the Parent of all or substantially all of the assets of the Parent or the Company Group, other than to a Permitted Holder or Permitted Holders;
provided , however , if a Change of Control constitutes a payment event with respect to any deferred compensation that is subject to Section 409A, a transaction or event described in paragraph (i), (ii), (iii) or (iv) shall constitute a Change of Control only if such transaction or event constitutes a “change in control event” as defined in Treasury Regulation Section 1.409A-3(i)(5).
(f)      “ Code ” shall mean the Internal Revenue Code of 1986, as amended.
(g)      “ Company Group ” shall mean the Parent and each of its Subsidiaries.
(h)      “ Date of Termination ” shall mean the effective date of termination of Executive’s employment hereunder, as specified in the applicable Notice of Termination.
(i)      “ Notice of Termination ” shall mean a notice from one party to this Agreement to the other party that indicates such party’s intent to terminate Executive’s employment hereunder, and which specifies the provision of this Agreement pursuant to which such termination will occur.
(j)      “ Permanent Disability ” shall mean a physical or mental impairment that renders Executive incapable of materially performing Executive’s duties hereunder (after accounting for reasonable accommodation, if applicable and required by applicable law) for a period in excess of six (6) months during any consecutive twelve (12) month period.
(k)      “ Permitted Holder ” shall mean (i) any trustee or other fiduciary holding securities of the Parent under an employee benefit plan of any member of the Company Group, (ii) any Subsidiary of the Parent that is at least 80% owned by the Parent, and (iii) any corporation, partnership, limited liability company or other entity owned, directly or indirectly, by the shareholders of the Parent in substantially the same proportions as their ownership of securities of the Parent.
(l)      “ Protected Period ” shall mean the period beginning on the effective date of a Change of Control and ending on the one (1) year anniversary of the effective date of such Change of Control.
(m)      “ Release Expiration Date ” shall mean the date that is twenty-one (21) days following the date upon which the Company timely delivers to Executive the Release (which shall occur no later than seven (7) days after the Date of Termination), or in the event that such termination of employment is “in connection with an exit incentive or other employment termination program” (as such phrase is defined in the

3


Age Discrimination in Employment Act of 1967, as amended), the date that is forty-five (45) days following such delivery date. The “ Release ” shall mean an agreement providing for the release of claims against the Company Group in a form acceptable to the Company.
(n)      “ Restricted Area ” shall mean (i) during the portion of the Prohibited Period that occurs while Executive is employed by any member of the Company Group, the world and, (ii) during the portion of the Prohibited Period that occurs following the Date of Termination, those geographic areas where the Company or any other member of the Company Group conducted the Business during the Term and for which Executive had direct or indirect, material responsibilities. Without limiting the foregoing, the Restricted Area shall include those geographic areas specified on Exhibit A , and any additional areas in which any member of the Company Group has taken material steps as of the Date of Termination, with Executive’s assistance, in preparation of conducting the Business.
(o)      “ Section 409A ” shall mean Section 409A of the Code and the final Department of Treasury regulations and other interpretive guidance issued thereunder.
(p)      “ Subsidiary ” shall mean any business entity with respect to which the Parent owns or controls, directly or indirectly, not less than a majority of the equity securities of such entity, or otherwise possesses, with by virtue of security ownership or contract, the power to elect a majority of the board of directors or other governing body or officers thereof.
ARTICLE II     
DUTIES
2.1      Duties . During the Term (as defined in Section 3.1 ), Executive shall serve as Chief Human Resources Officer of the Parent, or in such other position(s) as the Board or the Parent’s Chief Executive Officer shall determine. Executive shall comply with the policies of the Company Group as may be in effect from time to time for executive officers, including the Company Group’s policies regarding confidentiality, ownership of intellectual property, drug testing, trading in securities of the Parent, discrimination and harassment, and lawful and ethical conduct. Executive shall have such duties, authorities and responsibilities as the Board or the Parent’s Chief Executive Officer shall designate that are consistent with Executive’s position.
2.2      Extent of Duties . During the Term, Executive shall devote substantially all of Executive’s business time, energy and efforts to the affairs of the Parent and other members of the Company Group as the Parent, acting through its Board and the Parent’s Chief Executive Officer, shall deem necessary in the discharge of Executive’s duties hereunder. Executive shall not engage, directly or indirectly, in any other business or businesses, whether or not similar to that of the Company Group, except with the consent of the Chairman of the Board or as otherwise permitted by this Section 2.2 . Executive agrees to serve in the position(s) referred to in Section 2.1 and to perform diligently and to the best of Executive’s abilities the duties and services appertaining to such offices, as well as such additional duties and services appropriate to such offices which the parties mutually may agree upon from time to time. Notwithstanding the foregoing, nothing herein shall prevent Executive from participating in social, civic, charitable, religious, business, educational or professional associations, or the passive management of Executive’s personal investments, so long as such activities do not materially

4


detract from Executive’s ability to perform Executive’s duties under this Agreement or otherwise violate the provisions of this Agreement. Without limiting the foregoing, in the event that Executive desires to participate personally in any business opportunity that is related to the business of any member of the Company Group, Executive shall not participate in such opportunity without first making full written disclosure to the Board of such opportunity and the scope of Executive’s proposed involvement and seeking necessary approvals under the Parent’s corporate policies in effect at such time.
ARTICLE III     
TERMS OF EMPLOYMENT
3.1      Employment Period . Unless sooner terminated pursuant to the terms and conditions of this Agreement, Executive’s employment pursuant to this Agreement shall commence on the Effective Date and end on the first anniversary of the Effective Date (such period, the “ Initial Period ”); provided , however , that on the first anniversary of the Effective Date and on each subsequent anniversary of the Effective Date, if Executive’s employment under this Agreement has not been terminated pursuant to Article IV , the term of this Agreement shall automatically extend for an additional year (each one-year term, an “ Extension Period ”) unless on or before the date that is ninety (90) days prior to the end of the then-existing Initial Term or Extension Period, as applicable, the Company or Executive provides the other party hereto written notice (a “ Notice of Non-Renewal ”) that the term will not be so extended. The period from the Effective Date through the expiration of this Agreement or, if sooner, the termination of Executive’s employment pursuant to this Agreement, regardless of the time or reason for such termination, is referred to herein as the “ Term .”
3.2      Annualized Base Salary . As compensation for services rendered under this Agreement, Executive shall be entitled to receive an annualized base salary (before tax withholdings and other deductions) of $400,000 (“ Base Salary ”). Executive’s Base Salary shall be reviewed by the Board from time to time and, in the Board’s sole discretion, may be modified (such determined amount as in effect at any time, the “ Effective Base Salary ”). Executive’s base salary shall be payable in substantially equal installments in accordance with the practice and policies of the Company as may exist from time to time (but no less frequently than monthly).
3.3      Cash Incentive Awards .
(a)      Annual Bonus . For each complete year that Executive is employed with the Company hereunder during the Term (each such year, a “ Bonus Year ”), Executive shall be eligible to receive an annual cash bonus award (each, an “ Annual Bonus ”) under the Parent’s short-term incentive plan (as may be in effect from time to time, the “ STIP ”), subject to and conditioned on the Parent’s overall performance and financial results together with any other terms and conditions of the STIP that may be established by the Board or the Compensation Committee of the Board (the “ Compensation Committee ”) for that Bonus Year (generally and collectively, the “ STI Performance Plan ”). Unless otherwise established by the Board or the Compensation Committee, the incentive opportunity available to Executive shall be based on a target value of 65% of the annualized rate of Executive’s Effective Base Salary in effect at the time of determination. Notwithstanding the foregoing, (i) unless the Compensation Committee determines otherwise, Executive shall not be entitled to any payment of an Annual Bonus for any Bonus Year in which the Parent does not achieve the vesting requirements and other

5


conditions set forth in the applicable STI Performance Plan, as determined by the Compensation Committee in its sole discretion; (ii) the actual amount of each Annual Bonus, if any, paid to Executive is subject to determination in the sole discretion of the Compensation Committee; (iii) Executive shall not be entitled to any Annual Bonus if Executive’s employment under this Agreement is terminated by the Company for Cause prior to the date of payment of such Annual Bonus; and, (iv) subject to the exceptions set forth herein, Executive shall not be entitled to any Annual Bonus for any Bonus Year if Executive is not employed by the Company on the date the Compensation Committee approves payment of such Annual Bonus. It is expected but not guaranteed that payment of the Annual Bonus, if any, will be approved in connection with the finalization of the Parent’s annual financial statements for the Bonus Year to which it relates and paid as promptly as practicable following such approval but in no event later than December 31 of the year following the applicable Bonus Year. The Compensation Committee may, in its sole discretion, determine that up to 50% of the value of any Annual Bonus shall be paid in equity of the Parent and the remainder of such Annual Bonus be paid in cash. For each Bonus Year during the Term, the Compensation Committee will review the STIP and establish the structure, terms and conditions (including performance objectives, metrics, goals and incentive opportunities) of the STI Performance Plan and the target value of the incentive opportunity (“ Effective STI Bonus Target ”) provided to Executive for the Bonus Year as it deems appropriate.
(b)      Discretionary Bonus . In addition to the Annual Bonus, Executive may be eligible to receive additional short- and long-term incentive cash bonus awards in the sole discretion of the Board or the Compensation Committee (each a “ Discretionary Bonus ” and, together with the Annual Bonus, “ Bonuses ”). The frequency, amount, terms and conditions of any Discretionary Bonus shall be left to the exclusive discretion of the Board or the Compensation Committee.
3.4      Benefits . During the Term, the Company agrees to make available to Executive and Executive’s eligible family members the employment benefits that the Parent or another member of the Company Group, as applicable, makes available to similarly situated employees and their respective eligible family members, subject to the terms and conditions of the applicable benefit programs and plans. Executive and Executive’s eligible family members shall be eligible to participate in any and all employee benefit plans (including medical and dental insurance, retirement plans, disability insurance and life insurance) as may be implemented by the Parent (or another member of the Company Group, as applicable) from time to time for its similarly situated employees and their families. Such employment benefits shall be governed by the applicable plan documents, insurance policies, or employment policies, and may be at any time modified, suspended, discontinued, or revoked in the sole discretion of the Parent (or another member of the Company Group, as applicable) in accordance with the terms of the applicable documents or policies. In addition to such benefits, the Company agrees to provide, or cause to be provided, the following benefits upon satisfaction by Executive of any eligibility requirements, subject to the following limitations:
(a)      Sick-Leave Benefits and Disability Insurance . During the Term, to the extent made available to other similarly situated employees of the Company, Executive shall be eligible for paid sick leave benefits payable at Executive’s then Effective Base Salary rate during Executive’s absence due to illness or other incapacity; provided , however , that any sick-leave benefits will be reduced by the amount, if any, of workers’

6


compensation, Social Security entitlement, or disability or other wage replacement benefits, if any, paid or provided to Executive in connection with such illness or incapacity.
(b)      Vacation . During the Term, Executive shall be eligible for vacation consistent with Company policy in effect from time to time, and will be eligible for at least twenty (20) business days of paid vacation per complete calendar year (“ Vacation Days ”), which Vacation Days shall accrue and may be used pursuant to the Company’s vacation policies as may exist from time to time.
3.5      Equity Incentive Awards . During the Term, Executive shall be eligible to receive annual equity awards (“ Equity Awards ”) under the Parent’s long-term incentive plan, with such Equity Awards of a nature and type and in such amounts as determined in the sole discretion of the Board or the Compensation Committee. Unless otherwise established by the Board or the Compensation Committee, the Equity Awards granted to Executive each year, if any, shall have an aggregate target value of 200% of the annualized rate of Executive’s Effective Base Salary at the time the grant is approved; provided , however, that the actual value of such Equity Awards, shall be determined in the sole discretion of the Board or the Compensation Committee at the time of grant. All such Equity Awards shall be subject to the vesting requirements and other terms and conditions determined by the Board or the Compensation Committee and the award agreements pursuant to which they are granted, as may be modified by this Agreement.
3.6      Other Benefits .
(a)      Perquisites . During the Term, Executive shall be eligible to receive fringe benefits and perquisites as determined from time to time by the Company, which are commensurate with Executive’s position, title and duties with the Company or other member of the Company Group, as determined by the Company Group from time to time and subject to all applicable benefit and insurance policies, terms and conditions. Available perquisites shall specifically include provision for an automobile or automobile allowance for Executive’s business and personal use, and related fuel coverage; provided , however , that the provision of an automobile or automobile allowance to Executive shall not preclude Executive from receiving reimbursement under Company policies and practices for reasonable business expenses in connection with Executive’s use of other transportation for hire.
(b)      Reimbursement of Business Expenses . Executive is authorized to incur ordinary, necessary, and reasonable business expenses in connection with the performance of Executive’s duties, responsibilities, and authorities under this Agreement and for the promotion of the Company Group’s business and activities during the Term, including expenses for necessary travel and entertainment and other items of expense required in the normal and routine course of Executive’s employment under this Agreement. The Company will reimburse Executive from time to time for all such business expenses actually incurred pursuant to and in conformity with this paragraph and the policies and practices of the Company then in effect relative to the reimbursement of business expenses.
ARTICLE IV     
TERMINATION

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4.1      Termination of Employment .
(a)      Termination by the Company for Cause . The Company may terminate Executive’s employment under this Agreement for Cause at any time without any further liability to Executive, other than the obligations specified in Section 4.3(a) . If the Company wishes to terminate Executive’s employment hereunder for Cause, it shall give Executive a Notice of Termination and Executive’s employment under this Agreement shall terminate immediately upon provision of such notice.
(b)      Termination by Executive for Any Reason . Executive may terminate Executive’s employment under this Agreement for any reason or no reason at all. Any termination of Executive’s employment by Executive for any reason (other than Executive’s death or Permanent Disability) shall be made by the provision of at least thirty (30) days’ prior written notice to the Company in accordance with Section 4.2 ; provided, however, that if Executive has provided notice to the Company of Executive’s termination of employment, the Company may determine, in its sole discretion, that such termination shall be effective on any date prior to the effective date of termination provided in such notice (and, if such earlier date is so required, then it shall not change the basis for Executive’s termination of employment nor be construed or interpreted as a termination of employment by the Company without Cause). Termination of Executive’s employment under this Agreement by Executive for any reason will relieve the Company of any further liability to Executive other than the obligations specified in Section 4.3(c)4.3(a) . For the avoidance of doubt, if Executive’s employment is terminated as a result of Executive’s issuance of a Notice of Non-Renewal pursuant to Section 3.1 , then the Company also will be relieved of any further liability to Executive other than the obligations specified in Section 4.3(a) .
(c)      Termination by the Company Without Cause . The Company may terminate Executive’s employment under this Agreement without Cause at any time. Any termination of Executive’s employment by the Company without Cause (and not due to Executive’s death or Permanent Disability) shall be made by the provision of at least fourteen (14) days’ prior written notice to Executive in accordance with Section 4.2 ; provided , however , that the Company may, in its sole discretion, elect to pay Executive for all or any part of the notice period in lieu of providing prior written notice, calculated based on the annualized rate of Executive’s Effective Base Salary at the time of termination. Termination of Executive’s employment under this Agreement by the Company without Cause (and not due to Executive’s death or Permanent Disability, and other than during a Protected Period) will cause Executive to become eligible for the benefits specified in Section 4.3(b) .
(d)      Change of Control Termination . A termination of Executive’s employment by the Company without Cause (and not due to Executive’s death or Permanent Disability) during a Protected Period, will cause Executive to become eligible for the benefits specified in Section 4.3(c) .
(e)      Termination on Death or Permanent Disability . Executive’s employment under this Agreement shall automatically terminate on Executive’s death or upon the delivery to Executive of a Notice of Termination stating the Company’s determination of Executive’s Permanent Disability in accordance with Section 4.2 . Termination of

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Executive’s employment under this Agreement upon Executive’s death or Permanent Disability will cause Executive (or Executive’s estate, as applicable) to become eligible for the benefits specified in Section 4.3(d) .
4.2      Notice of Termination . Any termination of Executive’s employment by the Company or Executive pursuant to Section 4.1 (other than upon Executive’s death) shall be communicated by a Notice of Termination to the other party hereto. The failure by Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Cause or Permanent Disability, as set forth in Section 4.1(a) or (e) , as applicable, shall not waive any right of Executive or the Company under this Agreement or preclude Executive or the Company from asserting such fact or circumstance in enforcing Executive’s or the Company’s rights hereunder.
4.3      Obligations of the Company Upon Termination .
(a)      Terminations Not Giving Rise to Severance . If Executive’s employment hereunder terminates: (i) due to the Company’s termination of Executive’s employment for Cause; (ii) due to Executive termination of Executive’s employment for any reason; or (iii) upon the expiration of the then-existing Initial Period or Extension Period, as applicable, following (and as the result of) the Company’s issuance of a Notice of Non-Renewal such that such termination following the Company’s issuance of a Notice of Non-Renewal occurs (x) outside of a Protected Period and (y) without any member of the Company Group first having offered Executive employment (or continued employment) commencing following the end of the then-applicable Initial Period or Extension Period, as applicable, then Executive shall be entitled only to the payment of the Accrued Obligation.
(b)      Terminations Outside of a Protected Period Giving Rise to Severance Eligibility . If, at any time other than during a Protected Period, (x) the Company terminates Executive’s employment under this Agreement other than for Cause (and not due to Executive’s death or Permanent Disability), or (y) Executive’s employment terminates upon the expiration of the then-existing Initial Period or Extension Period, as applicable, following (and as the result of) the Company’s issuance of a Notice of Non-Renewal and the circumstances described in Section 4.3(a)(iii)(y) have not been satisfied, then Executive shall be entitled to receive (i) payment of the Accrued Obligation and (ii) subject to the satisfaction of the STIP and applicable STI Performance Plan or other applicable terms and conditions, as described in Section 3.3 , any of Executive’s unpaid Bonuses with respect to a previous year or other performance period, as applicable, completed prior to the Date of Termination (without regard to any requirement that Executive remain employed through the date of determination, date of approval or date of payment of such Bonuses, as may be applicable). In addition, subject to Executive’s (x) delivery to the Company by the Release Expiration Date (and non-revocation in any time provided to do so) of an executed Release and (y) compliance with Articles V , VI , and VII herein, Executive shall also be eligible to receive:
iii.
a lump sum payment of an amount equal to the Annual Bonus for the Bonus Year in which the Date of Termination occurs, which, for the purposes of this Section 4.3(b)(iii), shall be prorated and calculated as follows: (A) if the Date of Termination occurs within the first half of th

9


e Bonus Year, then calculated based on the Effective STI Bonus Target multiplied by Executive’s base earnings during the Bonus Year through the Date of Termination, and (B) if the Date of Termination occurs within the latter half of the Bonus Year, then calculated based on Executive’s base earnings during the Bonus Year through the Date of Termination multiplied and measured by the Company’s actual performance during the Bonus Year through the Date of Termination under the applicable STI Performance Plan;
iv.
any and all outstanding Equity Awards granted to Executive under any plan not previously vested shall become fully vested, without proration, with any unexercised options as of the Date of Termination remaining exercisable for the full term thereof; provided , however , that with respect to any Equity Award that is subject to performance-based vesting conditions, the number of securities subject to the Equity Award shall be reduced on a pro rata basis to the result of (A) the total number of target securities subject to the Equity Award multiplied by (B) a fraction, the numerator of which is the number of full months in which Executive was employed under this Agreement (counting the month in which the Date of Termination occurs as a full month) and the denominator of which is the number of full months in the performance period applicable to the Equity Award, and such reduced number of securities shall become vested and will be calculated, settled and delivered (if at all) subject to and based on the actual performance and achievement of the applicable performance metrics calculated as of the Date of Termination;
v.
a lump sum payment of an amount equal to one (1) times the sum of (A) the annualized rate of Executive’s Effective Base Salary as in effect on the Date of Termination and (B) the target value of Executive’s Annual Bonus for the Bonus Year in which the Date of Termination occurs, which, for the purposes of this Section 4.3(b)(v) , shall be calculated without proration based on the Effective STI Bonus Target established for Executive for the Bonus Year in which the Date of Termination occurs multiplied by the annualized rate of Executive’s Effective Base Salary as in effect on the Date of Termination;
vi.
a lump sum payment of an amount equal to all Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“ COBRA ”), premiums that would be payable during the period beginning on the Date of Termination and ending on the date that is twelve (12) months after the Date of Termination, assuming Executive and Executive’s dependents who were enrolled in the group health plans of the Parent (or other member of the Company Group, as applicable) as of the Date of Termination elected continuation coverage under such group health plans as in effect, and at the applicable COBRA rates, as of the Date of Termination, without regard to whether Executive and Executive’s dependents actually elected such coverage or whether actual COBRA coverage is applicable for the above-referenced time period; and

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vii.
a lump sum payment equal to (as applicable): (A) 100% of the value of Executive’s Vacation Days (which, for purposes of this Agreement, shall be calculated as 1/365 th of Executive’s annualized Base Salary multiplied by each applicable Vacation Day for which Executive is being paid) for the year in which the Date of Termination occurs if the Date of Termination occurs in the first quarter of the calendar year, (B) 75% of the value of Executive’s Vacation Days for the year in which the Date of Termination occurs if the Date of Termination occurs in the second quarter of the calendar year, (C) 50% of the value of Executive’s Vacation Days for the year in which the Date of Termination occurs if the Date of Termination occurs in the third quarter of the calendar year, or (D) 25% of the value of Executive’s Vacation Days for the year in which the Date of Termination occurs if the Date of Termination occurs in the fourth quarter of the calendar year.
(c)      Change of Control Termination . If, during a Protected Period: (A) the Company terminates Executive’s employment under this Agreement other than for Cause (and not due to Executive’s death or Permanent Disability), or (B) Executive’s employment under this Agreement ends upon the expiration of the then-existing Initial Period or Extension Period, as applicable, following (and as the result of) the Company’s issuance of a Notice of Non-Renewal , then Executive shall be entitled to receive (i) payment of the Accrued Obligation and (ii) subject to the satisfaction of the STIP and applicable STI Performance Plan or other applicable terms and conditions, as described in Section 3.3 , any of Executive’s unpaid Bonuses with respect to a previous year or other performance period, as applicable, completed prior to the Date of Termination (without regard to any requirement that Executive remain employed through the date of determination, date of approval or date of payment of such Bonuses, as may be applicable). In addition, subject to Executive’s (x) delivery to the Company by the Release Expiration Date (and non-revocation in any time provided to do so) of an executed Release and (y) compliance with Articles V , VI , and VII , Executive shall also be eligible to receive:
iii.
a lump sum payment of an amount equal to the Annual Bonus for the Bonus Year in which the Date of Termination occurs at the target level, which, for the purposes of this Section 4.3(c)(iii) , shall be calculated, without proration, based on the Effective STI Bonus Target established for Executive for the Bonus Year in which the Date of Termination occurs multiplied by the annualized rate of Executive’s Effective Base Salary as in effect on the Date of Termination;
iv.
any and all outstanding Equity Awards granted to Executive under any plan not previously vested shall become fully vested, without proration, with any unexercised options as of the Date of Termination remaining exercisable for the full term thereof; provided , however , that with respect to any Equity Award that is subject to performance-based vesting conditions, the number of securities subject to such Equity Award shall be reduced on a pro rata basis to the result of (A) the total number of target securities subject to the Equity Award multiplied by (B) a fraction, the numerator of which is the number of full months in which Executive

11


was employed under this Agreement (counting the month in which the Date of Termination occurs as a full month) and the denominator of which is the number of full months in the performance period applicable to the Equity Award, and such reduced number of securities shall become vested and will be calculated, settled and delivered (if at all) at the prorated target level without regard to any performance goal otherwise applicable thereto;
v.
a lump sum payment of an amount equal to one (1) times the sum of (A) the annualized rate of Executive’s Effective Base Salary as in effect on the Date of Termination and (B) the target value of Executive’s Annual Bonus for the Bonus Year in which the Date of Termination occurs, which, for the purposes of this Section 4.3(c)(v) , shall be calculated without proration, based on the Effective STI Bonus Target established for Executive for the Bonus Year in which the Date of Termination occurs multiplied by the annualized rate of Executive’s Effective Base Salary as in effect on the Date of Termination;
vi.
a lump sum payment of an amount equal to all COBRA premiums that would be payable during the period beginning on the Date of Termination and ending on the date that is eighteen (18) months after the Date of Termination, assuming Executive and Executive’s dependents who were enrolled in the group health plans of the Parent (or other member of the Company Group, as applicable) as of the Date of Termination elected continuation coverage under such group health plans as in effect, and at the applicable COBRA rates, as of the Date of Termination, without regard to whether Executive and Executive’s dependents actually elected such coverage or whether actual COBRA coverage is applicable for the above-referenced time period; and
vii.
a lump sum payment equal to (as applicable): (A) 100% of the value of Executive’s Vacation Days for the year in which the Date of Termination occurs if the Date of Termination occurs in the first quarter of the calendar year, (B) 75% of the value of Executive’s Vacation Days for the year in which the Date of Termination occurs if the Date of Termination occurs in the second quarter of the calendar year, (C) 50% of the value of Executive’s Vacation Days for the year in which the Date of Termination occurs if the Date of Termination occurs in the third quarter of the calendar year, or (D) 25% of the value of Executive’s Vacation Days for the year in which the Date of Termination occurs if the Date of Termination occurs in the fourth quarter of the calendar year.
(d)      Termination on Death or Permanent Disability . If Executive’s employment hereunder is terminated by reason of Executive’s death or by the Company due to Executive’s Permanent Disability, the Company shall have no further obligations to Executive, other than for (i) payment of the Accrued Obligation; (ii) subject to the satisfaction of the STIP and applicable STI Performance Plan or other applicable terms and conditions, as described in Section 3.3 , any of Executive’s unpaid Bonuses with respect to a previous year or other performance period, as applicable, completed p

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rior to the Date of Termination (without regard to any requirement that Executive remain employed through the date of determination, date of approval or date of payment of such Bonuses, as may be applicable); and (iii) the timely payment or provision of any and all benefit obligations provided under Section 3.4 , which under their terms are available in the event of Executive’s death or Permanent Disability. In addition, subject to Executive’s (or Executive’s estate) delivery to the Company by the Release Expiration Date (and non-revocation in any time provided to do so) of an executed Release, Executive (or Executive’s estate, if applicable) shall also be eligible to receive:
iv.
a lump sum payment of an amount equal to the Annual Bonus for the Bonus Year in which the Date of Termination occurs, which, for the purposes of this Section 4.3(d)(iv) , shall be prorated and calculated as follows: (A) if the Date of Termination occurs within the first half of the Bonus Year, then calculated based on the Effective STI Bonus Target multiplied by Executive’s base earnings during the Bonus Year through the Date of Termination, and (B) if the Date of Termination occurs within the latter half of the Bonus Year, then calculated based on Executive’s base earnings during the Bonus Year through the Date of Termination multiplied and measured by the Company’s actual performance during the Bonus Year through the Date of Termination under the applicable STI Performance Plan; 
v.
any and all outstanding Equity Awards granted to Executive under any plan not previously vested shall become fully vested, without proration, with any unexercised options as of the Date of Termination remaining exercisable for the full term thereof; provided , however , that with respect to any Equity Award that is subject to performance-based vesting conditions, such Equity Award shall be calculated, paid and delivered at the target level without proration and without regard to any performance goal otherwise applicable thereto; and
vi.
a lump sum payment equal to Executive’s Effective Base Salary as in effect on the Date of Termination for (as applicable): (A) 100% of the value of Executive’s Vacation Days for the year in which the Date of Termination occurs if the Date of Termination occurs in the first quarter of the calendar year, (B) 75% of the value of Executive’s Vacation Days for the year in which the Date of Termination occurs if the Date of Termination occurs in the second quarter of the calendar year, (C) 50% of the value of Executive’s Vacation Days for the year in which the Date of Termination occurs if the Date of Termination occurs in the third quarter of the calendar year, or (D) 25% of the value of Executive’s Vacation Days for the year in which the Date of Termination occurs if the Date of Termination occurs in the fourth quarter of the calendar year.
4.4      Payment Timing . Except as otherwise provided in Section 10.12 , the Company shall pay Executive the amounts specified in Sections 4.3(a) , (b)(i) , (c)(i) or (d)(i) , within thirty (30) days after the Date of Termination or such earlier time as may be required by applicable law. In addition, subject to Executive’s timely execution and non-revocation of the Release and compliance with Articles V , VI and VII the Company shall pay Executive the amounts specified

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in Sections 4.3(b)(iii) , (b)(v) , (b)(vi) , (b)(vii) , (c)(iii) , (c)(v) , (c)(vi) , (c)(vii) , (d)(iv) or (d)(vi) , as applicable, on or before the first business day that is on or after the date that is sixty (60) days after the Date of Termination. Any other amounts payable by the Company under Sections 4.3 (b)(ii) , (b)(iv) , (c)(ii) , (c)(iv) , (d)(ii) , (d)(iii) or (d)(v) , as applicable, are payable pursuant to the respective Section(s) of this Agreement.
4.5      Limitations on Severance Payment and Other Payments or Benefits .
(a)      Limitation on Payments . Notwithstanding any provision of this Agreement, if any portion of the payments or benefits under this Agreement, or under any other agreement between Executive and any member of the Company Group or plan of any member of the Company Group (in the aggregate, “ Total Payments ”), would constitute an “excess parachute payment” and would, but for this Section 4.5 , result in the imposition on Executive of an excise tax under Section 4999 of the Code (the “ Excise Tax ”), then the Total Payments to be made to Executive shall either be (i) delivered in full, or (ii) delivered in such reduced amount in the manner determined in accordance with Section 4.5(b) so that no portion of such Total Payments would be subject to the Excise Tax, whichever of the foregoing results in the receipt by Executive of the greatest benefit on an after-tax basis (taking into account the applicable federal, state and local income taxes and the Excise Tax).
(b)      Determination of Limit . Within forty (40) days following a Date of Termination or notice by one party to the other of its belief that there is a payment or benefit due Executive that would result in an excess parachute payment, Executive and the Company, at the Company’s expense, shall obtain the opinion (which need not be unqualified) of a nationally recognized accounting firm or tax counsel (the “ National Advisor ”) selected by the Company (which may be a regular accounting firm or outside counsel to the Company), which opinion sets forth (i) the amount of the Base Period Income (as defined below), (ii) the amount and present value of the Total Payments, (iii) the amount and present value of any excess parachute payments determined without regard to any reduction of Total Payments pursuant to Section 4.5(a) , and (iv) the net after-tax proceeds to Executive, taking into account applicable federal, state and local income taxes and the Excise Tax if (x) the Total Payments were reduced in accordance with Section 4.5(a) and (y) the Total Payments were not so reduced. The opinion of the National Advisor shall be addressed to the Company and Executive and shall be binding upon the Company and Executive. If such National Advisor’s opinion determines that Section 4.5(a)(ii) applies, then the Agreement Benefits (as defined below) hereunder or any other payment or benefit determined by such counsel to be includable in Total Payments shall be reduced or eliminated so that, under the bases of calculations set forth in such opinion, there will be no excess parachute payment. In such event, payments or benefits included in the Total Payments shall be reduced or eliminated by applying the following principles, in order: (1) the payment or benefit with the higher ratio of the parachute payment value to present economic value (determined using reasonable actuarial assumptions) shall be reduced or eliminated before a payment or benefit with a lower ratio; (2) the payment or benefit with the later possible payment date shall be reduced or eliminated before a payment or benefit with an earlier payment date; and (3) cash payments shall be reduced prior to non-cash benefits; provided that if the foregoing order of reduction or elimination would violate Section 409A, then the

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reduction shall be made pro rata among the payments or benefits included in the Total Payments (on the basis of the relative present value of the parachute payments).
(c)      Definitions and Assumptions . For purposes of this Agreement: (i) the terms “ excess parachute payment ” and “parachute payments ” shall have the meanings assigned to them in Section 280G of the Code, and such “parachute payments” shall be valued as provided therein; (ii) present value shall be calculated in accordance with Section 280G(d)(4) of the Code; (iii) the term “ Base Period Income ” means an amount equal to Executive’s “annualized includible compensation for the base period” as defined in Section 280G(d)(1) of the Code; (iv) “ Agreement Benefits ” shall mean the payments and benefits to be paid or provided pursuant to this Agreement; (v) for purposes of the opinion of the National Advisor, the value of any noncash benefits or any deferred payment or benefit shall be determined by the Company’s independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code, which determination shall be evidenced in a certificate of such auditors addressed to the Company and Executive; and (vi) Executive shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation, and state and local income taxes at the highest marginal rate of taxation in the state or locality of Executive’s domicile (determined in both cases in the calendar year in which the Date of Termination occurs or the notice described in Section 4.5(b) above is given, whichever is earlier), net of the maximum reduction in federal income taxes that may be obtained from the deduction of such state and local taxes.
(d)      Reasonableness of Compensation . The Company agrees that it shall instruct the National Advisor to take into account the value of any reasonable compensation for services to be rendered by Executive in connection with making determinations with respect to Section 280G or Section 4999 of the Code, including the non-competition provisions applicable to Executive under Article VII and any other non-competition provisions that may apply to Executive. The Company agrees to fully cooperate in the valuation of any such services, including any non-competition provisions, and agrees to retain, at the Company’s expense, a recognized valuation firm to make a determination of the value of the non-competition provisions. If the National Advisor so requests in connection with the opinion required by this Section 4.5 , Executive and the Company shall obtain, at the Company’s expense, and the National Advisor may rely on, the advice of a firm of recognized executive compensation consultants as to the reasonableness of any item of compensation to be received by Executive solely with respect to its status under Section 280G of the Code.
(e)      Changes to Sections of the Code . This Section 4.5 shall be amended to comply with any amendment or successor provision to Sections 280G or 4999 of the Code. If such provisions are repealed without successor, then this Section 4.5 shall be cancelled without further effect.
4.6      Resignation Upon Termination . Upon any termination of Executive’s employment with the Company, and without further action on the part of Executive or any member of the Company Group, Executive shall be deemed to have resigned (a) as an executive officer, principal officer or other officer of the Parent and any of any other member of the Company Group for which Executive served in such capacity; (b) from the board of directors or board of managers (or similar governing body) of any member of the Company Group, and

15


from the board of directors or board of managers (or similar governing body) of any corporation, limited liability entity, unlimited liability entity or other entity in which any member of the Company Group holds an equity interest and with respect to which board of directors or board of managers (or similar governing body) Executive serves as the designee or other representative of any member of the Company Group.
ARTICLE V     
CONFIDENTIAL INFORMATION
5.1      Confidential Information . Executive acknowledges that Executive will receive Confidential Information in Executive’s position with the Company, and during Executive’s employment hereunder. For the purposes of Articles V , VI , VII , VIII and IX , the “Company” shall be deemed to include the Company and each other member of the Company Group.
5.2      Scope of Confidential Information . Executive acknowledges that the Company has developed, and will during the term of Executive’s employment continue to develop, confidential information, competitively valuable information, and other intangible or “intellectual property” in connection with its business, some or all of which is proprietary to the Company, (collectively, the “ Confidential Information ”). Without limiting the generality of the preceding sentence, Executive expressly recognizes and agrees that, subject to the remainder of this Section 5.2 , the following items, and all copies, summaries, extracts or derivative works thereof, are entitled to trade secret protection and constitute Confidential Information under this Agreement, whether developed prior to the date hereof or thereafter, and whether with the assistance of Executive or otherwise: (i) the Company’s confidential or proprietary computer software, databases and lists of customers, prospects, candidates, and employees; employee applications; skills inventory sheets and similar summaries of employee qualifications, as well as employee compensation; customer ordering habits, billing rates, buying preferences, and short term needs; sales reports and analysis; (ii) employee reports and analyses; customer job orders and profit margin data; businesses processes, methods of operation and sales techniques; (iii) statistical information regarding the Company; (iv) financial information of the Company and its customers that is not publicly available; (v) negotiated terms and pricing with vendors and customers; (vi) research and development, business projects, strategic business plans, and strategies; products and solution services offered to customers; and (vii) any other non-public information of the Company that gives the Company a competitive advantage by virtue of it not being generally known. Notwithstanding the foregoing, Confidential Information shall not include (a) any information which is or becomes publicly available, other than as a result of the wrongful action of Executive or Executive’s agents; (b) any information independently developed by Executive subsequent to the date that Executive is no longer employed or engaged by the Company; (c) any information made available to Executive following the termination of Executive’s employment from a third party not bound by a confidentiality agreement with, or other obligation with respect to confidentiality to, the Company or (d) any information as to which the Company specifically waives its rights hereunder pursuant to an instrument in writing.
5.3      Agreement to Provide Confidential Information to Executive . The Company promises to provide some or all of the Confidential Information described above to Executive, without regard to the duration of Executive’s continued employment with the Company. Executive agrees that the Confidential Information belongs to the Company, is subject to the terms of this Agreement, and is not Executive’s property.

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5.4      Works Made for Hire . Executive recognizes and agrees that all original works of authorship, and all inventions, discoveries, improvements and other results of creative thinking or discovery by Executive during the term of Executive’s employment, whether the result of individual efforts or in acts in concert with others, arising in the scope of Executive’s employment, utilizing in any way any of the Confidential Information or Company property, or otherwise relating to the Company’s business (collectively, the “ Created Works ”), are and shall be “works made for hire” within the meaning of the United States copyright laws, to the extent applicable thereto, and in all events shall be the sole and exclusive property of the Company. Without limiting the generality of the foregoing, the Created Works shall include all computer software, written materials, business processes or plans, compilations, programs, improvements, inventions, notes, copyrightable works made, fixed, conceived, or acquired by Executive in the scope of Executive’s employment, utilizing in any way any Confidential Information, or otherwise relating to the Company’s business. No part of the definition of Created Works is intended to exclude the Created Works from being included among the items constituting Confidential Information.
5.5      Agreement to Return Confidential Information and Company Property . At any time upon demand by the Company, and within five (5) days of the termination of Executive’s employment for any reason, regardless of which party initiates such termination, Executive shall return all property of the Company to the Company, including all computer files and other electronically stored information and all copies of all or any part of all documents, files and other materials that constitute or reflect Confidential Information or any summaries, extracts or derivative works thereof, in good condition. Such property includes any documents, files and other materials that constitute or reflect Confidential Information, including Created Works constituting or reflecting Confidential Information, and any of the Company’s tools of trade.
5.6      Assignment of Created Works . To the extent for any reason any Created Works (or any element thereof) are not eligible for work-for-hire treatment, Executive hereby irrevocably and fully assigns to the Company all of Executive’s right, title and interest in and to the Created Works and all aspects thereof, including all rights to renewals, extensions, causes of action, reproduce, prepare derivative works, distribute, display, perform, transfer, make, use and sell, and waives all related moral rights. Executive will, from time to time during the term of this Agreement and thereafter, and at any time upon the request of the Company, execute and deliver any documents, agreements, certificates or other instruments affirming, giving effect to or otherwise perfecting the Company’s rights in the Created Works and will provide such cooperation as the Company shall reasonably request in connection with the protection, exploitation or perfection of its rights therein anywhere in the world.
5.7      Power of Attorney . If the Company is unable, after reasonable effort, to secure Executive’s signature on any application for patent, copyright, trademark or other analogous registration or other documents regarding any legal protection relating to a Created Work, whether because of Executive’s physical or mental incapacity or for any other reason whatsoever, Executive hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as Executive’s agent and attorney-in-fact, to act for and in Executive’s behalf and stead to execute and file any such application or applications or other documents and to do all other lawfully permitted acts to further the prosecution and issuance of patent, copyright or trademark registrations or any other legal protection thereon with the same legal force and effect as if executed by Executive.

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5.8      Disclosure of Inventions . Executive will promptly and without reservation fully disclose in writing any Created Works to the Company both during the Term and thereafter.
ARTICLE VI     
NON-DISCLOSURE, NON-DISPARAGEMENT
6.1      Non-Disclosure .
(a)      General Duty . Executive agrees that Executive will not directly or indirectly use any Confidential Information, including the Company’s confidential or proprietary information, trade secrets or Created Works, for Executive’s own benefit or for the benefit of any third party. Executive agrees that Executive will not directly or indirectly disclose any Confidential Information, including the Company’s confidential or proprietary information, trade secrets, or Created Works, to any person or entity who is not an employee of the Company unless previously authorized to do so by the Company.
(b)      Non-Disparagement . Executive agrees that Executive will not make any statement that is intended to become public, or that should reasonably be expected to become public, and that ridicules, disparages or is otherwise derogatory of the Company or any employee, officer, director, member or shareholder of the Company.
(c)      Special Exceptions; Permitted Disclosures . Nothing herein shall be construed to prevent disclosure of Confidential Information, or Executive from making any statement, as may be required by applicable law, regulation, or order of a court of competent jurisdiction or an authorized government agency, provided that the disclosure does not exceed the extent of disclosure required by such law, regulation, or order. Further, nothing herein shall prevent Executive from making a good faith report of possible violations of applicable law to any governmental agency or from making disclosures that are protected under the whistleblower provisions of applicable law. Pursuant to the federal Defend Trade Secrets Act, Executive shall not be held criminally or civilly liable for the disclosure of a trade secret that is: (A) made (x) in confidence to a federal, state or local government official, either directly or indirectly, or to an attorney, and (y) solely for the purpose of reporting or investigating a suspected violation of law; (B) made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal; or (C) protected under the whistleblower provisions of applicable law. In the event Executive files a lawsuit for retaliation by any member of the Company Group for Executive's reporting of a suspected violation of law, Executive may (i) disclose a trade secret to Executive's attorney and (ii) use the trade secret information in the court proceeding related to such lawsuit, in each case, if Executive (A) files any document containing such trade secret under seal; and (B) does not otherwise disclose such trade secret, except pursuant to court order. For the avoidance of doubt, nothing herein or in any other agreement between Executive and the Company or any other member of the Company Group shall prevent Executive from lawfully, and without obtaining prior authorization from the Company or any other member of the Company Group: (i) initiating communications directly with, cooperating with, providing information to, causing information to be provided to, or otherwise assisting in an investigation by the U.S. Securities and Exchange Commission (the “ SEC ”) or any other governmental or regulatory agency, entity, or official(s) (collectively, “ Governmental Authorities ”) regarding a possible violation of any law; (ii) responding to any inquiry

18


or legal process directed to an employee individually from any Governmental Authority; (iii) testifying, participating or otherwise assisting in an action or proceeding by any Governmental Authorities relating to a possible violation of law, including providing documents or other confidential information to Governmental Authorities; or (iv) receiving an award for information provided to the SEC or any other Governmental Authority. This Agreement shall not be construed or applied to require Employee to obtain prior authorization from the Company or any other member of the Company Group before engaging in any of the foregoing conduct referenced in this Section 6.1(c) , or to notify the Company of having engaged in any such conduct.
6.2      Nature of Business .
(a)      Acknowledgment of Competitive Business . Executive acknowledges and agrees that the Company is engaged in a highly competitive industry and must protect its Confidential Information against unauthorized use or disclosure that would irreparably harm the Company’s interests. Executive recognizes that the disclosure by the Company to Executive of certain of its Confidential Information will be necessary and useful to Executive in the performance of Executive’s job duties for the Company under this Agreement. As a result, Executive will have access to Confidential Information that could be used by the Company’s competitors in a manner which would irreparably harm the Company’s competitive position in the marketplace.
(b)      Acknowledgment of Need for Protection . Executive further acknowledges and agrees that it would be virtually impossible for Executive to ignore all knowledge of the Company’s Confidential Information if Executive were to engage in competition with the Company. It is, therefore, reasonable and proper for the Company to protect against the intentional or inadvertent use of such Confidential Information. Accordingly, Executive agrees that restrictions on competition and soliciting the Company’s customers or employees during Executive’s employment under this Agreement and for a reasonable period of time thereafter are appropriate and necessary for the protection of the Company’s Confidential Information, goodwill, and other legitimate business interests.
ARTICLE VII     
NON-SOLICITATION AND NON-COMPETITION
7.1      Non-Solicitation and Non-Competition . Ancillary to the agreements to provide Executive with the Confidential Information as set forth above, and in order to aid in the enforcement of those agreements and as a condition of Executive’s employment hereunder, Executive agrees that, during the Term and for a period of two (2) years after the termination of Executive’s employment with the Company (or, in the event Executive is entitled to the payments and benefits described in Section 4.3(c) hereof, for a period of one (1) year after termination of Executive’s employment with the Company) (as applicable, the “ Prohibited Period ”), Executive will:
(a)      refrain from carrying on or engaging in the Business in the Restricted Area. Executive agrees and covenants that, because the following conduct would effectively constitute carrying on or engaging in the Business, Executive will not, and Executive will cause Executive’s affiliates not to, in the Restricted Area during the

19


Prohibited Period: directly or indirectly, own, manage, operate, join, become an employee of, control or participate in or be connected with any business, individual, partnership, firm, corporation or other entity which engages in the Business;
(b)      refrain from, and cause Executive’s affiliates to refrain from, soliciting or causing to be solicited any customer of the Company that was a customer of the Company in the Restricted Area during the period when Executive was employed by the Company; and
(c)      refrain from, and cause Executive’s affiliates to refrain from, engaging or employing or soliciting or contacting with a view to the engagement or employment of, any person who is an officer or employee of the Company.
7.2      Exception for Equity Ownership . Notwithstanding the restrictions contained in Section 7.1 , Executive or any of Executive’s affiliates may own (a) less than five percent (5%) of any equity security registered under the Exchange Act, in any entity engaged in the Business, provided that neither Executive nor Executive’s affiliates has the power, directly or indirectly, to control or direct the management or affairs of any such entity and is not involved in the management of such entity, and (b) those equity investments owned by Executive as of the date of this Agreement as previously disclosed in writing to and agreed by the Board.
7.3      Exception Within Certain States . Notwithstanding the restrictions contained in Section 7.1 , within those areas of the State of Oklahoma that are within the Restricted Area (the “ Oklahoma Restricted Area ”), the restrictions in Sections 7.1(a) and 7.1(b) shall not apply after Executive’s employment with the Company has ended but before the Prohibited Period has expired; provided , however , that at no point during the Prohibited Period shall Executive, within the Oklahoma Restricted Area, solicit goods, services or a combination of goods and services from any established customer of the Company. Further, within those areas of the States of California or North Dakota that are within the Restricted Area, the restrictions contained in Section 7.1(a) and Section 7.1(b) shall not apply following the date that Executive is no longer employed by the Company and, during such period, Section 7.1(c) shall be applied within the States of California and North Dakota only to prohibit Executive from, directly or indirectly, soliciting or contacting with a view to the engagement or employment of, any person who is an officer or employee of the Company or otherwise directly or indirectly interfering with or raiding the Company’s employees.
ARTICLE VIII     
SURVIVAL OF COVENANTS, ENFORCEMENT OF COVENANTS AND REMEDIES
8.1      Survival of Covenants . Executive acknowledges and agrees that Executive’s covenants in Articles V , VI and VII , and those provisions necessary to interpret and enforce them, shall survive the termination of this Agreement, and the existence of any claim or cause of action of Executive against the Company whether predicated on this Agreement or otherwise shall not constitute a defense to the enforcement by the Company of those covenants.
8.2      Enforcement of Covenants . Executive acknowledges and agrees that Executive’s covenants in Articles V , VI and VII are, among other things, ancillary to the otherwise enforceable agreements to provide Executive with Confidential Information and are supported by independent, valuable consideration. Executive further acknowledges and agrees that the

20


limitations as to time, geographical area, and scope of activity to be restrained by those covenants are reasonable and acceptable to Executive in all respects and do not impose any greater restraint than is reasonably necessary to protect the Company’s goodwill and other legitimate business interests. Executive further agrees that if, at some later date, a court or arbitrator of competent jurisdiction determines that any of the covenants in Article V , VI or VII are unreasonable, any such covenants shall be reformed by the court or arbitrator and enforced to the maximum extent permitted under the law.
8.3      Remedies . In the event of actual or threatened breach by Executive of any of Executive’s covenants in Articles V , VI , and VII , the Company shall be entitled to equitable relief by temporary restraining order, temporary injunction, or permanent injunction or otherwise, in addition to all other legal and equitable relief to which it may be entitled, including any and all monetary damages that the Company may incur as a result of said breach, violation, or threatened breach or violation. For the avoidance of doubt, nothing shall restrict the Company from pursuing any relief otherwise provided for by this Agreement. The Company may pursue any remedy available to it concurrently or consecutively in any order as to any breach, violation, or threatened breach or violation, and the pursuit of one of such remedies at any time will not be deemed an election of remedies or waiver of the right to pursue any other of such remedies as to such breach, violation, or threatened breach or violation, or as to any other breach, violation, or threatened breach or violation. In addition to the above, in the event that a final determination concludes that Executive has materially breached any of Executive’s covenants in Article V , VI or VII , the Company will be entitled to reimbursement by Executive of all cash severance payments paid by the Company under (a) Sections 4.3(b)(iii) , (b)(v) , (b)(vi) and (b)(vii) , or (b) Sections 4.3(c)(iii) , (c)(v) , (c)(vi) , and (c)(vii) , as applicable, of this Agreement. In the event of an alleged material breach by Executive of any of Executive’s covenants in Article V , VI or VII , as determined in good faith by the Board, the Company may suspend the payments of cash severance then owing to Executive under Sections 4.3(b)(iii) , (b)(v), (b)(vi) , (b)(vii) , (c)(iii) , (c)(v) , (c)(vi) , or (c)(vii) , as applicable, of this Agreement without resort to judicial intervention or arbitration until such breach is cured (if curable); provided , however , that if it is later determined, whether by arbitration or otherwise by the Board, that Executive was not in breach of any such covenants, the Company shall promptly pay to Executive all such suspended payments and benefits, as well as reimbursement of all reasonable costs and expenses (including reasonable attorneys’ fees) incurred by Executive in defending any such claim or action in accordance with Section 10.10 ; and provided further , however , that any cure and payments upon cure and any payments upon a determination that no breach occurred will be made no later than the deadline under Section 409A that is applicable to disputed payments and refusals to pay.
8.4      Indemnification . In any situation where, under applicable law, the Company has the power to indemnify, advance expenses to and defend Executive in respect of any judgments, fines, settlements, loss, cost or expense (including attorneys’ fees) arising from bona fide claims of any nature related to or arising out of Executive’s activities as an agent, employee, officer or director of the Company or in any other capacity on behalf of or at the request of the Company, then the Company shall promptly on written request, indemnify Executive, advance expenses (including reasonable attorneys’ fees) to Executive and defend Executive to the fullest extent permitted by applicable law, including making such findings and determinations and taking any and all such actions as the Company may, under applicable law, be permitted to have the discretion to take so as to effectuate such indemnification, advancement or defense. Such agreement by the Company shall not be deemed to impair any other obligation of the Company respecting Executive’s indemnification or defense otherwise arising out of this or any other agreement or

21


promise of the Company under any statute. In no event will the Company indemnify, advance expenses to, or defend Executive from any claim relating to or arising out of any misconduct by Executive, including fraud, or any breach by Executive of any representation or warranty in this Agreement.
ARTICLE IX     
COMPLIANCE
9.1      Compliance with Applicable Laws and Policies . Executive acknowledges and agrees that Executive will comply with all applicable laws and policies, including the Parent’s Corporate Code of Business Conduct and Ethics, Financial Code of Ethics, Insider Trading Policy and Anti-Corruption Policy, and will not, directly or indirectly, take any action, or fail to take any action, that would violate any such laws or policies or would cause the Company to be in violation of any such laws or policies.
9.2      Duty of Loyalty . Executive acknowledges and agrees that Executive owes a fiduciary duty of loyalty, fidelity and allegiance to act in the best interests of the Company and to do no act that would injure the business, interests, or reputation of the Company. In keeping with these duties, Executive shall make full disclosure to the Company of all business opportunities pertaining to the Company’s business and shall not appropriate for Executive’s own benefit business opportunities concerning the subject matter of the fiduciary relationship.
ARTICLE X     
MISCELLANEOUS
10.1      Entire Agreement . This Agreement and the DRP (as defined below) constitute the entire agreement between the parties concerning this Agreement’s subject matter and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to its subject matter.
10.2      Modification; Amendment . This Agreement may not be modified or amended in any respect except by an instrument in writing signed by the party against whom such modification or amendment is sought to be enforced. No modification or amendment may be enforced against the Company unless such modification or amendment is in writing and authorized by the Board.
10.3      No Waiver . The waiver by either party of a breach of any term of this Agreement shall not operate or be construed as a waiver of a subsequent breach of the same provision by either party or of the breach of any other term or provision of this Agreement.
10.4      Governing Law . This Agreement shall be construed in accordance with the laws of the State of Texas, without giving effect to any conflicts of law principles that would cause the application of the laws of any jurisdiction other than the State of Texas.
10.5      Executive’s Representations . Executive represents and warrants that Executive is free to enter into this Agreement and to perform each of the terms and covenants of it. Executive represents and warrants that Executive is not restricted or prohibited, contractually or otherwise, from entering into and performing this Agreement, and that Executive’s execution and performance of this Agreement is not a violation or breach of any other agreement between Executive and any other person or entity. Executive further promises not to provide the Company

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or any other member of the Company Group with any confidential, proprietary, or legally protected information belonging to any former employer or other third-party, and Executive promises that in no circumstances will Executive use or disclose such information in the course of providing services for any member of the Company Group. Executive acknowledges and agrees that (a) Executive is not relying upon any determination by the Company, any other members of the Company Group, or any of their respective employees, directors, officers, attorneys or agents (collectively, the “ Company Parties ”) regarding the tax effects associated with Executive’s execution of this Agreement and (b) in deciding to enter into this Agreement, Executive is relying on Executive’s own judgment and the judgment of the professionals of Executive’s choice with whom Executive has consulted. Executive hereby releases, acquits and forever discharges the Company Parties from all actions, causes of action, suits, debts, obligations, liabilities, claims, damages, losses, costs and expenses of any nature whatsoever, whether known or unknown, on account of or arising out of, or in any way related to the tax effects associated with Executive’s execution of this Agreement.
10.6      Notices . All notices and other communications under this Agreement shall be in writing and shall be given in person or by either personal delivery, facsimile with confirmation of receipt, overnight delivery, or first class mail, certified or registered with return receipt requested, with postal or delivery charges prepaid, and shall be deemed to have been duly given when delivered personally, on the day on which confirmation of receipt is provided if given by facsimile provided that if a notice is sent by facsimile transmission after normal business hours of the recipient or on a non-business day, then it shall be deemed to have been received on the next business day after it is sent, or three days after mailing first class, certified or registered with return receipt requested, (i) if to the Company, to the Parent’s headquarters, attention General Counsel, and (ii) if to Executive, to Executive’s address on file in the Company’s records.
10.7      Tax Withholding . The Company may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation.
10.8      Severability . If any provision of this Agreement (or any portion thereof) is held to be illegal, invalid, or unenforceable, (a) this Agreement shall be considered divisible, (b) such provision (or any portion thereof) shall be deemed inoperative to the extent it is deemed illegal, invalid, or unenforceable, and (c) in all other respects this Agreement shall remain in full force and effect.
10.9      Assignment . The Company, its successors, and assigns may in their sole discretion assign this Agreement to any person or entity, with or without Executive’s consent, provided , however , that the Company Group shall remain liable for all compensation obligations to Executive under this Agreement. This Agreement thereafter shall bind, and inure to the benefit of, the Company’s successor or assign. Executive shall not assign either this Agreement or any right or obligation arising thereunder.
10.10      Employee Dispute Resolution Program . The parties acknowledge and agree that the parties have agreed to the dispute resolution procedures set forth in the Parent’s Employee Dispute Resolution Program (“ DRP ”), as in effect from time to time, and any dispute between the parties arising out of, or relating to, this Agreement or Executive’s employment shall be resolved pursuant to the dispute resolution procedures set forth in the DRP.

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10.11      Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument.
10.12      Section 409A .
(a)      General. Any compensation or benefits made to Executive under the terms of this Agreement may constitute nonqualified deferred compensation for purposes of Section 409A. Accordingly, notwithstanding any provision contained herein, this Agreement shall be interpreted in a manner that is consistent with Section 409A. In the event that any provision of this Agreement conflicts with Section 409A, such provision is to that extent superseded by the applicable Section 409A standards for nonqualified deferred compensation plans to satisfy the requirements of Section 409A.
(b)      General Suspension of Payments. Notwithstanding any contrary provisions in this Agreement, if Executive is a “specified employee,” as such term is defined within the meaning of Section 409A, as determined by policies established by the Board, any payments or benefits which are classified as “nonqualified deferred compensation” for purposes of Section 409A and are payable or provided as a result of Executive’s termination of employment that would otherwise be paid or provided within six (6) months and one (1) day of such termination (other than due to death or “disability”, as such term is defined within the meaning of Section 409A) shall instead be paid or provided on the earlier of (i) six (6) months and two (2) days following Executive’s termination, (ii) the date of Executive’s death, or (iii) any date that otherwise complies with Section 409A. In the event that Executive is entitled to receive payments during the suspension period provided under this Section 10.12(b), Executive shall receive the accumulated benefits that would have been paid or provided under this Agreement within the six (6) month and one (1) day suspension period on the earliest day that would be permitted under Section 409A.
(c)      Separation from Service . For all purposes of this Agreement, Executive’s employment with the Company shall be considered to have terminated when Executive incurs a “separation from service” with the Company within the meaning of Section 409A; provided , however , that whether such a separation from service has occurred shall be determined based upon a reasonably anticipated permanent reduction in the level of bona fide services to be performed to no more than twenty percent (20%) of the average level of bona fide services provided in the immediately preceding thirty-six (36) months.
(d)      Reimbursement Payments. The following rules shall apply to payments of any amounts under this Agreement that are treated as “reimbursement payments” under Section 409A, including any payments provided under Section 4.3 : (i) the amount of expenses eligible for reimbursement in one calendar year shall not limit the available reimbursements for any other calendar year; (ii) Executive shall file a claim for all reimbursement payments not later than thirty (30) days following the end of the calendar year during which the expenses were incurred, (iii) the Company shall make such reimbursement payments within thirty (30) days following the date Executive delivers written notice of the expenses to the Company; and (iv) Executive’s right to

24


such reimbursement payments shall not be subject to liquidation or exchange for any other payment or benefit.
(e)      Separate Payments . For purposes of Section 409A, any right to a series of installment payments under this Agreement shall be treated as a right to a series of separate payments so that each payment is designated as a separate payment for purposes of Section 409A, and any rights and benefits under this Agreement shall be treated as rights to separate payments for purposes of Section 409A.
(f)      Amendment. In the event that the Company determines that any amounts payable hereunder will be taxable to Executive under Section 409A prior to payment to Executive, then the Company may (i) adopt amendments to this Agreement, including amendments with retroactive effect, that the Company determines necessary or appropriate to preserve the intended tax treatment of the benefits provided hereunder or (ii) take such other actions as the Company determines necessary or appropriate to avoid the imposition of tax under Section 409A.
10.13      Prior Employment Agreement Superseded . Upon the Effective Date, any and all prior employment agreements between the Company or any other member of the Company Group shall be of no further force or effect, and this Agreement shall supersede all such prior agreements.
10.14      Limitation . Subject to the termination provisions contained herein, this Agreement shall not confer any right or impose any obligation on any member of the Company Group to continue the employment of Executive in any capacity or limit the right of any member of the Company Group or Executive to terminate Executive’s employment.
10.15      Third-Party Beneficiaries . Each member of the Company Group shall be a third-party beneficiary of Executive’s obligations under Articles V , VI , VII , VIII and IX and shall be entitled to enforce such obligations as if a party hereto.
10.16      Titles and Headings; Construction . Titles and headings to Sections hereof are for the purpose of reference only and shall in no way limit, define or otherwise affect the provisions hereof. Any and all Exhibits or Attachments referred to in this Agreement are, by such reference, incorporated herein and made a part hereof for all purposes. Unless the context requires otherwise, all references herein to an agreement, instrument or other document shall be deemed to refer to such agreement, instrument or other document as amended, supplemented, modified and restated from time to time to the extent permitted by the provisions thereof. All references to “dollars” or “$” in this Agreement refer to United States dollars. The words “herein”, “hereof”, “hereunder” and other compounds of the word “here” shall refer to the entire Agreement, including all Exhibits attached hereto, and not to any particular provision hereof. The word “or” is not exclusive. Wherever the context so requires, the masculine gender includes the feminine or neuter, and the singular number includes the plural and conversely. The use herein of the word “including” following any general statement, term or matter shall not be construed to limit such statement, term or matter to the specific items or matters set forth immediately following such word or to similar items or matters, whether or not non-limiting language (such as “without limitation”, “but not limited to”, or words of similar import) is used with reference thereto, but rather shall be deemed to refer to all other items or matters that could reasonably fall within the broadest possible scope of such general statement, term or matter.

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Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against any party hereto, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by each of the parties hereto and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of the parties hereto.
[ Signature Page Follows ]

IN WITNESS WHEREOF , the parties have executed this Agreement effective as of the day and year indicated above.
COMPANY:

C&J SPEC-RENT SERVICES, INC.
    
By:     /s/Danielle Hunter    
Name:     Danielle Hunter     
Title:     EVP and General Counsel    


EXECUTIVE:

/s/ Sharon Paul    
Sharon Paul


Exhibit A

[RESTRICTED AREA]

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Exhibit 31.1
CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Donald J. Gawick , certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended March 31, 2019 of C&J Energy Services, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date:
 
May 7, 2019
 
By:
 
/s/ Donald J. Gawick
 
 
 
 
Donald J. Gawick
 
 
 
 
Chief Executive Officer, President and Director
 
 
 
 
(Principal Executive Officer)




Exhibit 31.2
CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Jan Kees van Gaalen, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ended March 31, 2019 of C&J Energy Services, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date:
 
May 7, 2019
 
By:
 
/s/ Jan Kees van Gaalen
 
 
 
 
Jan Kees van Gaalen
 
 
 
 
Chief Financial Officer
 
 
 
 
(Principal Financial Officer)





Exhibit 32.1
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the period ending March 31, 2019 of C&J Energy Services, Inc. (the "Company") as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Donald J. Gawick , Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:
 
May 7, 2019
 
By:
 
/s/ Donald J. Gawick
 
 
 
 
Donald J. Gawick
 
 
 
 
Chief Executive Officer, President and Director
 
 
 
 
(Principal Executive Officer)





Exhibit 32.2
CERTIFICATION BY CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the period ending March 31, 2019 of C&J Energy Services, Inc. (the "Company") as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jan Kees van Gaalen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:
 
May 7, 2019
 
By:
 
/s/ Jan Kees van Gaalen
 
 
 
 
Jan Kees van Gaalen
 
 
 
 
Chief Financial Officer
 
 
 
 
(Principal Financial Officer)