C&J Energy Services, Inc. - FORM 10-Q - November 7, 2016

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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 September 30, 2016
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 Ltd.
(Exact name of registrant as specified in its charter)
 
 
 
Bermuda
 
98-1188116
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Crown House, 2nd Floor
4 Par-la-Ville Rd
Hamilton HM08 Bermuda
(Address of principal executive offices)
(441) 279-4200
(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 and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of the registrant’s common shares, par value $0.01 per share, outstanding at November 4, 2016, was 119,568,676.

 



C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
TABLE OF CONTENTS
 

 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



-i-

PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
 
September 30, 2016
 
December 31, 2015
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
101,411

 
$
25,900

Accounts receivable, net of allowance of $2,537 at September 30, 2016 and $7,917 at December 31, 2015
 
151,986

 
274,691

Inventories, net
 
73,082

 
102,257

Prepaid and other current assets
 
51,313

 
72,560

Deferred tax assets
 
5,958

 
9,035

Total current assets
 
383,750

 
484,443

Property, plant and equipment, net of accumulated depreciation of $644,182 at September 30, 2016 and $499,894 at December 31, 2015
 
1,017,183

 
1,210,441

Other assets:
 
 
 
 
Goodwill
 
—

 
307,677

Intangible assets, net
 
84,307

 
147,861

Deferred financing costs, net of accumulated amortization of $6,396 at December 31, 2015
 
—

 
14,355

Other noncurrent assets
 
36,602

 
34,175

Total assets
 
$
1,521,842

 
$
2,198,952

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
43,553

 
$
184,859

Payroll and related costs
 
18,474

 
10,516

Accrued expenses
 
59,365

 
52,069

DIP Facility
 
25,000

 
—

Current portion of debt and capital lease obligations
 
—

 
13,433

Related party payables
 
—

 
28,206

Other current liabilities
 
1,307

 
1,785

Total current liabilities
 
147,699

 
290,868

Deferred tax liabilities
 
28,716

 
149,151

Long-term debt and capital lease obligations, net of original issue discount and deferred financing costs of $86,368 at December 31, 2015
 
—

 
1,108,123

Other long-term liabilities
 
12,897

 
18,167

Total liabilities not subject to compromise
 
189,312

 
1,566,309

Liabilities subject to compromise
 
1,514,551

 
—

Commitments and contingencies
 
 
 
 
Shareholders' equity:
 
 
 
 
Common shares, par value of $0.01, 750,000,000 shares authorized, 119,581,014 issued and outstanding at September 30, 2016 and 120,420,120 issued and outstanding at December 31, 2015
 
1,196

 
1,204

Additional paid-in capital
 
1,007,296

 
997,766

Accumulated other comprehensive loss
 
(2,290
)
 
(4,025
)
Retained deficit
 
(1,188,223
)
 
(362,302
)
Total shareholders' equity (deficit)
 
(182,021
)
 
632,643

Total liabilities and shareholders’ equity (deficit)
 
$
1,521,842

 
$
2,198,952

See accompanying notes to consolidated financial statements

-1-

C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenue
 
$
232,537

 
$
427,497

 
$
727,320

 
$
1,339,878

Costs and expenses:
 
 
 
 
 
 
 
 
Direct costs
 
216,841

 
385,879

 
708,377

 
1,151,522

Selling, general and administrative expenses
 
48,825

 
60,977

 
182,205

 
188,424

Research and development
 
1,797

 
4,916

 
5,959

 
13,311

Depreciation and amortization
 
51,321

 
74,731

 
164,557

 
193,685

Impairment expense
 
—

 
394,191

 
430,406

 
394,191

(Gain) loss on disposal of assets
 
(694
)
 
141

 
4,220

 
(365
)
Operating loss
 
(85,553
)
 
(493,338
)
 
(768,404
)
 
(600,890
)
Other income (expense):
 
 
 
 
 
 
 
 
Interest expense, net
 
(8,158
)
 
(28,396
)
 
(155,559
)
 
(57,448
)
Other income (expense), net
 
7,075

 
(2,644
)
 
12,397

 
(1,073
)
Total other income (expense)
 
(1,083
)
 
(31,040
)
 
(143,162
)
 
(58,521
)
Loss before reorganization items and income taxes
 
(86,636
)
 
(524,378
)
 
(911,566
)
 
(659,411
)
Reorganization items
 
40,877

 
—

 
40,877

 
—

Income tax benefit
 
(21,123
)
 
(69,362
)
 
(126,522
)
 
(108,611
)
Net loss
 
$
(106,390
)
 
$
(455,016
)
 
$
(825,921
)
 
$
(550,800
)
Net loss per common share:
 
 
 
 
 
 
 
 
Basic
 
$
(0.90
)
 
$
(3.89
)
 
$
(6.99
)
 
$
(5.62
)
Diluted
 
$
(0.90
)
 
$
(3.89
)
 
$
(6.99
)
 
$
(5.62
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
118,626

 
117,019

 
118,196

 
98,061

Diluted
 
118,626

 
117,019

 
118,196

 
98,061


See accompanying notes to consolidated financial statements


-2-

C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(106,390
)
 
$
(455,016
)
 
$
(825,921
)
 
$
(550,800
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
     Foreign currency translation gain (loss), net of tax
(288
)
 
(1,372
)
 
1,735

 
(2,712
)
Comprehensive loss
$
(106,678
)
 
$
(456,388
)
 
$
(824,186
)
 
$
(553,512
)
See accompanying notes to consolidated financial statements

-3-

C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
 
 
 
Common Shares
 
Additional
Paid-in
Capital
 
Other
Comprehensive
Loss
 
Retained
Earnings (Deficit)
 
Total
 
 
Number of
Shares
 
Amount, at
$0.01 par 
value
 
Balance, December 31, 2014
 
55,333

 
$
553

 
$
271,104

 
$
(45
)
 
$
510,240

 
$
781,852

Issuance of common shares, net of issuance costs
62,542

 
625

 
709,642

 
—

 
—

 
710,267

Issuance of restricted shares, net of forfeitures
2,613

 
26

 
3,006

 
—

 
—

 
3,032

Employee tax withholding on restricted shares vesting
(222
)
 
(2
)
 
(2,619
)
 
—

 
—

 
(2,621
)
Issuance of common shares for stock options exercised
154

 
2

 
451

 
—

 
—

 
453

Tax effect of share-based compensation
—

 
—

 
(2,367
)
 
—

 
—

 
(2,367
)
Share-based compensation
—

 
—

 
18,549

 
—

 
—

 
18,549

Net loss
—

 
—

 
—

 
—

 
(872,542
)
 
(872,542
)
Foreign currency translation loss
—

 
—

 
—

 
(3,980
)
 
—

 
(3,980
)
Balance, December 31, 2015
 
120,420

 
1,204

 
997,766

 
(4,025
)
 
(362,302
)
 
632,643

Forfeitures of restricted shares
(529
)
 
(5
)
 
5

 
—

 
—

 
—

Employee tax withholding on restricted shares vesting
(310
)
 
(3
)
 
(406
)
 
—

 
—

 
(409
)
Tax effect of share-based compensation
—

 
—

 
(5,592
)
 
—

 
—

 
(5,592
)
Share-based compensation
—

 
—

 
15,523

 
—

 
—

 
15,523

Net loss
—

 
—

 
—

 
—

 
(825,921
)
 
(825,921
)
Foreign currency translation gain
—

 
—

 
—

 
1,735

 
—

 
1,735

Balance, September 30, 2016*
 
119,581

 
$
1,196

 
$
1,007,296

 
$
(2,290
)
 
$
(1,188,223
)
 
$
(182,021
)
 
*
Unaudited
See accompanying notes to consolidated financial statements


-4-

C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(825,921
)
 
$
(550,800
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
 
164,557

 
193,685

Impairment expense
 
430,406

 
394,191

Inventory write-down
 
13,399

 
—

Earnout adjustment
 
(4,700
)
 
—

Deferred income taxes
 
(126,522
)
 
(93,851
)
Provision for doubtful accounts, net of write-offs
 
1,021

 
4,516

Equity in earnings from unconsolidated affiliate
 
4,126

 
(585
)
(Gain) loss on disposal of assets
 
4,220

 
(365
)
Share-based compensation expense
 
15,523

 
13,916

Amortization of deferred financing costs
 
49,318

 
8,680

Accretion of original issue discount
 
52,913

 
4,141

Reorganization items, net
 
37,582

 
—

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
125,911

 
259,049

Inventory
 
7,624

 
18,656

Prepaid and other current assets
 
19,640

 
(8,182
)
Accounts payable
 
(91,481
)
 
(161,708
)
Payroll and related costs and accrued expenses
 
43,780

 
25,130

Income taxes payable
 
5,187

 
(109
)
Deposits and other
 
(9,327
)
 
(3,960
)
Net cash provided by (used in) operating activities
 
(82,744
)
 
102,404

Cash flows from investing activities:
 
 
 
 
Purchases of and deposits on property, plant and equipment
 
(44,606
)
 
(141,491
)
Proceeds from disposal of property, plant and equipment
 
30,775

 
2,743

Investment in unconsolidated affiliate
 
(408
)
 
—

Payments made for business acquisitions, net of cash acquired
 
(1,419
)
 
(663,303
)
Net cash used in investing activities
 
(15,658
)
 
(802,051
)
Cash flows from financing activities:
 
 
 
 
Proceeds from revolving debt
 
174,000

 
271,000

Payments on revolving debt
 
(10,600
)
 
(492,000
)
Proceeds from term loans
 
—

 
1,001,400

Payments on term loans
 
(2,650
)
 
(5,300
)
Proceeds from DIP Facility
 
24,500

 
—

Payments of capital lease obligations
 
(2,171
)
 
(3,058
)
Financing costs
 
(1,009
)
 
(55,400
)
Proceeds from issuance of common shares for stock options exercised
 
—

 
295

Registration costs associated with issuance of common shares
 
—

 
(1,690
)
Employee tax withholding on restricted shares vesting
 
(409
)
 
(2,620
)
Excess tax expense from share-based compensation
 
(5,592
)
 
(2,401
)
Net cash provided by financing activities
 
176,069

 
710,226

 
 
 
 
 
Effect of exchange rate changes on cash
 
(2,156
)
 
2,534

 
 
 
 
 
Net increase in cash and cash equivalents
 
75,511

 
13,113

Cash and cash equivalents, beginning of period
 
25,900

 
10,017

Cash and cash equivalents, end of period
 
$
101,411

 
$
23,130



See accompanying notes to consolidated financial statements

-5-


C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) 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 Ltd. (together with its consolidated subsidiaries, “C&J” or the “Company”) provides well construction, well completions, well support and other complementary oilfield services to oil and gas exploration and production companies primarily in North America. As one of the largest completion and production services companies in North America, C&J offers a full, vertically integrated suite of services involved in the entire life cycle of the well, including hydraulic fracturing, cased-hole wireline, coiled tubing, cementing, rig services, fluids management services and other special well site services. The Company provides its core services in all of the major oil and gas producing regions of the continental United States and Western Canada.
On March 24, 2015, C&J Energy Services, Inc. (“Legacy C&J”) and Nabors Industries Ltd. (“Nabors”) completed the combination of Legacy C&J with Nabors’ completion and production services business (the “C&P Business”), whereby Legacy C&J became a subsidiary of C&J Energy Services Ltd. (the “Merger”). The resulting combined company is currently led by the former management team of Legacy C&J.
Upon the closing of the Merger, shares of common stock of Legacy C&J were converted into common shares of C&J on a 1-for-1 basis and C&J's common shares began trading on the New York Stock Exchange ("NYSE") under the ticker “CJES.” C&J is the successor issuer to Legacy C&J following the closing of the Merger and is deemed to succeed to Legacy C&J’s reporting history under the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act"). As discussed in more detail in Note 8 – Mergers and Acquisitions, Legacy C&J and Nabors determined that Legacy C&J possessed the controlling financial interest in C&J and subsequently concluded the business combination should be treated as a reverse acquisition with Legacy C&J as the accounting acquirer.
On July 20, 2016, the Company filed voluntary petitions for reorganization seeking relief under the provisions of Chapter 11 of Title 11 of the United States Bankruptcy Code with the United States Bankruptcy Court in the Southern District of Texas, Houston Division. The Company's Chapter 11 proceeding is being administered under the caption "In re: CJ Holding Co., et al., Case No. 16-33590." Additionally, the Company commenced ancillary proceedings in Canada on behalf of its Canadian subsidiaries and a provisional liquidation proceeding in Bermuda on behalf of certain of its Bermudian subsidiaries. The Company is continuing operations and management of its assets in the ordinary course as debtors-in-possession under the jurisdiction of the bankruptcy court in accordance with the applicable provisions of the United States Bankruptcy Code and orders of the bankruptcy court. See Note 2 - Chapter 11 Proceeding for additional information about the Company's Chapter 11 Proceeding.
As noted above, the Company was listed on the NYSE under the symbol "CJES" prior to the suspension of trading of its common shares on July 20, 2016, in connection with the commencement of the Chapter 11 Proceeding. The Company's common shares resumed trading on the OTC Markets Group Inc.'s OTC Pink under the symbol "CJESQ" on July 21, 2016.
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, 2015 and the consolidated statement of changes in shareholders' equity as of December 31, 2015, 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. Certain reclassifications have been made to prior period amounts to conform to current period financial statement classifications, including changes in accounting principle from the adoption of Accounting Standards Update ("ASU") No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs which requires deferred financing costs to be presented on the balance sheet as a direct deduction from the carrying amount of a debt liability, consistent with debt discounts. Because ASU 2015-03 was applied on a retrospective basis, deferred financing costs of $34.0 million related to the Company's Term Loan B facility have been reclassified to long-term debt and capital lease obligations as of December 31, 2015. These reclassifications had no effect on the consolidated financial position, results of operations or cash flows of the Company.

-6-
C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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 year ended December 31, 2015, which are included in the Company’s Annual Report on Form 10-K 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.
As a result of the Merger, the Company revised its reportable segments late in the first quarter of 2015. The Company’s revised reportable segments are: (1) Completion Services, which includes the Company's hydraulic fracturing services, cased-hole wireline services, coiled tubing services and other stimulation services; (2) Well Support Services, which includes the Company's rig services, fluids management services, and other special well site services; and (3) Other Services, which includes the Company’s smaller service lines and divisions, such as cementing services, equipment manufacturing and repair, and research and technology. The Company manages several of its vertically integrated businesses through its research and technology division, including its directional drilling services and products, its data acquisition and control instruments provider and its artificial lift applications provider.
This segment structure reflects the financial information and reports used by the Company’s management, specifically its Chief Operating Decision Maker, to make decisions regarding the Company’s business, including resource allocations and performance assessments. This segment structure reflects the Company’s current operating focus in compliance with Accounting Standards Codification ("ASC") No. 280 - Segment Reporting. See Note 7 – Segment Information for further discussion regarding the Company’s reportable segments.
The Company’s results for the nine months ended September 30, 2015 include results from the C&P Business from the closing of the Merger on March 24, 2015 through September 30, 2015. Results for periods prior to March 24, 2015 reflect the financial and operating results of Legacy C&J, and do not include the financial and operating results of the C&P Business. Unless the context indicates otherwise, as used herein, the terms “C&J” or the “Company”, or like terms refer to Legacy C&J and its subsidiaries when referring to time periods prior to March 24, 2015 and refer to C&J and its subsidiaries (which include Legacy C&J and its subsidiaries) when referring to time periods subsequent to March 24, 2015.
For the three and nine months ended September 30, 2016, the Company has applied the Financial Accounting Standards Board ("FASB") ASC 852 - Reorganizations, in preparing the consolidated financial statements. ASC 852 requires that the financial statements distinguish transactions and events that are directly associated with the Chapter 11 Proceeding from the ongoing operations of the business. Accordingly, certain expenses, gains and losses that are realized or incurred in the Chapter 11 Proceeding will be recorded in a reorganization line item on the consolidated statements of operations. In addition, the pre-petition obligations that may be impacted by the Chapter 11 Proceeding will be classified on the balance sheet in liabilities subject to compromise. These liabilities will be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts.
Going Concern. These consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern. These principles assume that the Company will be able to realize its assets and discharge its liabilities in the normal course of operations. The Company incurred a net loss of $872.5 million during 2015 and $825.9 million for the nine months ended September 30, 2016. During the first quarter of 2016, low utilization and commodity price levels continued to negatively impact the Company's results of operations which caused the Company to be unable to comply with the Minimum Cumulative Consolidated EBITDA Covenant under the terms of the Credit Agreement measured as of March 31, 2016 (see Note 2 - Chapter 11 Proceeding and Note 3 - Debt and Capital Lease Obligations for the meaning of all defined terms contained within this Going Concern section), which led to the Company's entry into the Restructuring Support Agreement with the Supporting Lenders and subsequent commencement of the Chapter 11 Proceeding. The Restructuring Support Agreement contemplates the implementation of a restructuring of the Company through a debt-to-equity conversion and Rights Offering, which transaction will be effectuated through the Restructuring Plan, subject to Bankruptcy Court approval. The Restructuring Plan is expected to significantly reduce the Company’s indebtedness, including eliminating all amounts owed under the Credit Agreement, pursuant to a consensual debt-to-equity exchange. At this time, there is no assurance the Company will be able to restructure as a going concern or successfully propose or implement the Restructuring Plan.
Given the circumstances leading to the Company's decision to seek relief under Chapter 11 and the impact on its business, including its liquidity and the uncertainties associated with the Chapter 11 process, there is substantial doubt

-7-
C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


regarding the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the substantial doubt about the Company's ability to continue as a going concern. For additional information, please see “Risk Factors” in Part II, Item 1A of this Quarterly Report, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in Part I, Item 2 of this Quarterly Report.
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, recoverability and valuation of long-lived assets, goodwill, useful lives used in depreciation and amortization, inventory reserves, income taxes, and share-based compensation. 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 $16.7 million and $18.3 million at September 30, 2016 and December 31, 2015, 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 operations of the captive insurance subsidiaries and to settle future anticipated claims.

Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable are 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 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 for the Completion Services segment consist of finished goods, including equipment components, chemicals, proppants, supplies and materials for the segment’s operations. Inventories for the Other Services segment consists of raw materials, work-in-process and finished goods, including equipment components, supplies and materials.
Inventories are stated at the lower of cost or market (net realizable value) on a first-in, first-out basis and appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value. Inventories consisted of the following (in thousands):
 
 
 
September 30, 2016
 
December 31, 2015
Raw materials
 
$
26,676

 
$
34,720

Work-in-process
 
8,691

 
13,574

Finished goods
 
41,069

 
58,657

Total inventory
 
76,436

 
106,951

Inventory reserve
 
(3,354
)
 
(4,694
)
Inventory, net
 
$
73,082

 
$
102,257


On June 29, 2016, the Company sold a majority of the assets comprising their specialty chemicals supply business, including inventory, for approximately $9.3 million of net cash.

Property, Plant and Equipment. Property, plant and equipment (PP&E) are reported at cost less accumulated depreciation. The cost of property and equipment currently in service is depreciated, on a straight-line basis, over the estimated useful lives of the related assets, which range from three to 25 years. 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

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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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 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 PP&E is 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 at the service line level, which consists of the well services, hydraulic fracturing, coiled tubing, wireline, pumpdown, directional drilling services and products, cementing, artificial lift applications, international coiled tubing, equipment manufacturing and repair services, and data acquisition and control instruments provider service lines as well as the vertically integrated research and technology service line. 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.

The Company concluded that the sharp fall in commodity prices during the second half of 2014 constituted a triggering event that resulted in a significant slowdown in activity across the Company’s customer base, which in turn has increased competition and put pressure on pricing for its services throughout 2015 and the first three quarters of 2016. Although the severity and extent of this continued downturn is uncertain, absent a significant recovery in commodity prices, activity and pricing levels may continue to decline in future periods. As a result of the triggering event during the fourth quarter of 2014, PP&E recoverability testing was performed throughout 2015 and the first three quarters of 2016 on the asset groups in each of the Company’s service lines. For the first six months of 2016, the recoverability testing for the coiled tubing, directional drilling, cementing, artificial lift applications and international coiled tubing asset groups yielded an estimated undiscounted net cash flow that was less than the carrying amount of the related assets. The estimated fair value for each respective asset group was compared to its carrying value, and impairment expense of $61.1 million was recognized during the first half of 2016 and allocated across each respective asset group's major classification. The impairment charge was primarily related to underutilized equipment in the Completion Services and Other Services segments.  The fair value of these assets was based on the projected present value of future cash flows that these assets are expected to generate. Should industry conditions not significantly improve or worsen, additional impairment charges may be required in future periods. Recoverability testing at September 30, 2016 resulted in no additional PP&E impairment charge.

On June 29, 2016, the Company sold a majority of the assets comprising their specialty chemicals supply business, including PP&E, for approximately $9.3 million of net cash.
Goodwill, Indefinite-Lived Intangible Assets and Definite-Lived Intangible Assets. Goodwill is allocated to the Company’s three reporting units: Completion Services, Well Support Services and Other Services, all of which are consistent with the presentation of the Company’s three reportable segments. At the reporting unit level, the Company tests goodwill for impairment on an annual basis as of October 31 of each year, or when certain events or changes in circumstances (referred to as "triggering events") indicate the carrying value of goodwill may not be recoverable and that a potential impairment exists.
Judgment is used in assessing whether goodwill should be tested for impairment more frequently than annually. Factors such as unexpected adverse economic conditions, competition, market changes and other external events may require more frequent assessments. During the third quarter of 2015, sustained low commodity price levels and the resulting impact on the Company’s results of operations, coupled with the sustained weakness in the Company’s share price were deemed triggering events that led to an interim period test for goodwill impairment. During the first quarter of 2016, commodity price levels remained depressed which materially and negatively impacted the Company's results of operations, and the further declines in the Company's share price led to another interim period test for goodwill impairment. See Note 4 - Goodwill and Other Intangible Assets for further discussion on impairment testing results.
Before employing detailed impairment testing methodologies, the Company may first evaluate the likelihood of impairment by considering qualitative factors relevant to each reporting unit, such as macroeconomic, industry, market or any other factors that have a significant bearing on fair value. If the Company first utilizes a qualitative approach and determines that it is more likely than not that goodwill is impaired, detailed testing methodologies are then applied. Otherwise, the Company concludes that no impairment has occurred. Detailed impairment testing, or Step 1 testing, involves comparing the

-9-
C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds carrying value, then it is concluded that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, a second step is required to measure possible goodwill impairment loss. The second step, or Step 2 testing, includes hypothetically valuing the tangible and intangible assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit’s goodwill is compared to the carrying value of that goodwill. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess, not to exceed the carrying value.
The Company’s Step 1 impairment analysis involves the use of a blended income and market approach. Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes on each reporting unit. Critical assumptions include projected revenue growth, fleet count, utilization, gross profit rates, sales, general and administrative ("SG&A") rates, working capital fluctuations, capital expenditures, discount rates, terminal growth rates, and price-to-earnings multiples. The Company’s market capitalization is also used to corroborate reporting unit valuations.
Similar to goodwill, indefinite-lived intangible assets are subject to annual impairment tests or more frequently if events or circumstances indicate the carrying amount may not be recoverable.
Definite-lived intangible assets are amortized over their estimated useful lives. These intangibles are reviewed for impairment when a triggering event indicates that the asset may have a net book value in excess of recoverable value. In these cases, the Company performs a recoverability test on its definite-lived intangible assets by comparing the estimated future net undiscounted cash flows expected to be generated from the use of the asset to the carrying amount of the asset for recoverability. If the estimated undiscounted cash flows exceed the carrying amount of the asset, 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 asset, the asset is not recoverable and the amount of impairment must be determined by fair valuing the asset.
For further discussion of the application of this accounting policy regarding impairments, please see Note 4 - Goodwill and Other Intangible Assets.
Revenue Recognition. All revenue is recognized when persuasive evidence of an arrangement exists, the service is complete or the equipment has been delivered to the customer, the amount is fixed or determinable and collectability is reasonably assured, as follows:
Completion Services Segment
Hydraulic Fracturing Revenue. Through its hydraulic fracturing service line, the Company provides hydraulic fracturing services on a spot market basis or pursuant to contractual arrangements, such as term contracts and pricing agreements. Under either scenario, revenue is 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 to the customer’s satisfaction, a field ticket is written that includes charges for the service performed and the consumables (such as fluids and proppants) 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.
Rates for services performed on a spot market basis are based on an agreed-upon hourly spot market rate for a specified number of hours of service.
Pursuant to pricing agreements and other contractual arrangements which the Company may enter into from time to time, such as those associated with an award from a bid process, customers typically commit to targeted utilization levels based on a specified number of hours of service at agreed-upon pricing, but without termination penalties or 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.
Cased-Hole Wireline Revenue. Through its cased-hole wireline service line, the Company provides cased-hole wireline logging, perforating, pressure pumping, well site make-up and pressure testing and other complementary services, 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.

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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Coiled Tubing and Other Stimulation Services Revenue. Through its coiled tubing service line, the Company provides a range of coiled tubing and other well stimulation services, including nitrogen and pressure pumping services, 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 (such as stimulation fluids, nitrogen and coiled tubing materials) 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.
Revenue from Materials Consumed While Performing Certain Completion Services. The Company generates revenue from consumables used during the course of providing services.
With respect to hydraulic fracturing services, the Company generates revenue from the fluids, proppants and other materials that are consumed while performing a job. For services performed on a spot market basis, the required consumables are typically provided by the Company and the customer is billed for those consumables at cost plus an agreed-upon markup. For services performed on a contractual basis, when the consumables are provided by the Company, the customer typically is billed for those consumables at a negotiated contractual rate. When consumables are supplied by the customer, the Company typically charges handling fees based on the amount of consumables used.
In addition, ancillary to coiled tubing and other stimulation services revenue, the Company generates revenue from stimulation fluids, nitrogen, coiled tubing materials and other consumables used during those processes.
Well Support Services Segment
Rig Services Revenue. Through its rig service line, the Company primarily provides workover and well servicing rigs that are involved in routine repair and maintenance, completions, re-drilling 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.
Fluids Management Services Revenue. Through its fluids management service line, the Company primarily provides transportation, storage 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.

Other Services Segment
Revenue within the Other Services Segment is generated from certain of the Company's smaller service lines and divisions, specifically including cementing services, equipment manufacturing and repair services, which includes the sale of oilfield parts and supplies used in completion and production services, and research and technology. Additionally, the Company manages several of its vertically integrated business through its research and technology division, including its directional drilling services and products, its data acquisition and control instruments provider and its artificial lift applications provider.
With respect to its directional drilling services, the Company provides these services on a spot market basis. Jobs for these services are typically short-term in nature, lasting anywhere from a few days to multiple weeks. The Company typically charges the customer for some of its directional drilling services on a per day basis, while other components are

-11-
C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


charged based upon the amount of footage drilled. Revenue is recognized and customers are invoiced upon the completion of each job. Once a job has been completed to the customer’s satisfaction, a field ticket is written that includes charges for the service performed.
With respect to its cementing services, the Company provides these 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. Once a job has been completed to the customer’s satisfaction, a field ticket is written that includes charges for the service performed and the consumables (such as blended bulk cement and chemical additives) used during the course of service.
With respect to its equipment manufacturing and repair services, data acquisition and control instruments provider and artificial lift applications provider, the Company generates revenue primarily from the sale of manufactured equipment and products. Revenue is recognized upon the completion, delivery and customer acceptance of each order.
Share-Based Compensation. The Company’s share-based compensation plans provide the ability to grant equity awards to the Company’s employees, consultants and non-employee directors. As of September 30, 2016, only nonqualified stock options and restricted shares had been granted under such plans. The Company values option grants based on the grant date fair value by using the Black-Scholes option-pricing model and values restricted share grants based on the closing price of C&J’s common shares on the grant date. The Company recognizes share-based compensation expense on a straight-line basis over the requisite service period for the entire award. Further information regarding the Company’s share-based compensation arrangements and the related accounting treatment can be found in Note 5 – Share-Based Compensation.
Fair Value of Financial Instruments. The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, debt and capital lease obligations. The recorded values of cash and cash equivalents, accounts receivable, accounts payable and the Debtor-in-Possession credit facility approximate their fair values given the short-term nature of these instruments. The following table compares the carrying value of the Company's term debt instruments to their fair value as of September 30, 2016. As of September 30, 2016, the Five-Year Term Loans and the Seven-Year Term Loans are classified as liabilities subject to compromise in the Company's consolidated balance sheet. (See Note 3 – Debt and Capital Lease Obligations for further discussion regarding the Company’s Credit Facilities and for the meaning of all defined terms contained within this Fair Value of Financial Instruments section):
 
September 30, 2016
 
Carrying Value
 
Fair Value
 
(In thousands)
Five-Year Term Loans
$
569,250

 
$
478,170

Seven-Year Term Loans
$
480,150

 
$
401,213

The Company estimated the fair values of its term debt using quoted market prices in an active market. As a result, the Company considers this a Level 1 fair value measurement within the fair value hierarchy.
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 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 accounts for income taxes using 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 bases. 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

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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


expected to be recovered or settled. The effect on deferred tax assets and liabilities of 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 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 some portion or all of the deferred tax assets will not be realized.
As of September 30, 2016, the Company has federal, state and international net operating loss carryforwards that will expire in the years 2021 through 2036. After considering the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies, the Company established a valuation allowance due to the uncertainty regarding the ultimate realization of the deferred tax assets.
The Company expects that most, if not all of its net operating loss carryforwards will be eliminated as a result of the cancellation of certain of its debt pursuant to the reorganization. Furthermore, to the extent that any net operating loss carryforwards remain after the reorganization, the Company's ability to use such net operating loss carryforwards would likely be significantly limited because the reorganization will constitute an “ownership change” as defined in Section 382 of the Internal Revenue Code.
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 tax positions are reversed in the first period in which it is no longer 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. The Company had no uncertain tax positions as of September 30, 2016.
The effective tax rate was a benefit of 13.3% for the nine month period ended September 30, 2016 as compared to a 16.5% provision for the nine month period ended September 30, 2015. The effective tax rate, and resulting benefit, is less than the expected statutory rate primarily due to impairment charges recorded in the first half of 2016 that were not deductible for tax and valuation allowances applied against certain deferred tax assets, including net operating loss carryforwards.
Earnings (Loss) Per Share. Basic earnings (loss) per share is based on the weighted average number of common shares outstanding during the applicable period and excludes shares subject to outstanding stock options and restricted shares. Diluted earnings per share is computed based on the weighted average number of common shares outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to outstanding stock options and restricted shares.

The following is a reconciliation of the components of the basic and diluted loss per share calculations for the applicable periods:
 

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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands, except per
share amounts)
Numerator:
 
 
 
 
 
 
 
 
Net loss attributed to common shareholders
 
$
(106,390
)
 
$
(455,016
)
 
$
(825,921
)
 
$
(550,800
)
Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
118,626

 
117,019

 
118,196

 
98,061

Effect of potentially dilutive common shares:
 
 
 
 
 
 
 
 
Stock options
 
—

 
—

 
—

 
—

Restricted shares
 
—

 
—

 
—

 
—

Weighted average common shares outstanding and assumed conversions
 
118,626

 
117,019

 
118,196

 
98,061

Loss per common share:
 
 
 
 
 
 
 
 
Basic
 
$
(0.90
)
 
$
(3.89
)
 
$
(6.99
)
 
$
(5.62
)
Diluted
 
$
(0.90
)
 
$
(3.89
)
 
$
(6.99
)
 
$
(5.62
)
A summary of securities excluded from the computation of basic and diluted loss per share is presented below for the applicable periods:
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
Basic loss per share:
 
 
 
 
 
 
 
 
Restricted shares
 
970

 
3,367

 
1,732

 
2,378

Diluted loss per share:
 
 
 
 
 
 
 
 
Anti-dilutive stock options
 
5,016

 
4,819

 
4,873

 
3,304

Anti-dilutive restricted shares
 
970

 
3,043

 
1,724

 
1,770

Potentially dilutive securities excluded as anti-dilutive
 
5,986

 
7,862

 
6,597

 
5,074

Recent Accounting Pronouncements. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers ("ASU 2015-14"), which deferred the effective date of ASU 2014-09 for all entities by one year and is effective for the Company's fiscal year beginning January 1, 2018.  ASU 2015-14 permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the impact, if any, of adopting this new accounting standard on its results of operations and financial position.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory ("ASU 2015-11"), which changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. ASU 2015-11 is part of the FASB’s simplification initiative and applies to entities that measure inventory using a method other than last-in, first-out ("LIFO") or the retail inventory method. The guidance will require prospective application at the beginning of the Company's first quarter of fiscal 2018, but permits adoption in an earlier period.  The Company does not expect this ASU to have a material impact on its consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes ("ASU 2015-17”). ASU 2015-17 amends existing guidance on income taxes to require the classification of all deferred tax assets and liabilities as non-current on the balance sheet. The Company is required to adopt this ASU for years beginning after December 15, 2016, with early adoption permitted, and the guidance may be applied either prospectively or retrospectively. The Company does not expect this ASU to have a material impact on its consolidated financial statements.


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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). ASU 2016-01 improves upon U.S. GAAP by, among other things, (1) requiring equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value, with changes in fair value recognized in net income; (2) simplifying the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) eliminating the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and (4) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The Company is required to adopt this ASU for years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact, if any, of adopting this new accounting standard on its results of operations and financial position.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU No. 2016-02 seeks to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. Unlike current U.S. GAAP, which requires only capital leases to be recognized on the balance sheet, ASU No. 2016-02 will require both operating and finance leases to be recognized on the balance sheet. Additionally, the new guidance will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. The amendments in ASU No. 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early application is permitted. The Company is currently evaluating the impact of adopting this new accounting standard on its results of operations and financial position.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), to simplify certain provisions in stock compensation accounting, including the simplification of accounting for a stock payment's tax consequences. The ASU amends the guidance for classifying awards as either equity or liabilities, allows companies to estimate the number of stock awards they expect to vest, and revises the tax withholding requirements for stock awards. The amendments in ASU No. 2016-09 are effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and early application is permitted. The Company is currently evaluating the impact of adopting this new accounting standard on its results of operations and financial position.

In May 2016, the FASB issued ASU No. 2016-12, Revenues from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients ("ASU 2016-12"), to clarify in the FASB's revenue recognition standard the assessment of the likelihood that revenue will be collected from a contract, the guidance for presenting sales taxes and similar taxes, and the timing for measuring customer payments that are not in cash. The Company does not expect this ASU to have a material impact on its consolidated financial statements.

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 results of operations and financial position.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments: A Consensus of the FASB Emerging Issues Task Force ("ASU 2016-15"), which makes target changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for interim and annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, and early application is permitted. The Company is currently evaluating the impact of adopting this new accounting standard on its results of operations and financial position.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16"), which requires an entity to recognize the income tax consequences of an intra-entity asset transfer, other than an intra-entity asset transfer of inventory, when the transfer occurs. The ASU is effective for the interim and annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years,

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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


and early application is permitted. The Company is currently evaluating the impact of adopting this new accounting standard on its results of operations and financial position.

Note 2 - Chapter 11 Proceeding
Overview
On July 8, 2016, C&J and certain of its direct and indirect subsidiaries, including C&J Corporate Services (Bermuda) Ltd. (together with C&J, collectively the “Bermudian Entities”), C&J Energy Production Services-Canada Ltd. and Mobile Data Technologies Ltd. (together, the “Canadian Entities”), entered into a Restructuring Support and Lock-Up Agreement (the “Restructuring Support Agreement”), with certain lenders (the “Supporting Lenders”) holding approximately 90% of the secured claims and interests arising under the Credit Agreement, dated as of March 24, 2015 (as amended and otherwise modified, the “Credit Agreement”). The Restructuring Support Agreement contemplates the implementation of a restructuring of the Company, including eliminating all amounts owed under the Company’s Credit Agreement, through a debt-to-equity conversion and equity rights offering, which transaction will be effectuated through a plan of reorganization (the “Restructuring Plan”) under Chapter 11 of Title 11 (“Chapter 11”) of the United States Bankruptcy Code (the “Bankruptcy Code”), which will be subject to the approval of the United States Bankruptcy Court in the Southern District of Texas, Houston Division (the “Bankruptcy Court”).
To implement the restructuring, on July 20, 2016 (the "Petition Date"), the Company and certain other subsidiaries of the Company (the "Debtors" or the "Reorganized Debtors") filed voluntary petitions for reorganization (the "Bankruptcy Petitions") seeking relief under the provisions of Chapter 11 with the Bankruptcy Court. These Chapter 11 cases are being administered under the caption "In re: CJ Holding Co., et al., Case No. 16-33590", and the Company commenced ancillary proceedings in Canada on behalf of the Canadian Entities and a provisional liquidation proceeding in Bermuda on behalf of the Bermudian Entities (collectively, the "Chapter 11 Proceeding"). Throughout the Chapter 11 Proceeding, the Debtors will continue operations and management of their assets in the ordinary course as debtors-in-possession under the jurisdiction of the Bankruptcy Court in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
In accordance with the Restructuring Support Agreement, the Debtors filed the Restructuring Plan with the Bankruptcy Court on August 19, 2016, with a first amendment to the Restructuring Plan filed on September 28, 2016 and a second amendment filed on November 3, 2016. The key terms of the restructuring included in the Restructuring Plan are as follows:
•Debt-to-equity Conversion: The Supporting Lenders will be issued new common equity in the reorganized Company ("New Equity"), and all of the existing shares of C&J common equity will be canceled as of the effective date of the Restructuring Plan (the "Effective Date").
•The Rights Offering:  Certain of the Supporting Lenders (the "Backstop Parties") have agreed to provide an equity rights offering for an investment in the Company in an amount of up to $200 million as part of the approved Restructuring Plan (the “Rights Offering”). The Rights Offering will be consummated on the Effective Date pursuant to a Backstop Commitment Agreement, which will also provide for a commitment premium of 5% of the $200 million committed amount payable in New Equity to the Backstop Parties (the “Backstop Fee”). The Rights Offering shares will be issued at a price that reflects a discount of 20% to the Restructuring Plan value, provided that the Restructuring Plan value will not be greater than $750 million.
•DIP Facility: Certain of the Supporting Lenders (the “DIP Lenders”) are providing a superpriority secured delayed draw term loan facility to the Company in an aggregate principal amount of up to $100 million (the “DIP Facility”). As further discussed below, on July 25, 2016, the Bankruptcy Court entered an order approving the Debtors’ entry into the DIP Facility on an interim basis, pending a final hearing. On July 29, 2016, the Debtors entered into a superpriority secured debtor-in-possession credit agreement, among the Debtors, the DIP Lenders and Cortland Capital Market Services LLC, as Administrative Agent (the “DIP Credit Agreement”), which sets forth the terms and conditions of the DIP Facility. On September 25, 2016, the Bankruptcy Court entered a final order approving entry into the DIP Facility and DIP Credit Agreement. The Company is required to repay all amounts outstanding under the DIP Facility on the Effective Date.
•The Exit Facility:  The Company is evaluating various financing options which will take effect upon emergence from its Chapter 11 proceeding, including entry into a senior secured revolving asset-based lending credit facility to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


be arranged and provided by one or more commercial lending institutions in a minimum amount of $100 million (the "Exit Facility"). Entry into the Exit Facility will require that the Debtors, the Backstop Parties and certain other Supporting Lenders agree that such a financing facility is in the best interests of the Reorganized Debtors.
•The New Warrants:  On the Effective Date, the Company will issue new seven-year warrants exercisable on a net-share settled basis into up to 6% of the New Equity at a strike price of $1.55 billion (the “New Warrants”). New Warrants representing up to 2% of the New Equity will be issued to existing holders of C&J common equity, provided that such holders vote as a class to accept the Restructuring Plan, and the remaining New Warrants representing up to 4% of the New Equity will be issued to the Debtors' general unsecured creditors.
•Distributions:  The DIP Lenders will receive payment in full in cash on the Effective Date from cash on hand and proceeds from the Rights Offering and Exit Facility, as applicable. The Supporting Lenders will receive all of the New Equity, subject to dilution on account of the Management Incentive Plan (as defined below), the Rights Offering, the Backstop Fee and the New Warrants, along with all of the subscription rights under the Rights Offering. Under the Restructuring Plan, mineral contractor claimants will be paid in full in the ordinary course of business. Additionally, subject to the terms of the Plan, certain other unsecured claimants will share in a $33.0 million cash recovery pool, plus a portion of the New Warrants, as described above.
•Management Incentive Plan: 10% of the New Equity will be reserved for a management incentive program to be issued to management of the reorganized Company after the Effective Date at the discretion of the board of the reorganized Company (the “Management Incentive Plan”).
•Governance: The board of the reorganized Company will be appointed by the Supporting Lenders and will include the reorganized Company’s Chief Executive Officer.
•Releases: The Restructuring Plan contemplates certain releases relating to the Company, the Supporting Lenders, including the Backstop Parties and DIP Lenders, the UCC and its members, and holders of claims and interests, which will take effect upon the Effective Date. Further, all indemnification provisions for current and former directors, officers, managers, employees, attorneys, accountants, investments bankers, and other professionals of the Company, as applicable, will remain in place after the restructuring.
Pursuant to the Restructuring Support Agreement, the Supporting Lenders have agreed to, among other things: (a) use good faith efforts to implement the restructuring; (b) vote all claims and interests held in favor of the Restructuring Plan; (c) with respect to the Backstop Parties, backstop the Rights Offering; (d) support and not object or opt out of the release provisions under the Restructuring Plan so long as such release provisions are consistent with the Restructuring Support Agreement term sheet; and (e) not exercise any right or remedy under the Credit Agreement against an affiliate of the Company that does not file for Chapter 11, subject to certain conditions.
The Restructuring Support Agreement contains certain Plan-related milestones, including deadlines: (a) to file the Restructuring Plan and related disclosure statement; (b) for entry of interim and final DIP orders; (c) for entry of the disclosure statement order; (d) for entry of the confirmation order; and (e) for the Effective Date to occur. The Supporting Lenders may
agree to extend the foregoing milestones, and in one case the Supporting Lenders agreed to extend the milestone related to entry of the final order approving the DIP Facility.

On November 4, 2016, the Bankruptcy Court approved the Disclosure Statement, finding that the Disclosure Statement contains adequate information as required by the Bankruptcy Code. The Debtors intend to launch solicitation of acceptances of the Restructuring Plan, as required by the Bankruptcy Code, as soon as reasonably practicable thereafter. A hearing with respect to confirmation of the Restructuring Plan is expected to take place on December 16, 2016, and the Company expects to emerge from the Chapter 11 Proceeding in the following weeks.

Reorganization Process
On and after the Petition Date, the Bankruptcy Court issued certain additional interim and final orders with respect to the Company's’ first-day motions and other operating motions that allow the Company to operate the business in the ordinary course. The first-day motions provided for, among other things, the payment of certain pre-petition employee expenses and benefits, the use of the Company’s existing cash management system, the payment of certain pre-petition amounts to certain

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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


critical vendors and mineral lien claimants, the ability to pay certain pre-petition taxes and regulatory fees, and the payment of certain pre-petition claims owed on account of insurance policies and programs. With respect to those first-day motions for which only interim approval had been initially granted, the Bankruptcy Court has since issued final orders on all such motions as of September 30, 2016.
Subject to certain exceptions under the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically stayed the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the filing of the Bankruptcy Petitions. Most creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the Debtors’ property, or to collect on monies owed or otherwise exercise rights or remedies with respect to a pre-petition claim are stayed unless and until the Bankruptcy Court lifts the automatic stay.
Under Section 365 and other relevant sections of the Bankruptcy Code, the Debtors may assume, assume and assign, or reject certain executory contracts and unexpired leases, including leases of real property and equipment, subject to the approval of the Bankruptcy Court and certain other conditions, including Supporting Lender approval in accordance with the Restructuring Support Agreement.
Under Chapter 11, the Restructuring Plan will determine the rights and satisfaction of claims and interests of various creditors and security holders and will be subject to the ultimate outcome of negotiations and the Bankruptcy Court’s decisions through the date on which the Restructuring Plan is confirmed. As noted above, the Debtors filed the Restructuring Plan with the Bankruptcy Court on August 19, 2016 with a subsequent first amendment to the Restructuring Plan filed on September 28, 2016. The proposed Restructuring Plan, among other things, provides mechanisms for treatment of the Debtors’ pre-petition obligations, treatment of the Company’s existing equity holders, potential income tax liabilities and certain corporate governance and administrative matters pertaining to the reorganized Company. The proposed Chapter 11 plan was subject to revision prior to submission to the Bankruptcy Court based upon discussions with the Debtors’ creditors, including the Supporting Lenders and other interested parties, and thereafter in response to further discussions with parties in interest and the Company's further analysis. There can be no assurance that the Debtors will be able to secure approval for the Restructuring Plan or any other Chapter 11 plan from the Bankruptcy Court or that any Chapter 11 plan will be accepted by the Debtors’ creditors.
Under the priority scheme established by the Bankruptcy Code, unless creditors agree otherwise, pre-petition liabilities and post-petition liabilities must be satisfied in full before shareholders are entitled to receive any distribution or retain any property under a Chapter 11 plan. The ultimate recovery to creditors and/or shareholders, if any, will not be determined until confirmation of the Restructuring Plan. No assurance can be given as to what values, if any, will be ascribed to each of these constituencies or what types or amounts of distributions, if any, they would receive. The Restructuring Plan and any other proposed Chapter 11 plan could result in holders of certain liabilities and/or securities, including common shares, receiving no distribution on account of their interests. Because of such possibilities, there is significant uncertainty regarding the value of the Company's liabilities and securities, including its common shares. At this time, there is no assurance the Company will be able to restructure as a going concern or successfully implement the Restructuring Plan or any other proposed Chapter 11 plan.
The Company has filed schedules and statements with the Bankruptcy Court setting forth, among other things, the assets and liabilities of each of the Debtors. These schedules and statements may be subject to further amendment or modification after filing. Certain holders of pre-petition claims that are not governmental units are required to file proofs of claim by the deadline for general claims, (the “bar date”), which was set by the Bankruptcy Court as November 8, 2016. Differences between amounts scheduled by the Debtors and claims by creditors will be investigated and will be reconciled and resolved to within an immaterial amount in connection with the claims resolution process. In light of the expected number of creditors, the claims resolution process may take considerable time to complete and likely will continue after the Debtors emerge from bankruptcy. Accordingly, the ultimate number and amount of allowed claims is not presently known, nor can the ultimate recovery with respect to allowed claims be presently asserted.
Liabilities Subject to Compromise
The Company has segregated liabilities and obligations whose treatment and satisfaction are dependent on the outcome of its reorganization under the Chapter 11 Proceeding and has classified these items as liabilities subject to compromise. Generally, all actions to enforce or otherwise effect repayment of pre-petition liabilities of the Debtors, as well as all pending litigation against the Debtors, are stayed while the Company is subject to the Chapter 11 Proceeding. The ultimate

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


amount and treatment for these types of liabilities will be subject to the claims resolution processes in the Chapter 11 Proceeding and the terms of any plan of reorganization confirmed by the Bankruptcy Court in the Chapter 11 Proceeding. Liabilities subject to compromise includes only those liabilities that are obligations of the Debtors and excludes the obligations of the Company's non-debtor subsidiaries. Those liabilities subject to compromise may vary significantly from the stated amounts of claims filed with the Bankruptcy Court. Obligations classified as liabilities subject to compromise may be subject to future adjustments depending on the decisions of the Bankruptcy Court in the Chapter 11 Proceeding, further developments with respect to potential disputed claims and/or determination as to the value of any collateral securing claims or other events. Further, additional claims may arise subsequent to the Petition Date resulting from the rejection of executory contracts and from a determination by the Bankruptcy Court, or agreed to by parties in interest, of allowed claims for disputed amounts.
Interest expense incurred subsequent to the Company's Chapter 11 filing is recognized only to the extent that it will be paid during the cases or that it is probable that it will be an allowed claim. Principal and interest payments may not be made on pre-petition debt subject to compromise without approval from the Bankruptcy Court or until a plan of reorganization defining the repayment terms, if any, has been confirmed. In addition, the Bankruptcy Code generally disallows the payment of post-petition interest that accrues with respect to unsecured or undersecured claims. As a result, the Company has not accrued interest that it believes is not probable of being treated as an allowed claim in the Chapter 11 Proceeding. For the three and nine months ended September 30, 2016, the Company did not accrue interest totaling $26.6 million under the Credit Agreement subsequent to the Petition Date.
As of September 30, 2016, the Company classified the entire principal balance of the Revolving Credit Facility, the Five-Year Term Loans and the Seven-Year Term Loans (see Note 3 - Debt and Capital Lease Obligations for defined terms), as well as interest that was accrued but unpaid as of the Petition Date, as liabilities subject to compromise in accordance with ASC 852 - Reorganizations. The components of liabilities subject to compromise are as follows (in thousands):

 
 
 
September 30, 2016
Revolving Credit Facility
 
 
$
284,400

Five-Year Term Loans
 
 
569,250

Seven-Year Term Loans
 
 
480,150

Total debt subject to compromise
 
 
1,333,800

Accrued interest on debt subject to compromise
 
 
37,516

Accounts payable and other estimated allowed claims
 
 
80,523

Capital lease obligations
 
 
32,702

Related party payables
 
 
30,010

Total liabilities subject to compromise
 
 
$
1,514,551

Reorganization Items
The Company classifies all income, expenses, gains or losses that are incurred or realized as a result of the Chapter 11 Proceeding as reorganization items in its consolidated statements of operations. In addition, the Company reports professional fees and related costs associated with and incurred during the Chapter 11 Proceeding as reorganization items. The components of reorganization items are as follows (in thousands):

 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
Professional fees
$
21,451

 
$
21,451

Contract termination settlements
19,548

 
19,548

Vendor claims adjustment
(122
)
 
(122
)
Total reorganization items
$
40,877

 
$
40,877


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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


In accordance with the requirements of ASC 852 - Reorganizations, the following are condensed combined financial statements of the Debtor entities:

C&J ENERGY SERVICES LTD. AND CERTAIN SUBSIDIARIES (DEBTOR-IN-POSSESSION) (1)
CONDENSED COMBINED BALANCE SHEET
(In thousands)
 
 
September 30, 2016
 
 
 
(Unaudited)
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
 
$
83,135

 
Accounts receivable, net of allowance of $2,537
 
151,278

 
Inventories, net
 
68,872

 
Prepaid and other current assets
 
54,541

 
Deferred tax assets
 
5,706

 
Total current assets
 
363,532

 
Property, plant and equipment, net of accumulated depreciation of $642,798
 
1,016,563

 
Intangible assets, net
 
61,465

 
Investments in non-debtor subsidiaries
 
22,893

 
Intercompany receivables from non-debtor subsidiaries
 
42,353

 
Other noncurrent assets
 
33,532

 
Total assets
 
$
1,540,338

 
LIABILITIES AND SHAREHOLDERS' DEFICIT
 
 
 
Current liabilities:
 
 
 
Accounts payable
 
$
43,253

 
Accrued expenses and other
 
73,271

 
DIP Facility
 
25,000

 
Total current liabilities
 
141,524

 
Deferred tax liabilities
 
28,299

 
Intercompany payables to non-debtor subsidiaries
 
12,096

 
Other long-term liabilities
 
6,583

 
Total liabilities not subject to compromise
 
188,502

 
Liabilities subject to compromise
 
1,514,551

 
Total liabilities
 
1,703,053

 
Total shareholders' deficit
 
(162,715
)
 
Total liabilities and shareholders’ deficit
 
$
1,540,338

 


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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


C&J ENERGY SERVICES LTD. AND CERTAIN SUBSIDIARIES (DEBTOR-IN-POSSESSION) (1)
CONDENSED COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands)
(Unaudited)

 
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
Revenue
 
$
232,330

 
$
727,092

Costs and expenses:
 
 
 
 
Direct costs
 
214,905

 
704,161

Selling, general and administrative expenses
 
51,511

 
188,986

Research and development
 
1,797

 
5,959

Depreciation and amortization
 
50,570

 
162,197

Impairment expense
 
—

 
423,216

(Gain) loss on disposal of assets
 
(672
)
 
4,242

Operating loss
 
(85,781
)
 
(761,669
)
Other income (expense):
 
 
 
 
Interest expense, net
 
(7,636
)
 
(153,758
)
Equity in losses of non-debtor subsidiaries
 
(893
)
 
(14,437
)
Other income (expense), net
 
7,346

 
17,097

Total other income (expense)
 
(1,183
)
 
(151,098
)
 
 
 
 
 
Loss before reorganization items and income taxes
 
(86,964
)
 
(912,767
)
Reorganization items
 
40,877

 
40,877

Income tax benefit
 
(21,655
)
 
(128,002
)
 
 
 
 
 
Net loss
 
(106,186
)
 
(825,642
)
 
 
 
 
 
Comprehensive loss, net of income taxes:
 
 
 
 
Net loss
 
(106,186
)
 
(825,642
)
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
Foreign currency translation gain (loss), net of tax
 
(288
)
 
1,735

Comprehensive loss
 
$
(106,474
)
 
$
(823,907
)
 
 
 
 
 


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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


C&J ENERGY SERVICES LTD. AND CERTAIN SUBSIDIARIES (DEBTOR-IN-POSSESSION) (1)
CONDENSED COMBINED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended September 30, 2016
Cash flows from operating activities:
 
 
Net loss
 
$
(825,642
)
Adjustments to reconcile net loss to net cash used in operating activities
 
751,167

Net cash used in operating activities
 
(74,475
)
Cash flows from investing activities:
 
 
Purchases of and deposits on property, plant and equipment
 
(41,195
)
Proceeds from disposal of property, plant and equipment
 
30,752

Investment in unconsolidated affiliate
 
(408
)
Payments made for business acquisitions, net of cash acquired
 
(1,419
)
Investment in non-debtor subsidiaries
 
(7,984
)
Payments made for intercompany receivables
 
(2,637
)
Net cash used in investing activities
 
(22,891
)
Cash flows from financing activities:
 
 
Proceeds from revolving debt
 
174,000

Payments on revolving debt
 
(10,600
)
Payments on term loans
 
(2,650
)
Proceeds from DIP Facility
 
24,500

Payments of capital lease obligations
 
(2,171
)
Financing costs
 
(1,009
)
Payments on non-debtor intercompany notes
 
(250
)
Employee tax withholding on restricted shares vesting
 
(410
)
Excess tax expense from share-based compensation
 
(5,592
)
Net cash provided by financing activities
 
175,818

 
 
 
Effect of exchange rate changes on cash
 
(2,156
)
 
 
 
Net increase in cash and cash equivalents
 
76,296

Cash and cash equivalents, beginning of period
 
6,839

Cash and cash equivalents, end of period
 
$
83,135

(1) As of September 30, 2016, the subsidiaries of C&J Energy Services Ltd. that had filed voluntary petitions seeking relief under the Chapter 11 Proceeding were CJ Holding Co.; Blue Ribbon Technology Inc.; C&J Corporate Services (Bermuda) Ltd.; C&J Energy Production Services-Canada Ltd.; C&J Energy Services, Inc.; C&J Spec-Rent Services, Inc.; C&J VLC, LLC; C&J Well Services Inc.; ESP Completion Technologies LLC; KVS Transportation, Inc.; Mobile Data Technologies Ltd.; Tellus Oilfield Inc.; Tiger Cased Hole Services Inc.; and Total E&S, Inc. The condensed combined balance sheet, the condensed combined statements of comprehensive loss and the condensed combined statement of cash flows above include only those entities that were subject to Chapter 11 Proceeding as of September 30, 2016. All direct and indirect investments in debtor subsidiaries that were included in the condensed combined financial statements have been eliminated.
Note 3 - Debt and Capital Lease Obligations

Debt and capital lease obligations consisted of the following as of September 30, 2016 and December 31, 2015 (in thousands):


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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
 
September 30, 2016
 
December 31, 2015
Revolving Credit Facility
 
$
284,400

 
$
121,000

Five-Year Term Loans, net of original issue discount and deferred financing costs of $34,336 as of December 31, 2015
 
569,250

 
536,353

Seven-Year Term Loans, net of original issue discount and deferred financing costs of $52,032 as of December 31, 2015
 
480,150

 
429,330

Capital leases
 
32,702

 
34,873

Total debt and capital lease obligations
 
1,366,502

 
1,121,556

Less: liabilities subject to compromise
 
(1,366,502
)
 
—

Less: current portion of debt and capital lease obligations
 
—

 
(13,433
)
Long-term debt and capital lease obligations
 
$
—

 
$
1,108,123


On July 20, 2016, the Debtors filed Bankruptcy Petitions in the Bankruptcy Court seeking relief under Chapter 11 of the Bankruptcy Code under the caption “In re: CJ Holding Co., et al., Case No. 16-33590.” The filing of the Bankruptcy Petitions constituted an event of default with respect to the Company's Credit Agreement. As a result, the Company’s pre-petition secured indebtedness under the Credit Agreement became immediately due and payable and any efforts to enforce such payment obligations were automatically stayed as a result of the Chapter 11 Proceeding. As of September 30, 2016, $1.3 billion of debt under the Company's Credit Agreement was classified as liabilities subject to compromise.
Additional information regarding the Chapter 11 Proceeding is included in Note 2 - Chapter 11 Proceeding.
Credit Agreements
On March 24, 2015, in connection with the closing of the Merger, the Company entered into a new credit agreement with Bank of America N.A., as administrative agent and other lending parties (the “Original Credit Agreement”). At the closing, the Original Credit Agreement provided for senior secured credit facilities (collectively, the "Credit Facilities") in an aggregate principal amount of $1.66 billion, consisting of (i) a revolving credit facility (“Revolving Credit Facility” or the “Revolver”) in the aggregate principal amount of $600.0 million and (ii) a term loan B facility (“Term Loan B Facility”) in the aggregate principal amount of $1.06 billion. The Company simultaneously repaid all amounts outstanding and terminated Legacy C&J’s prior credit agreement; no penalties were due in connection with such repayment and termination. The borrowers under the Revolver are the Company and certain wholly-owned subsidiaries of the Company, specifically, CJ Lux Holdings S.à r.l. and CJ Holding Co. The borrower under the Term Loan B Facility is CJ Holding Co. All obligations under the Original Credit Agreement were guaranteed by the Company’s wholly-owned domestic subsidiaries, other than immaterial subsidiaries.
On September 29, 2015, the Company obtained and entered into a waiver and certain amendments to the Original Credit Agreement (as amended by the amendments, the "Amended Credit Agreement"). The Amended Credit Agreement, among other things, suspended the quarterly maximum Total Leverage Ratio (as defined herein) and quarterly minimum Interest Coverage Ratio (as defined herein) covenants set forth in the Original Credit Agreement. The suspension of these financial covenants commenced with the fiscal quarter ended September 30, 2015 and was set to run through the fiscal quarter ending June 30, 2017. Upon reinstatement of these covenants as of the quarter ending September 30, 2017, the required levels initially were to be more lenient than those in effect under the terms of the Original Credit Agreement and were to gradually adjust to those prior levels over the subsequent fiscal quarters.
On May 10, 2016, the Company obtained a temporary limited waiver agreement (the “Temporary Waiver”) from certain of the lenders pursuant to which, effective as of March 31, 2016, such lenders agreed to not consider a breach of the Minimum Cumulative Consolidated EBITDA Covenant measured as of March 31, 2016 an event of default through May 31, 2016. Minimum Cumulative Consolidated EBITDA is defined as total earnings (loss) before net interest expense, income taxes, depreciation and amortization, other income (expense), and net gain or loss on disposal of assets, and excludes, among other things, stock based compensation expense, acquisition-related costs, and non-routine items.
On May 31, 2016, the Company obtained and entered into a forbearance agreement (the "Forbearance Agreement") with certain of the lenders pursuant to which, among other things, such lenders agreed not to pursue default remedies against the Company with respect to its breach of the Minimum Cumulative Consolidated EBITDA Covenant or certain specified payment defaults.

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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


On June 30, 2016, this forbearance was extended through July 17, 2016 pursuant to a second forbearance agreement (the “Second Forbearance Agreement”), and prior to the termination of the Second Forbearance Agreement, this forbearance period was once again extended through July 20, 2016. The Second Forbearance Agreement provided that the forbearance would terminate upon the occurrence of certain events, including the failure of the Company to enter into the Restructuring Support Agreement on or prior to July 8, 2016. On July 8, 2016, the Company entered into the Restructuring Support Agreement with the Supporting Lenders. The Restructuring Support Agreement contemplates the implementation of a restructuring of the Company through a debt-to-equity conversion and Rights Offering, which transaction will be effectuated through the Restructuring Plan, subject to Bankruptcy Court approval.
On July 20, 2016, the Debtors filed Bankruptcy Petitions in the Bankruptcy Court seeking relief under Chapter 11. Additional information, including definitions of capitalized defined terms, regarding the Chapter 11 Proceeding is included in Note 2 - Chapter 11 Proceeding.
DIP Facility
In connection with the commencement of the Chapter 11 Proceeding, the Company filed a motion seeking Bankruptcy Court approval of debtor-in-possession financing on the terms set forth in a contemplated $100 million Superpriority Secured Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”).  On July 25, 2016, the Bankruptcy Court entered an order approving, on an interim basis, the financing to be provided pursuant to the DIP Facility, and on July 29, 2016, the DIP Credit Agreement was entered into by and among the Company, the other Debtors, the DIP Lenders and Cortland Capital Market Services LLC, as administrative agent. Under the terms of the interim order, the Debtors were authorized to access $25 million in funding under the DIP Facility, and on July 29, 2016, the Company accessed $25 million under the DIP Facility.  On September 25, 2016, the Bankruptcy Court entered the final order authorizing the Debtors' entry into the DIP Facility and DIP Credit Agreement, allowing the Company to access up to $100 million under the DIP Facility.
The DIP Facility provides for financial covenants that include budget variance limitations and limitations on capital expenditures. A rolling 13 week cash budget projecting sources and uses of cash is required to be provided to the DIP Lenders every four weeks. Budget variances are tested against each of the first four weeks of each refreshed budget as of the last business day of each week. For each of the testing periods set forth in the table below, aggregate receipts of the Company and its subsidiaries must not be less than the applicable variance percentage for receipts as reflected in the table below, and aggregate operating disbursements (excluding professional fees and related expenses) made by the Company and its subsidiaries must not be greater than the applicable variance percentage for disbursements as reflected in the table below.

Test Period
Variance Percentage
Receipts
Disbursements
First Week after delivery of Rolling Budget
75%
125%
Second Week after delivery of Rolling Budget
75%
125%
Third Week after delivery of Rolling Budget
80%
120%
Fourth and Subsequent Weeks after delivery of Rolling Budget
80%
120%


Capital Expenditures are tested monthly, on a cumulative basis, commencing with the July 20, 2016 Petition Date and cannot exceed the amounts set forth in the table below.



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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Fiscal Month
Capital Expenditures
August 2016
$15,560,000
September 2016
$21,550,000
October 2016
$27,540,000
November 2016
$33,530,000
December 2016
$39,510,000
January 2017
$46,540,000
February 2017
$53,660,000
March 2017
$61,870,000

The DIP Facility matures on the earliest of (a) March 31, 2017 or (b) the date of the substantial consummation of a reorganization plan that is confirmed pursuant to an order of the Bankruptcy Court.

Amounts outstanding under the DIP Facility bear interest based on, at the option of the borrower, the London Interbank Offered Rate (“LIBOR”) plus a rate of 9.00% with a 1.00% LIBOR floor or an alternative base rate plus 8.00%. The DIP Facility also requires that the Company pay a commitment fee equal to 5.00% per annum times the actual daily amount by which the aggregate commitments exceed the aggregate outstanding principal amount of loans.

The DIP Facility contained an original issue discount equal to 2.00% of the DIP commitments and contains a prepayment fee of 2.00% if the DIP loans are prepaid with the proceeds of another financing during the pendency of the bankruptcy case.

The DIP Credit Agreement contains customary restrictive covenants that limit, among other things, the Company's ability to create, incur, assume or suffer to exist liens or indebtedness, sell or otherwise dispose of assets, make certain restricted payments and investments, enter into transactions with affiliates, make capital expenditures and prepay certain indebtedness.
As of September 30, 2016, $25.0 million was outstanding under the DIP Facility with remaining borrowing capacity of $75.0 million. As of September 30, 2016, the weighted average interest rate of borrowings under the DIP Facility was 10.0%.
Revolving Credit Facility
The Revolver was scheduled to mature on March 24, 2020 (except that if any Five-Year Term Loans (as defined herein) had not been repaid prior to September 24, 2019, the Revolver was scheduled to mature on September 24, 2019). Borrowings under the Revolver are non-amortizing. Amounts outstanding under the Revolver bore interest based on, at the option of the borrower, LIBOR or an alternative base rate, plus an applicable margin determined pursuant to a pricing grid based on the ratio of consolidated total indebtedness of C&J and its subsidiaries to Consolidated EBITDA of C&J and its subsidiaries for the most recent four fiscal quarter period for which financial statements are available (the “Total Leverage Ratio”).
On July 20, 2016, the Debtors filed the Bankruptcy Petitions which constituted an event of default under the Credit Agreement and accelerated the Revolver indebtedness to become immediately due and payable; however, any efforts to enforce such payment obligations were automatically stayed as a result of the Chapter 11 Proceeding. Pursuant to the Restructuring Support Agreement entered into on July 8, 2016, holders of the Revolver will receive their pro rata share of 100% of the New Equity in the reorganized company, subject to dilution from the issuance of New Equity on account of the Management Incentive Plan, the Rights Offering, the Backstop Fee and the New Warrants as discussed further in Note 2 - Chapter 11 Proceeding. However, even if the Restructuring Plan meets other requirements under the Bankruptcy Code, creditors may not vote in favor of the Restructuring Plan, and certain parties in interest may file objections to the Restructuring Plan in an effort to persuade the Bankruptcy Court that the Company has not satisfied the confirmation requirements under section 1129 of the Bankruptcy Code. Further, even if no objections are filed and the requisite acceptances of the Restructuring Plan are received from creditors entitled to vote on the Restructuring Plan, the Bankruptcy Court, which can exercise substantial discretion, may not confirm the Restructuring Plan.
Term Loan B Facility
Borrowings under the Term Loan B Facility were comprised of two tranches: a tranche consisting of $575.0 million in original aggregate principal amount of term loans that were to mature on March 24, 2020 (the “Five-Year Term Loans”) and

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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


a tranche consisting of a $485.0 million in original aggregate principal amount of term loans that were to mature on March 24, 2022 (the “Seven-Year Term Loans”). The Company was required to make quarterly amortization payments in an amount equal to 1.00% per annum, with the remaining balance payable on the applicable maturity date.
Five-Year Term Loans outstanding under the Term Loan B Facility bore interest based on, at the option of the Company, (i) LIBOR subject to a floor of 1.00% per annum, plus a margin of 5.50%, or (ii) an alternative base rate, plus a margin of 4.50%. Seven-Year Term Loans outstanding under the Term Loan B Facility bore interest based on, at the option of the Company, (i) LIBOR subject to a floor of 1.00% per annum, plus a margin of 6.25%, or (ii) an alternative base rate, plus a margin of 5.25%. The Term Loan B Facility also contained ‘most favored nation’ pricing protection requiring that if the effective yield (giving effect to, among other things, consent fees paid to the lenders) of the Five-Year Term Loans increased by more than 50 basis points, the effective yield of the Seven-Year Term Loans must increase by the same amount less 50 basis points.
The alternative base rate was equal to the highest of (i) the Administrative Agent’s prime rate, (ii) the Federal Funds Effective Rate plus 0.50%, or (iii) LIBOR plus 1.00%.
On July 20, 2016, the Debtors filed the Bankruptcy Petitions which constituted an event of default under the Credit Agreement and accelerated the Term Loan B Facility indebtedness to become immediately due and payable; however, any efforts to enforce such payment obligations were automatically stayed as a result of the Chapter 11 Proceeding. Pursuant to the Restructuring Support Agreement entered into on July 8, 2016, holders of the Term Loan B Facility debt will receive their pro rata share of 100% of the New Equity in the reorganized company, subject to dilution from the issuance of New Equity on account of the Management Incentive Plan, the Rights Offering, the Backstop Fee and the New Warrants as discussed further in Note 2 - Chapter 11 Proceeding. However, even if the Restructuring Plan meets other requirements under the Bankruptcy Code, creditors may not vote in favor of the Restructuring Plan, and certain parties in interest may file objections to the Restructuring Plan in an effort to persuade the Bankruptcy Court that the Company has not satisfied the confirmation requirements under section 1129 of the Bankruptcy Code. Further, even if no objections are filed and the requisite acceptances of the Restructuring Plan are received from creditors entitled to vote on the Restructuring Plan, the Bankruptcy Court, which can exercise substantial discretion, may not confirm the Restructuring Plan.

Capital Lease Obligations
In 2013, the Company entered into “build-to-suit” lease agreements for the construction of a new, technology-focused research and development facility and new corporate headquarters, respectively. Each lease is accounted for as a capital lease. In addition, the Company leases certain service equipment, with the intent to purchase, under non-cancelable capital leases. The terms of these contracts range from three to four years with varying payment dates throughout each month.
As of September 30, 2016, the Company had $32.7 million in capital lease obligations which were classified as liabilities subject to compromise.
In October 2016, the Company entered into amended lease agreements related to the Company’s corporate headquarters and its research and technology facility, both originally entered into during 2013 and accounted for as capital leases.  The Company determined that both amended lease agreements qualify as a new operating lease under ASC 840 - Leases, which will result in accounting for the amended leases as a sale-leaseback pursuant to the requirements of ASC 840.  The conversion from capital lease to operating lease accounting treatment will result in the deferral of gain associated with the conversion with such deferred gain amortized into income over the remaining lease terms. 

Interest Expense
As of June 30, 2016, based on the negotiations between the Company and the lenders, it became evident that the restructuring of the Company's capital structure would not include a restructuring of the Company's Revolving Credit Facility, the Five-Year Term Loans and the Seven-Year Term Loans, and these debt obligations, as demand obligations, would not be paid in the ordinary course of business over the term of these loans. As a result, during the second quarter of 2016, the Company accelerated the amortization of the associated original issue discount and deferred financing costs, fully amortizing these amounts as of June 30, 2016. In addition, the Company has not accrued interest that it believes is not probable of being treated as an allowed claim in the Chapter 11 Proceeding. For the three and nine months ended September 30, 2016, the Company did not accrue interest totaling $26.6 million under the Credit Agreement subsequent to the Petition Date. For the three and nine months ended September 30, 2016 and 2015, interest expense consisted of the following (in thousands):

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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
Revolving Credit Facility
 
$
1,449

 
$
1,535

 
$
8,504

 
$
5,412

Five-Year Term Loans
 
3,111

 
9,527

 
23,330

 
19,798

Seven-Year Term Loans
 
2,820

 
8,963

 
21,761

 
18,616

DIP Facility
 
438

 
—

 
438

 
—

Capital leases
 
380

 
247

 
950

 
766

Accretion of original issue discount
 
—

 
2,011

 
4,192

 
4,141

Amortization of deferred financing costs
 
—

 
6,100

 
4,589

 
8,680

Original issue discount accelerated amortization
 
—

 
—

 
48,221

 
—

Deferred financing costs accelerated amortization
 
—

 
—

 
43,720

 
—

Interest income and other
 
(40
)
 
13

 
(146
)
 
35

Interest expense, net
 
$
8,158

 
$
28,396

 
$
155,559

 
$
57,448

Note 4 - Goodwill and Other Intangible Assets
During the first quarter of 2016, utilization and commodity price levels continued to fall towards unprecedented levels and the resulting negative impact on the Company’s results of operations, coupled with the sustained decrease in the Company’s stock price, were deemed triggering events that led to an interim period test for goodwill impairment. The Company chose to bypass a qualitative approach and instead opted to employ the detailed Step 1 impairment testing methodologies discussed below.
Income approach
The income approach impairment testing methodology is based on a discounted cash flow model, which utilizes present values of cash flows to estimate fair value. For the Completion Services and Well Support Services reporting units, the future cash flows were projected based on estimates of projected revenue growth, fleet and rig count, utilization, gross profit rates, SG&A rates, working capital fluctuations, and capital expenditures. For the Other Services reporting unit, the future cash flows were projected based primarily on estimates of future demand for manufactured and refurbished equipment as well as parts and service, gross profit rates, SG&A rates, working capital fluctuations, and capital expenditures. Forecasted cash flows for the three reporting units took into account known market conditions as of March 31, 2016, and management’s anticipated business outlook, both of which have been impacted by the sustained decline in commodity prices.
A terminal period was used to reflect an estimate of stable, perpetual growth. The terminal period reflects a terminal growth rate of 2.5% for all three reporting units, including an estimated inflation factor.
 
The future cash flows were discounted using a market-participant risk-adjusted weighted average cost of capital (“WACC”) of 14.5% for Completion Services, 14.0% for Well Support Services, and 16.0% for Other Services reporting units. These assumptions were derived from unobservable inputs and reflect management’s judgments and assumptions.
Market approach
The market approach impairment testing methodology is based upon the guideline public company method. The application of the guideline public company method was based upon selected public companies operating within the same industry as the Company. Based on this set of comparable competitor data, price-to-earnings multiples were derived and a range of price-to-earnings multiples was determined for each reporting unit. Selected market multiples were 10.6x for Completion Services, 10.5x for Well Support Services and 11.0x for Other Services reporting units.
The fair value determined under the market approach is sensitive to these market multiples, and a decline in any of the multiples could reduce the estimated fair value of any of the three reporting units below their respective carrying values. Earnings estimates were derived from unobservable inputs that require significant estimates, judgments and assumptions as

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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


described in the income approach.
The estimated fair value determined under the income approach was consistent with the estimated fair value determined under the market approach. The concluded fair value for the Completion Services and Well Support Services reporting units consisted of a weighted average, with an 80% weight under the income approach and a 20% weight under the market approach. The concluded fair value for the Other Services reporting unit consisted of a weighted average with a 50% weight under the income approach and a 50% weight under the market approach.
The results of the Step 1 impairment testing indicated potential impairment in the Well Support Services reporting unit. The goodwill associated with both the Completion Services and Other Services reporting units was completely impaired during the third quarter of 2015. As a way to validate the estimated reporting unit fair values, the total market capitalization of the Company was compared to the total estimated fair value of all reporting units, and an implied control premium was derived. Market data in support of the implied control premium was used in this reconciliation to corroborate the estimated reporting unit fair values.
Step 2 of the goodwill impairment testing for the Well Support Services reporting units was performed during the first quarter of 2016, and the results concluded that there was no value remaining to be allocated to the goodwill associated with this reporting unit. As a result, the Company recognized impairment expense of $314.8 million during the first quarter of 2016.
As of September 30, 2016, there is no goodwill remaining to be allocated across the Company's three reporting units.
The changes in the carrying amount of goodwill for the year ended December 31, 2015 and for the nine months ended September 30, 2016, are as follows (in thousands):
 
 
Completion Services
 
Well Support Services
 
Other Services
 
Total
As of December 31, 2014
 
$
206,465

 
$
—

 
$
13,488

 
$
219,953

Acquisitions
 
141,435

 
309,541

 
24,700

 
475,676

Impairment expense
 
(347,652
)
 
—

 
(37,316
)
 
(384,968
)
Foreign currency translation and other adjustments
 
(248
)
 
(1,864
)
 
(872
)
 
(2,984
)
As of December 31, 2015
 
—

 
307,677

 
—

 
307,677

Measurement period adjustments
 
8

 
5,863

 
(481
)
 
5,390

Impairment expense
 
(8
)
 
(314,774
)
 
481

 
(314,301
)
Foreign currency translation and other adjustments
 
—

 
1,234

 
—

 
1,234

As of September 30, 2016
 
$
—

 
$
—

 
$
—

 
$
—

Indefinite-Lived Intangible Assets
The Company had approximately $6.0 million of intangible assets with indefinite useful lives, which are subject to annual impairment tests or more frequently if events or circumstances indicate the carrying amount may not be recoverable.
The Company’s intangible assets associated with intellectual property, research and development (“IPR&D”) consist of technology that is still in the testing phase, and management continues to actively pursue development and planned marketing of the new technology. Based on the Company's evaluation which includes successful test results within its research and development facilities, it was determined that the IPR&D carry value of $6.0 million was not impaired as of September 30, 2016.
Definite-Lived Intangible Assets
The Company reviews definite-lived intangible assets for impairment when a triggering event indicates that the asset

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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


may have a net book value in excess of recoverable value. During the first three quarters of 2016, management determined the sustained low commodity price levels coupled with the sustained decrease in the Company’s share price were deemed triggering events that provided indicators that its definite-lived intangible assets may be impaired. The Company performed a recoverability test on all of its definite-lived intangible assets which compares the estimated future net undiscounted cash flows expected to be generated from the use of the asset to the carrying amount of the asset for recoverability. If the estimated undiscounted cash flows exceed the carrying amount of the asset, 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 asset, the asset is not recoverable and the amount of impairment must be determined by fair valuing the asset.
Recoverability testing through June 30, 2016 resulted in the determination that certain intangible assets associated with the Company’s wireline and artificial lift lines of business were not recoverable. The fair value of the wireline and artificial lift assets was determined to be approximately $38.2 million and zero, respectively, resulting in impairment expense of $50.4 million and $4.6 million, respectively. Recoverability testing at September 30, 2016 resulted in no additional impairment as the intangible assets assessed were determined to be recoverable.
The changes in the carrying amounts of other intangible assets for the nine months ended September 30, 2016 are as follows (in thousands):
     
 
 
Amortization
Period
 
December 31, 2015
 
Impairment Expense
 
Amortization Expense
 
Move from Indefinite-Lived to Definite- Lived
 
Foreign Currency Translation Adjustment
 
September 30, 2016
Customer relationships
 
8-15 years
 
$
122,814

 
$
(41,990
)
 
$
—

 
$
—

 
$
3

 
$
80,827

Trade name
 
10-15 years
 
42,580

 
(12,588
)
 
—

 
—

 
3

 
29,995

Developed technology
 
5-15 years
 
19,897

 
—

 
—

 
1,610

 
16

 
21,523

Non-compete
 
4-5 years
 
2,710

 
(110
)
 
—

 
—

 
—

 
2,600

Patents
 
10 years
 
373

 
(338
)
 
—

 
—

 
—

 
35

IPR&D
 
Indefinite
 
7,598

 
—

 
—

 
(1,610
)
 
—

 
5,988

 
 
 
 
195,972

 
(55,026
)
 
—

 
—

 
22

 
140,968

Less: accumulated amortization
 
 
 
(48,111
)
 
—

 
(8,528
)
 
—

 
(22
)
 
(56,661
)
Intangible assets, net
 
 
 
$
147,861

 
$
(55,026
)
 
$
(8,528
)
 
$
—

 
$
—

 
$
84,307

Note 5 - Share-Based Compensation
Equity Plans
In connection with the Merger, the Company approved and adopted the C&J Energy Services 2015 Long Term Incentive Plan (the “2015 LTIP”), effective as of March 23, 2015, contingent upon the consummation of the Merger. The 2015 LTIP served as an assumption of the Legacy C&J 2012 Long-Term Incentive Plan, including the sub-plan titled the C&J International Middle East FZCO Phantom Equity Arrangement (the “2012 LTIP”), with certain non-material revisions made and no increase in the number of shares remaining available for issuance under the 2012 LTIP. Prior to the adoption of the 2015 LTIP, all share-based awards granted to Legacy C&J employees, consultants and non-employee directors were granted under the 2012 LTIP and, following the 2015 LTIP’s adoption, no further awards will be granted under the 2012 LTIP. Awards that were previously outstanding under the 2012 LTIP will continue and remain outstanding under the 2015 LTIP, as adjusted to reflect the Merger. At the closing of the Merger, restricted shares and stock option awards were granted under the 2015 LTIP to certain employees of the C&P Business and approximately 0.4 million C&J common shares underlying those awards were deemed part of the consideration paid to Nabors for the Merger.
 
The 2015 LTIP 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 2015 LTIP: incentive stock options and nonqualified stock options, stock appreciation rights, restricted shares, restricted share units, dividend equivalent rights, performance awards and share awards. As of September 30, 2016 only nonqualified stock options and restricted shares have been awarded under the 2015 LTIP and 2012 LTIP. No grants were issued during the nine months ended September 30, 2016.

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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


A total of 4.3 million common shares were originally authorized and approved for issuance under the 2012 LTIP and on June 4, 2015, the shareholders of the Company approved the First Amendment to the 2015 LTIP, which increased the number of common shares that may be issued under the 2015 LTIP by approximately 3.6 million shares. The shareholders of the Company approved the Second Amendment to the 2015 LTIP in February 2016, which increased the number of common shares that may be issued by approximately 6.0 million shares. Including the add-back of approximately 0.9 million shares of canceled grants under the 2012 LTIP and 2015 LTIP during the first three quarters of 2016, approximately 10.6 million common shares remain available for issuance under the 2015 LTIP as of September 30, 2016. The number of common shares available for issuance under the 2015 LTIP is subject to adjustment in the event of a reclassification, recapitalization, merger, consolidation, reorganization, spin-off, split-up, issuance of warrants, rights or debentures, stock dividend, stock split or reverse stock 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 common shares available for issuance may also increase due to the termination of an award granted under the 2015 LTIP, the 2012 LTIP or the Prior Plans (as defined below), by expiration, forfeiture, cancellation or otherwise without the issuance of the common shares.
Prior to the approval of the 2012 LTIP, all share-based awards granted to Legacy C&J’s employees, consultants and non-employee directors were granted under the C&J Energy Services 2006 Stock Option Plan and subsequently under the C&J Energy Services 2010 Stock Option Plans (collectively known as the “Prior Plans”). No additional awards will be granted under the Prior Plans.
Stock Options
The fair value of each option award granted under the 2015 LTIP, the 2012 LTIP and the Prior Plans is estimated on the date of grant using the Black-Scholes option-pricing model. Option awards are generally granted with an exercise price equal to the market price of the Company’s common shares on the grant date. For options granted prior to Legacy C&J’s initial public offering, which closed on August 3, 2011, the calculation of Legacy C&J’s share price involved the use of different valuation techniques, including a combination of an income and/or market approach. Determination of the fair value was a matter of judgment and often involved the use of significant estimates and assumptions. Additionally, due to the Company’s lack of historical volume of option activity, the expected term of options granted is derived using the “plain vanilla” method. In addition, expected volatilities have been based on comparable public company data, with consideration given to the Company’s limited historical data. The Company makes estimates with respect to employee termination and forfeiture rates of the options within the valuation model. The risk-free rate is based on the approximate U.S. Treasury yield rate in effect at the time of grant. During the nine months ended September 30, 2015, approximately 0.3 million replacement option awards were granted by the Company to employees. No options were granted during the nine months ended September 30, 2016.
As of September 30, 2016, the Company had approximately 5.0 million options outstanding to employees and non-employee directors. Option awards granted under the 2015 LTIP and the Prior Plans expire on the tenth anniversary of the grant date and generally vest over three years of continuous service with one-third vesting on each of the first, second and third anniversaries of the grant date.
Restricted Shares
 
Historically, restricted shares were valued based on the closing price of the Company’s common shares on the NYSE on the date of grant. During the nine months ended September 30, 2015, approximately 2.8 million restricted shares were granted to employees and non-employee directors under the 2015 LTIP, including approximately 0.6 million replacement restricted shares, at fair market values ranging from $11.38 to $15.10 per share. During the nine months ended September 30, 2016, no restricted shares were granted by the Company.
To the extent permitted by law, the recipient of an award of restricted shares will have all of the rights of a shareholder with respect to the underlying common shares, including the right to vote the common shares and to receive all dividends or other distributions made with respect to the common shares. Dividends on restricted shares will be deferred until the lapsing of the restrictions imposed on the shares and will be held by the Company for the account of the recipient (either in cash or to be reinvested in restricted shares) until such time. Payment of the deferred dividends and accrued interest, if any, shall be made upon the lapsing of restrictions on the restricted shares, and any dividends deferred in respect of any restricted shares shall be forfeited upon the forfeiture of such restricted shares. As of September 30, 2016, the Company had not issued any dividends.

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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


As of September 30, 2016, the Company had approximately 1.0 million restricted shares outstanding to employees and non-employee directors. During the first quarter of 2016, 0.8 million restricted shares were subject to accelerated vesting in accordance with the terms of the employee agreement of the Company's former Chief Executive Officer. Restricted share awards granted under the 2015 LTIP generally vest over a three-year period from the grant date.
Prior to the filing of the Bankruptcy Petitions, no modifications were made to the Company's 2015 LTIP.
As described in Note 2 — Chapter 11 Proceeding, pursuant to the Restructuring Plan, the liquidation of C&J Energy Services Ltd. will be completed under the laws of Bermuda, and all of the existing shares of C&J common equity will be canceled as of the Effective Date. Also, on the Effective Date, the Company will issue the New Warrants to the holders of the canceled C&J common shares, provided that such class of holders votes to accept the Restructuring Plan. As described in the Restructuring Plan, the Plan will include the new long-term Management Incentive Plan to be issued to management of the reorganized Company after the Effective Date at the discretion of the board of the reorganized Company. The reorganized Company will reserve 10% of the New Equity for the Management Incentive Plan.
Note 6 - 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. 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, which are subject to change and can have retroactive effectiveness.
Currently, the Company has not been fined, cited or notified of any environmental violations 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 in the near term to maintain compliance. 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 presently not possible to determine 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.
Self-Insured Risk Accruals
The Company maintains insurance policies for workers’ compensation, automobile liability, general liability, which also includes sudden and accidental pollution insurance, and property damage relating to catastrophic events. These insurance policies carry self-insured retention limits or deductibles on a per occurrence basis. The Company has deductibles per occurrence for: workers’ compensation of $1,000,000; automobile liability claims of $1,000,000; general liability claims, including sudden and accidental pollution claims, of $250,000, plus an additional annual aggregate deductible of $250,000; and property damage for catastrophic events of $25,000.
 
Additionally, under the terms of the Separation Agreement, dated as of February 12, 2015, by and between the Company and Nabors, relating to the Merger, the Company assumed, among other liabilities, all liabilities of the C&P Business to the extent arising out of or resulting from the operation of the C&P Business at any time before, at or after the closing of the Merger, including liability for death, personal injury and property damage resulting from or caused by the assets, products and services of the C&P Business; other than those liabilities relating to or resulting from any demand, claim, investigation or litigation pending or asserted in writing as of the closing of the Merger. Any liability relating to or resulting from any claim or litigation asserted after the closing of the Merger, but where the underlying cause of action arose prior to that time, would not be covered by the Company’s insurance policies.


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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 7 - Segment Information
In accordance with ASC 280 - Segment Reporting, 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.
Due to the transformative nature of the Merger, the CODM changed the way in which the Company is managed, including a revised segment approach in making performance evaluation and resource allocation decisions. Discrete financial information was created to provide the segment information necessary for the CODM to manage the Company under the revised operating segment structure. As a result of this change in operating segments, the Company revised its reportable segments late in the first quarter of 2015. The Company’s revised reportable segments are: (i) Completion Services, (ii) Well Support Services and (iii) Other 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 description of the reportable segments:
Completion Services
The Company provides hydraulic fracturing services, cased-hole wireline services, coiled tubing services and other well stimulation services through its Completion Services segment.
Well Support Services
The Company provides rig services, fluid management services and other special well site services through its Well Support Services segment.
 
Other Services
The Other Services segment is comprised of the Company’s smaller service lines and divisions, including cementing services, equipment manufacturing and repair, research and technology and Middle Eastern operations; the Company manages several of its vertically integrated business through its research and technology division, including its directional drilling services and products, data acquisition and control instruments provider as well as its artificial lift applications provider. Also included in the Other Services are intersegment eliminations and costs associated with activities of a general corporate nature.
 
The following tables set forth certain financial information with respect to the Company’s reportable segments.
 

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C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
 
Completion
Services
 
Well Support
Services
 
Other
Services
 
Total
Three months ended September 30, 2016
 
 
 
 
 
 
 
 
Revenue from external customers
 
$
132,836

 
$
88,748

 
$
10,953

 
$
232,537

Inter-segment revenues
 
95

 
—

 
(95
)
 
—

Depreciation and amortization
 
28,909

 
18,374

 
4,038

 
51,321

Operating loss
 
(36,700
)
 
(11,015
)
 
(37,838
)
 
(85,553
)
Net loss
 
(36,473
)
 
(11,042
)
 
(58,875
)
 
(106,390
)
Adjusted EBITDA
 
(3,571
)
 
7,754

 
(22,091
)
 
(17,908
)
Capital expenditures
 
2,365

 
4,178

 
1,626

 
8,169

Nine months ended September 30, 2016
 
 
 
 
 
 
 
 
Revenue from external customers
 
$
422,919

 
$
270,150

 
$
34,251

 
$
727,320

Inter-segment revenues
 
183

 
148

 
(331
)
 
—

Depreciation and amortization
 
96,708

 
54,039

 
13,810

 
164,557

Operating loss
 
(224,459
)
 
(352,078
)
 
(191,867
)
 
(768,404
)
Net loss
 
(224,308
)
 
(348,877
)
 
(252,736
)
 
(825,921
)
Adjusted EBITDA
 
(29,683
)
 
17,747

 
(71,336
)
 
(83,272
)
Capital expenditures
 
10,626

 
8,912

 
25,068

 
44,606

As of September 30, 2016
 
 
 
 
 
 
 
 
Total assets
 
$
756,019

 
$
503,151

 
$
262,672

 
$
1,521,842

Goodwill
 
—

 
—

 
—

 
—

Three months ended September 30, 2015
 
 
 
 
 
 
 
 
Revenue from external customers
 
$
256,907

 
$
150,884

 
$
19,706

 
$
427,497

Depreciation and amortization
 
52,926

 
17,366

 
4,439

 
74,731

Operating loss
 
(409,993
)
 
6,067

 
(89,412
)
 
(493,338
)
Net loss
 
(409,994
)
 
5,836

 
(50,858
)
 
(455,016
)
Adjusted EBITDA
 
(8,599
)
 
23,613

 
(26,424
)
 
(11,410
)
Capital expenditures
 
7,573

 
9,576

 
7,038

 
24,187

Nine months ended September 30, 2015
 
 
 
 
 
 
 
 
Revenue from external customers
 
$
960,360

 
$
320,102

 
$
59,416

 
$
1,339,878

Depreciation and amortization
 
136,990

 
45,789

 
10,906

 
193,685

Operating loss
 
(424,274
)
 
3,075

 
(179,691
)
 
(600,890
)
Net loss
 
(424,049
)
 
2,920

 
(129,671
)
 
(550,800
)
Adjusted EBITDA
 
64,440

 
50,049

 
(74,986
)
 
39,503

Capital expenditures
 
86,204

 
31,721

 
23,566

 
141,491

As of September 30, 2015
 
 
 
 
 
 
 
 
Total assets
 
$
1,536,036

 
$
868,442

 
$
293,127

 
$
2,697,605

Goodwill
 
—

 
314,410

 
—

 
314,410

The CODM evaluates 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, and non-routine items (“Adjusted EBITDA”), a non-GAAP financial measure, because Adjusted EBITDA is considered an important measure of each segment’s performance. In addition, management believes that the disclosure of Adjusted EBITDA as a measure of each segment’s operating performance 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 segment basis.

-33-
C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


As required under Item 10(e) of Regulation S-K of the Exchange Act, included below is a reconciliation of Adjusted EBITDA, a non-GAAP financial measure, to net income (loss), which is the nearest comparable U.S. GAAP financial measure (in thousands) on a consolidated basis for the three and nine months ended September 30, 2016 and 2015, and on a reportable segment basis for the three and nine months ended September 30, 2016 and 2015.
 
 
Three Months Ended September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
Adjusted EBITDA
 
$
(17,908
)
 
$
(11,410
)
 
$
(83,272
)
 
$
39,503

Interest expense, net
 
(8,158
)
 
(28,396
)
 
(155,559
)
 
(57,448
)
Income tax benefit (expense)
 
21,123

 
69,362

 
126,522

 
108,611

Depreciation and amortization
 
(51,321
)
 
(74,731
)
 
(164,557
)
 
(193,685
)
Other income (expense), net
 
7,075

 
(2,644
)
 
12,397

 
(1,073
)
Gain (loss) on disposal of assets
 
694

 
(141
)
 
(4,220
)
 
365

Impairment expense
 
—

 
(394,191
)
 
(430,406
)
 
(394,191
)
Severance, facility closures and other
 
(6,847
)
 
(3,163
)
 
(29,817
)
 
(3,727
)
Share-based compensation expense acceleration
 
—

 
—

 
(7,792
)
 
—

Acquisition-related costs
 
(1,481
)
 
(6,488
)
 
(8,549
)
 
(38,647
)
Customer settlement/bad debt write-off
 
(78
)
 
(179
)
 
(1,113
)
 
(4,651
)
Inventory write-down
 
(352
)
 
—

 
(13,399
)
 
(2,822
)
Incremental insurance reserve
 
—

 
(3,035
)
 
(548
)
 
(3,035
)
Debt restructuring costs
 
(8,260
)
 
—

 
(23,711
)
 
—

Legal settlement
 
—

 
—

 
(1,020
)
 
—

Reorganization items
 
(40,877
)
 
—

 
(40,877
)
 
—

Net loss
 
$
(106,390
)
 
$
(455,016
)
 
$
(825,921
)
 
$
(550,800
)
 
 
 
Three Months Ended September 30, 2016
 
 
Completion
Services
 
Well Support
Services
 
Other
Services
 
Total
Adjusted EBITDA
 
$
(3,571
)
 
$
7,754

 
$
(22,091
)
 
$
(17,908
)
Interest expense, net
 
(157
)
 
7

 
(8,008
)
 
(8,158
)
Income tax benefit (expense)
 
—

 
—

 
21,123

 
21,123

Depreciation and amortization
 
(28,909
)
 
(18,374
)
 
(4,038
)
 
(51,321
)
Other income (expense), net
 
384

 
(34
)
 
6,725

 
7,075

Gain (loss) on disposal of assets
 
547

 
32

 
115

 
694

Severance, facility closures and other
 
(4,545
)
 
(349
)
 
(1,953
)
 
(6,847
)
Acquisition-related costs
 
—

 
—

 
(1,481
)
 
(1,481
)
Customer settlement/bad debt write-off
 
—

 
(78
)
 
—

 
(78
)
Inventory write-down
 
(222
)
 
—

 
(130
)
 
(352
)
Debt restructuring costs
 
—

 
—

 
(8,260
)
 
(8,260
)
Reorganization items
 
—

 
—

 
(40,877
)
 
(40,877
)
Net loss
 
$
(36,473
)
 
$
(11,042
)
 
$
(58,875
)
 
$
(106,390
)


-34-
C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
 
Nine Months Ended September 30, 2016
 
 
Completion
Services
 
Well Support
Services
 
Other
Services
 
Total
Adjusted EBITDA
 
$
(29,683
)
 
$
17,747

 
$
(71,336
)
 
$
(83,272
)
Interest expense, net
 
(269
)
 
145

 
(155,435
)
 
(155,559
)
Income tax benefit (expense)
 
—

 
—

 
126,522

 
126,522

Depreciation and amortization
 
(96,708
)
 
(54,039
)
 
(13,810
)
 
(164,557
)
Other income (expense), net
 
420

 
3,055

 
8,922

 
12,397

Gain (loss) on disposal of assets
 
659

 
3,147

 
(8,026
)
 
(4,220
)
Impairment expense
 
(86,554
)
 
(314,774
)
 
(29,078
)
 
(430,406
)
Severance, facility closures and other
 
(5,292
)
 
(3,420
)
 
(21,105
)
 
(29,817
)
Share-based compensation expense acceleration
 
—

 
—

 
(7,792
)
 
(7,792
)
Acquisition-related costs
 
—

 
—

 
(8,549
)
 
(8,549
)
Customer settlement/bad debt write-off
 
(375
)
 
(738
)
 
—

 
(1,113
)
Inventory write-down
 
(6,506
)
 
—

 
(6,893
)
 
(13,399
)
Incremental insurance reserve
 
—

 
—

 
(548
)
 
(548
)
Debt restructuring costs
 
—

 
—

 
(23,711
)
 
(23,711
)
Legal settlement
 
—

 
—

 
(1,020
)
 
(1,020
)
Reorganization items
 
—

 
—

 
(40,877
)
 
(40,877
)
Net loss
 
$
(224,308
)
 
$
(348,877
)
 
$
(252,736
)
 
$
(825,921
)

 

Three Months Ended September 30, 2015
 

Completion
Services

Well Support
Services

Other
Services

Total
Adjusted EBITDA

$
(8,599
)

$
23,613


$
(26,424
)

$
(11,410
)
Interest expense, net

(6
)

—


(28,390
)

(28,396
)
Income tax benefit (expense)

—


—


69,362


69,362

Depreciation and amortization

(52,926
)

(17,366
)

(4,439
)

(74,731
)
Impairment expense
 
(343,508
)
 
—

 
(50,683
)
 
(394,191
)
Other income (expense), net

4


(231
)

(2,417
)

(2,644
)
Gain (loss) on disposal of assets

(76
)

—


(65
)

(141
)
Acquisition-related costs

—


—


(6,488
)

(6,488
)
Severance, facility closures and other

(1,894
)
 
(491
)
 
(778
)

(3,163
)
Customer settlement/bad debt write-off

(179
)
 
—

 
—


(179
)
Incremental insurance reserve

(2,810
)
 
311

 
(536
)

(3,035
)
Net income (loss)

$
(409,994
)

$
5,836


$
(50,858
)

$
(455,016
)


-35-
C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
 
Nine Months Ended September 30, 2015
 
 
Completion
Services
 
Well Support
Services
 
Other
Services
 
Total
Adjusted EBITDA
 
$
64,440

 
$
50,049

 
$
(74,986
)
 
$
39,503

Interest expense, net
 
(28
)
 
—

 
(57,420
)
 
(57,448
)
Income tax benefit (expense)
 
—

 
—

 
108,611

 
108,611

Depreciation and amortization
 
(136,990
)
 
(45,789
)
 
(10,906
)
 
(193,685
)
Impairment Expense
 
(343,508
)
 
—

 
(50,683
)
 
(394,191
)
Other income (expense), net
 
253

 
(155
)
 
(1,171
)
 
(1,073
)
Gain (loss) on disposal of assets
 
531

 
—

 
(166
)
 
365

Acquisition-related costs
 
—

 
—

 
(38,647
)
 
(38,647
)
Severance, facility closures and other
 
(1,286
)
 
(1,496
)
 
(945
)
 
(3,727
)
Customer settlement/bad debt write-off
 
(4,651
)
 
—

 
—

 
(4,651
)
Inventory write-down
 
—

 
—

 
(2,822
)
 
(2,822
)
Incremental insurance reserve
 
(2,810
)
 
311

 
(536
)
 
(3,035
)
Net income (loss)
 
$
(424,049
)

$
2,920


$
(129,671
)

$
(550,800
)
Note 8 - Mergers and Acquisitions
Merger between Legacy C&J and the C&P Business of Nabors
On March 24, 2015, Legacy C&J and Nabors completed the combination of Legacy C&J with the C&P Business. The resulting combined company, which was renamed C&J Energy Services Ltd., is now one of the largest completion and production services providers in North America led by the former management team of Legacy C&J. At the closing of the combination, Nabors received total consideration of $1.4 billion, subject to working capital adjustments, in the form of $688.1 million in cash, $5.5 million in cash to reimburse Nabors for operating assets acquired prior to March 24, 2015, and $714.8 million in C&J common shares. The C&J common share value was based upon Legacy C&J’s closing stock price on March 23, 2015 and consisted of approximately 62.5 million C&J common shares issued to Nabors and approximately 0.4 million designated C&J common shares attributable to replacement restricted share and share option awards issued to certain employees of the C&P Business for the pre-acquisition-related employee service period. Upon the closing of the combination, Nabors owned approximately 53% of the outstanding and issued common shares of C&J, with the remainder held by former Legacy C&J shareholders. As of September 30, 2016, Nabors owns approximately 52% of C&J outstanding common shares.
 
On September 25, 2015, C&J and Nabors agreed to a working capital adjustment of $43.4 million in favor of C&J, which was accounted for as a reduction to the purchase price of the C&P Business.

The Merger was accounted for using the acquisition method of accounting for business combinations. In applying the acquisition method of accounting, Legacy C&J and Nabors were required to determine both the accounting acquirer and the accounting acquiree with the accounting acquirer deemed to be the party possessing the controlling financial interest. Irrespective of Nabors 53% common share ownership in C&J immediately following the closing of the Merger, Legacy C&J and Nabors determined that Legacy C&J possessed the controlling financial interest, based on, among other factors, the presence of a majority of Legacy C&J directors on the C&J board of directors and through the composition of C&J senior management consisting almost entirely of the executive officers of Legacy C&J. Legacy C&J and Nabors therefore concluded the business combination should be treated as a reverse acquisition with Legacy C&J as the accounting acquirer.
C&J financed the cash portion of the Merger and repaid previously outstanding revolver debt with borrowings drawn under the Original Credit Agreement which provided for senior secured credit facilities in an aggregate principal amount of $1.66 billion. See Note 3 – Debt and Capital Lease Obligations for further discussion on the Company’s Original Credit Agreement.
The purchase price was allocated to the net assets acquired based upon their estimated fair values, as shown below (in thousands). The estimated fair values of certain assets and liabilities, including accounts receivable, inventory, property plant and equipment, other intangible assets, taxes (including uncertain tax positions), and contingencies required significant judgments and estimates.

-36-
C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


All of the goodwill associated with the Merger was allocated to the Completion Services and Well Support Services reporting units. As part of the Company's interim test for goodwill impairment, during the third quarter of 2015, all of the goodwill allocated to the Completion Services reporting unit was written off. In addition, during the first quarter of 2016, all of the goodwill allocated to the Well Support Services reporting unit was written off. See Note 4 - Goodwill and Other Intangible Assets for further discussion.
The purchase price was initially allocated to the net assets acquired during the first quarter of 2015 and subsequently adjusted during 2015 and in the first quarter of 2016 in connection with the measurement period based upon revised estimated fair values, as follows (in thousands):
 
 
 
Amounts Recognized as of Merger Date
 
Measurement Period Adjustments (1)
 
Estimated Fair Value
Accounts receivable
 
$
262,973

 
$
11,079

 
$
274,052

Inventory
 
35,491

 
(7,372
)
 
28,119

Other current assets
 
8,857

 
(1,940
)
 
6,917

Property, plant and equipment
 
1,024,622

 
(59,378
)
 
965,244

Goodwill
 
444,162

 
12,684

 
456,846

Other intangible assets
 
28,300

 
13,700

 
42,000

Other assets
 
11,171

 
(2,913
)
 
8,258

Total assets acquired
 
1,815,576

 
(34,140
)
 
1,781,436

Accounts payable
 
(195,913
)
 
19,610

 
(176,303
)
Other current liabilities
 
(23,813
)
 
(7,503
)
 
(31,316
)
Deferred income taxes
 
(187,515
)
 
(21,368
)
 
(208,883
)
Total liabilities assumed
 
(407,241
)
 
(9,261
)
 
(416,502
)
Net assets acquired
 
$
1,408,335

 
$
(43,401
)
 
$
1,364,934

(1) The measurement period adjustments reflect changes in the estimated fair values of certain assets and liabilities, including income taxes. The measurement period adjustments were recorded to reflect new information obtained about facts and circumstances existing as of the date the Merger was consummated and did not result from intervening events subsequent to that date.
The fair value and gross contractual amount of accounts receivable acquired on March 24, 2015 was $274.1 million and $296.2 million, respectively. Based on the age of certain accounts receivable, a portion of the gross contractual amount was estimated to be uncollectible.
Property, plant and equipment assets acquired consist of the following fair values (in thousands) and ranges of estimated useful lives. As with fair value estimates, the determination of estimated useful lives requires judgments and assumptions.
 
 
 
Estimated
Useful Lives
Estimated Fair Value
Land
 
Indefinite
$
42,741

Building and leasehold improvements
 
2-25
79,456

Office furniture, fixtures and equipment
 
2-5
2,845

Machinery & Equipment
 
2-10
628,791

Transportation equipment
 
2-5
166,457

Construction in progress
 
 
44,954

Property, plant and equipment
 
 
$
965,244

Other intangibles were assessed a fair value of $42.0 million with a weighted average amortization period of approximately 11 years. These intangible assets consist of developed technology of $19.6 million, amortizable over 5 – 15 years, customer relationships of $13.0 million, amortizable over 15 years, trade name of $8.5 million, amortizable over ten

-37-
C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


years, and non-compete agreements of $0.9 million, amortizable over five years. The amount allocated to goodwill represents the excess of the purchase price over the fair value of the net assets acquired. Goodwill was allocated between C&J’s Completion Services and Well Support Services reporting units on the basis of historical levels of EBITDA with $141.4 million allocated to Completion Services and $315.4 million allocated to Well Support Services. The goodwill recognized as a result of the Merger was primarily attributable to the expected increased economies of scale, capabilities, resources and geographic footprint of the combined company as well as the cost savings opportunities as C&J expected to capitalize on synergies from the new combined company. The tax deductible portion of goodwill and other intangibles is $60.8 million and $22.3 million, respectively.
The Company treated the Merger as a non-taxable transaction. Such treatment resulted in the acquired assets and liabilities having carryover basis for tax purposes. A deferred tax liability in the amount of $208.9 million was recorded to account for the differences between the preliminary purchase price allocation and carryover tax basis.
The results of operations for the C&P Business that have been included in C&J's consolidated financial statements from the March 24, 2015 acquisition date through September 30, 2015 include revenue of $582.0 million and a net loss of $(186.7) million. The following unaudited pro forma results of operations have been prepared as though the Merger was completed on January 1, 2014. Pro forma amounts are based on the purchase price allocation of the acquisition and are not necessarily indicative of results that may be reported in the future (in thousands, except per share data):
 
 
 
 
Nine Months Ended 
 September 30, 2015
Revenues
 
 
$
1,706,663

Net income (loss)
 
 
$
(570,253
)
Net income (loss) per common share:
 
 
 
Basic
 
 
$
(4.87
)
Diluted
 
 
$
(4.87
)

Acquisition of Artificial Lift Provider
On May 18, 2015, the Company acquired all of the outstanding equity interests of ESP Completion Technologies LLC, a manufacturer of wellheads, artificial lift completion tools and electric submersible pumps ("Artificial Lift Provider") for approximately $34.0 million consisting of cash of approximately $13.6 million, a holdback of $6.0 million, and an earn-out valued at approximately $14.4 million on the acquisition date.
During the second quarter of 2016, C&J and the sellers agreed to a working capital adjustment of $0.5 million in favor of C&J, which was accounted for as a reduction to the purchase price of ESP Completion Technologies LLC. The adjusted purchase price of $33.5 million was allocated to the net assets acquired based upon their estimated fair values, as follows (in thousands):
Current assets
 
$
5,822

Property, plant and equipment
 
2,529

Goodwill
 
24,219

Other intangible assets
 
5,173

Total assets acquired
 
37,743

Current liabilities
 
(1,927
)
Deferred income taxes
 
(2,067
)
Other liabilities
 
(276
)
Total liabilities assumed
 
(4,270
)
Net assets acquired
 
$
33,473

If Artificial Lift Provider is able to achieve certain levels of EBITDA over a three-year period, the Company will be obligated to make future tiered payments of up to $29.5 million. This could result in a maximum total purchase price of $49.1

-38-
C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


million. The potential payment is considered contingent consideration. At the acquisition date, the fair value of this earn-out was determined using a Monte Carlo simulation discounted cash flow model over many simulated possible future outcomes which yielded a value of $14.4 million. The earn-out has been remeasured on a fair value basis each quarter and will continue to be remeasured each quarter until the contingent consideration is paid or expires. As of September 30, 2016, the earn-out was estimated to have zero value.

-39-
C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Note 9 - Supplemental Cash Flow Disclosures
Listed below are supplemental cash flow disclosures for the nine months ended September 30, 2016 and 2015:
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
Cash paid for interest
 
$
17,270

 
$
44,891

Income taxes paid (refunded)
 
$
(14,388
)
 
$
(11,281
)
Reorganization items, cash
 
$
3,295

 
$
—

Non-cash investing and financing activity:
 
 
 
 
Change in accrued capital expenditures
 
$
(2,433
)
 
$
(40,172
)
Non-cash consideration for business acquisition
 
$
—

 
$
735,125





-40-
C&J ENERGY SERVICES LTD. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 10 - Subsequent Events
On November 4, 2016, the Bankruptcy Court approved the Disclosure Statement, finding that the Disclosure Statement contains sufficient information as required by the Bankruptcy Code. The Debtors intend to launch solicitation of acceptances of the Restructuring Plan, as required by the Bankruptcy Code, as soon as practicable thereafter. The Debtors currently contemplate that a hearing with respect to confirmation of the Restructuring Plan will take place on December 16, 2016, as set out in the Disclosure Statement.



-41-

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,” “aim,” “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:
•
the potential impact of the Chapter 11 Proceeding (as described under “Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments & Other Matters - Chapter 11 Proceeding and Restructuring Support Agreement” in Part I, Item 2 of this Quarterly Report), on the Company’s operations, management, customers, suppliers, employees and other third-party stakeholders;
•
our ability to develop, confirm and consummate a plan under Chapter 11 or an alternative restructuring transaction and emerge from the Chapter 11 Proceeding as a going concern;
•
our business strategy;
•
our financial strategy;
•
our financial position, including operating cash flows, the availability of capital and our liquidity;
•
our ability to continue as a going concern;
•
our future revenue, income and overall financial and operating performance;
•
our ability to sustain and improve our utilization, revenue and margins;
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our ability to maintain acceptable pricing for our services;
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future capital expenditures;
•
our ability to finance equipment, working capital and capital expenditures;
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our ability to execute our long-term growth strategy, including expansion into new geographic regions and business lines;
•
our plan to continue to focus on international growth opportunities, and our ability to successfully execute and capitalize on such opportunities;
•
our ability to successfully develop our research and technology capabilities and implement technological developments and enhancements; and
•
the timing and success of future acquisitions and other strategic initiatives and special projects.
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:

•
risks and uncertainties associated with the Chapter 11 Proceeding, including our ability to develop, confirm and consummate the Restructuring Plan or an alternative plan under Chapter 11 or alternative restructuring transaction, including a sale of all or substantially all of our assets, which may be necessary to continue as a going concern (as described under “Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments & Other Matters - Chapter 11 Proceeding and Restructuring Support Agreement” in Part I, Item 2 of this Quarterly Report);
•
ability to maintain relationships with suppliers, customers, employees and other third parties as a result of our Chapter 11 Proceeding;
•
our ability to obtain the approval of the with respect to motions or other requests made to the Bankruptcy Court in our Chapter 11 Proceeding, including maintaining strategic control as debtors-in-possession ;

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•
our ability to obtain sufficient financing to allow us to continue as a going concern and execute our business plan post-emergence;
•
failure to satisfy our short- or long-term liquidity needs, including our inability to generate sufficient cash flow from operations or to obtain adequate financing to fund our capital expenditures and meet working capital needs;
•
the effects of the Chapter 11 Proceeding on the Company and on the interests of our various constituents, including holders of our common shares;
•
Bankruptcy Court rulings in the Chapter 11 Proceeding as well as the outcome of all other pending litigation and the outcome of the Chapter 11 Proceeding in general;
•
the length of time that the Company will operate under Chapter 11 protection and the continued availability of operating capital during the pendency of the Chapter 11 Proceeding;
•
risks associated with third party motions in the Chapter 11 Proceeding, which may interfere with our ability to confirm and consummate a plan of reorganization;
•
the potential adverse effects of the Chapter 11 Proceeding on our liquidity and results of operations;
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substantial advisory and other costs to execute the Chapter 11 Proceeding and fulfill the Company's obligations following emergence;
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the impact of the New York Stock Exchange's delisting of our common shares on the liquidity and market price of our common shares and on our ability to access the public capital markets;
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a decline in demand for our services, including due to declining commodity prices, overcapacity and other competitive factors affecting our industry;
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the cyclical nature and volatility of the oil and gas industry, which impacts the level of exploration, production and development activity and spending patterns by the oil and gas industry;
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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 and therefore impacts demand and pricing for our services, which negatively impacts our results of operations, including potentially resulting in impairment charges;
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pressure on pricing for our core 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 on our core services;
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the loss of, or interruption or delay in operations by, one or more significant customers;
•
the failure to pay amounts when due, or at all, by one or more significant customers;
•
changes in customer requirements in markets or industries we serve;
•
costs, delays, regulatory compliance requirements and other difficulties in executing our long-term growth strategy, including those related to expansion into new geographic regions and new business lines;
•
the effects of future acquisitions on our business, including our ability to successfully integrate our operations and the costs incurred in doing so;
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business growth outpacing the capabilities of our infrastructure;
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adverse weather conditions in oil or gas producing regions;
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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;
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the incurrence of significant costs and liabilities resulting from litigation;
•
the incurrence of significant costs and liabilities resulting from our failure to comply, or our compliance with, new or existing environmental regulations or an accidental release of hazardous substances into the environment;
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expanding our operations overseas;
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the loss of, or inability to attract key management personnel;
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a shortage of qualified workers;
•
the loss of, or interruption or delay in operations by, one or more of our key suppliers;
•
operating hazards inherent in our industry, including the significant possibility of accidents resulting in personal injury or death, property damage or environmental damage; and
•
accidental damage to or malfunction of equipment.

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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 A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, “Risk Factors” in Part II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2016, and “Risk Factors” in Part II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2016; 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 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. 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.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report, together with the audited consolidated financial statements and notes thereto and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
This section contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in any forward-looking statement because of various factors, including those described in the section titled “Cautionary Note Regarding Forward-Looking Statements” in Part I, Financial Information of this Quarterly Report and “Risk Factors” in Part II, Item 1A of this Quarterly Report.
Introductory Note and Corporate Overview

C&J Energy Services Ltd. is a Bermuda exempt company. With our principal operating headquarters in Houston, Texas, we are one of the largest, integrated providers of completion and production services in North America, providing a full range of well construction, well completion, well support and other complementary oilfield services to oil and gas exploration and production companies primarily in North America. We were listed on the New York Stock Exchange (“NYSE”) under the symbol “CJES” prior to the suspension of trading of our common shares on July 20, 2016, in connection with the commencement of the Chapter 11 Proceeding on July 20, 2016, as defined and discussed under “Recent Developments & Other Matters - Chapter 11 Proceeding and Restructuring Support Agreement” in Part I, Item 2 of this Quarterly Report. Our common shares resumed trading on the OTC Markets Group Inc.’s OTC Pink under the symbol “CJESQ” on July 21, 2016.

Effective as of March 24, 2015, we completed the combination of C&J Energy Services, Inc. (“Legacy C&J”) with the completion and production services business (the “C&P Business”) of Nabors Industries Ltd. (“Nabors”) pursuant to that certain Agreement and Plan of Merger (as amended, the “Merger Agreement”), dated as of June 25, 2014, by and among Legacy C&J, Nabors, Nabors Red Lion Limited (subsequently renamed C&J Energy Services Ltd., “New C&J”), Nabors CJ Merger Co. and CJ Holding Co. Under the terms of the Merger Agreement, Nabors separated the C&P Business from the rest of its operations and consolidated this business under New C&J. A Delaware subsidiary of New C&J then merged with and into Legacy C&J, with Legacy C&J continuing as the surviving corporation and a direct wholly owned subsidiary of New C&J (such transactions referred to collectively as the “Merger”). Effective upon closing of the Merger (the “Effective Time”), shares of common stock of Legacy C&J were converted into common shares of New C&J on a 1-for-1 basis, New C&J was renamed “C&J Energy Services Ltd.” and its common shares began trading on the NYSE under the ticker “CJES,” which was previously used by Legacy C&J following completion of our initial public offering in 2011. After giving effect to the Merger, Nabors owned approximately 53% of our outstanding common shares, with Legacy C&J shareholders owning the remaining 47% of our outstanding common shares. As of September 30, 2016, Nabors owns approximately 52% of our outstanding common shares. We are led primarily by the individuals who served as Legacy C&J’s executive officers prior to the Merger.
Pursuant to Rule 12g-3(a) under the Exchange Act, following the closing of the Merger, New C&J is the successor issuer to Legacy C&J and is deemed to succeed to Legacy C&J’s reporting history under the Exchange Act. Because Legacy C&J was considered the accounting acquirer in the Merger under accounting principles generally accepted in the United States of America (“U.S. GAAP”), Legacy C&J is also considered the accounting predecessor of C&J Energy Services Ltd. 
Our results for the nine months ended September 30, 2016 include the financial and operating results of both Legacy C&J and the C&P Business for the entire period. Results for the nine months ended September 30, 2015 include the financial and operating results of Legacy C&J for the entire period and the C&P Business for the period from the Effective Time through September 30, 2015. Accordingly, comparisons of our results for the current period to the comparable prior year period may not be meaningful. Unless the context indicates otherwise, as used herein, the terms “we,” “us,” “our,” “the Company,” “C&J,” or like terms refer to Legacy C&J and its subsidiaries when referring to time periods prior to the Effective Time and refer to New C&J and its subsidiaries (which include Legacy C&J and its subsidiaries) when referring to time periods subsequent to the Effective Time of the Merger.
Business Overview
We are one of the largest, integrated providers of completion and production services in North America. We provide a full range of well construction, well completion, well support and other complementary oilfield services to oil and gas exploration and production companies primarily in North America. Our core service lines, which are involved in the entire life cycle of the well, include hydraulic fracturing, cased-hole wireline, coiled tubing, cementing, rig services, fluids management

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services and other special well site services. We operate in all of the major oil and gas producing regions of the continental United States and Western Canada.
Demand for our services is primarily driven by, and therefore our operating and financial performance is heavily influenced by drilling, completion and production activity of our customers in the upstream exploration and production ("E&P") business of the oil and gas industry, which in turn is significantly impacted by oil and gas prices. In late 2014, oil prices began a substantial and rapid decline, and the severe weakness and volatility continued throughout 2015. As we entered 2016, we experienced a sharp drop in activity across our customer base as operators reacted to further declines in oil prices and the deteriorating rig count. The significant volatility and weakness in commodity prices has continued to date and oil prices have remained significantly lower than the industry has previously experienced in recent years. With the continued market instability, many of our customers have stopped drilling and/or completing wells, while others have been forced to file for bankruptcy protection or stop operations altogether.
In response to this severe, prolonged downturn, over the course of 2015 and throughout 2016 to date, we have implemented various operational rightsizing measures, coupled with substantial cost-cutting efforts further described below, in an attempt to mitigate the liquidity strain brought on by significantly reduced utilization and pricing for our services. In spite of our efforts, however, and due to the extremely depressed market conditions that materially and negatively impacted our results for the first quarter of 2016, we were unable to satisfy one of the financial covenants under our Credit Agreement required to be tested as of March 31, 2016. Accordingly, and as a result of our substantial debt burden, throughout the second quarter and into the third quarter, we worked with our financial and legal advisors to analyze a variety of solutions to reduce our overall financial leverage, while maintaining a primary focus on preserving liquidity. As part of this process, we engaged in discussions with certain of our lenders and other stakeholders to develop and implement a comprehensive plan to restructure our balance sheet, which ultimately led to the commencement of the Chapter 11 Proceeding on July 20, 2016, as defined and further discussed under “Recent Developments & Other Matters - Chapter 11 Proceeding and Restructuring Support Agreement” in this Part I, Item 2 of this Quarterly Report. 
Our business and financial and operational performance also reflects the impact of our long-term growth strategy, further discussed below, which we aggressively implemented following our initial public offering in July 2011 through mid-2015. Our long-term growth strategy focused on strengthening, expanding and diversifying our business through: (1) the growth of our assets, customer base and geographic reach, both domestically and internationally, for our core service lines; and (2) strategic initiatives advancing service line diversification, vertical integration and technological advancement. As a result of the prolonged industry downturn, during the first quarter of 2016, we began evaluating opportunities to monetize some of our vertically integrated businesses in order to enhance our liquidity position and reduce our overall cost structure. On June 29, 2016, we sold the majority of the assets comprising our specialty chemicals supply business, which we developed in-house in 2013, for approximately $9.3 million. We are currently negotiating several other strategic divestitures and evaluating other opportunities to divest select non-core assets and businesses in line with our strategy of preserving liquidity and streamlining our business to better focus on the advancement of our core services lines to ensure we are strongly positioned to capitalize on the eventual market recovery. However, there can be no assurance any such potential transactions will prove successful, or that we will be able to sell these assets or business lines on satisfactory terms, if at all.
Additionally, over the last several years we worked to establish an operational presence in key countries in the Middle East, and we currently have offices in Dubai, Saudi Arabia and Oman. Given the Company's financial position and in connection with recent changes in the Company's executive management team with a resulting shift in short- and long-term growth strategy, we re-evaluated our business plan with respect to the Middle East and determined it was appropriate to significantly scale back our investment in this area to preserve liquidity and focus on the advancement of our business in the U.S. Accordingly, and following unsuccessful customer bids, we have now begun the process of unwinding our businesses in the Middle East.
As indicated above, in keeping with our long-term growth strategy, from our initial public offering in July 2011 through the closing of the Merger in March 2015, we rapidly grew our core business through the expansion of our assets, customer base and geographic reach, both domestically and internationally, and most notably through the Merger. The combination of Legacy C&J with the C&P Business greatly expanded our scale, service offerings and geographic reach, increasing capacity for our existing services offerings and providing diversification through the additional services offerings of the C&P Business with a stronger presence in all major domestic basins. However, with the Merger closing during the early part of the prevailing market downturn, we have not been able to capitalize on many of the opportunities that we believe the diversified service offering and increased scale, customer base and geographic footprint of our combined company can provide in healthy market conditions. Moreover, in response to difficult market conditions and also as part of our integration strategy, late in the first quarter of 2015, we began to rightsize the Company by stacking idle equipment, reducing headcount and consolidating facilities. Since that time, we have continued to tightly manage the business with a focus on aligning our

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operations to the rapidly deteriorating operating environment, primarily by stacking additional equipment, closing unprofitable facilities, further reducing headcount, and implementing stringent cost control measures to lower our operational cost structure, including reductions in compensation and benefits across the organization.
In implementing our growth strategy over the last few years, in addition to the Merger, we acquired an equipment manufacturing business in 2011 and a data acquisition and control systems business in 2013. We utilize the equipment and products manufactured by these vertically integrated businesses in our day-to-day operations, and we also sell them to third-party customers in the global oilfield services industry. We are currently evaluating opportunities to divest all or some of this equipment manufacturing business, potentially through multiple transactions. In May 2015, we acquired an integrated business that designs, manufactures and installs electrical submersible pump systems and accessories primarily for artificial lift applications and is now developing a line of electrical submersible pump systems that are optimized for the small casing sizes typical of long horizontal wells.
Additionally, we have taken a multi-faceted, integrated approach to developing our directional drilling capabilities, which we manage through our research & technology division. In April 2013, we acquired a provider of directional drilling technology and related downhole tools, and during the first half of 2014, we began manufacturing premium drilling motors in-house and offering our directional drilling services line to customers as a new service offering. However, due to the substantial decline in the rig count and the competitive landscape for directional drilling services in the current market environment, we recently changed our business model and began providing our USBS directional drilling motor as a rental to other directional drilling providers. This change in business strategy has enabled our proprietary technology to gain additional exposure to numerous E&P companies, which has resulted in increased credibility, higher utilization and enhanced profitability. As market conditions improve, we will continue to evaluate our directional drilling business strategy in order to maximize the benefits of this technology because we continue to believe our proprietary USBS directional drilling motor has the potential to deliver significant value to our organization, and to many of our customers, over the long-term.

Over the last several years we have also significantly invested in our research and technology capabilities, including the development of a state-of-the-art research and technology center with a team of engineers and support staff focused on developing innovative, fit-for-purpose solutions designed to enhance our core service offerings, increase completion efficiencies, provide cost savings to our operations and add value for our customers. We believe that one of the strategic benefits of this division is the ability to develop and implement new technologies and respond to changes in customer requirements and industry demand. Several of our research and technology initiatives are generating monthly cost savings for our completion services operations, which is central to our overall strategy of proactively managing our costs to maximize returns. Additionally, several of these investments are delivering value-added products and services that, in addition to producing revenue, are generating demand from key customers. We believe these capabilities can provide a competitive advantage as customers look for innovative means for extracting oil and gas in the most economical and efficient way possible. That said, as with our other service lines and divisions, over the last year we have been forced to implement meaningful cost reductions that significantly scaled back the size and resources of this division.

Recent Developments & Other Matters

Chapter 11 Proceeding and Restructuring Support Agreement

In May 2016, we announced that we were not in compliance with the Minimum Cumulative Consolidated EBITDA Covenant required to be tested as of March 31, 2016 ("Covenant Default") under the Credit Agreement governing our Credit Facilities, which is considered an event of default with respect to the Credit Agreement (Please see “Liquidity and Capital Resources - Description of Our Credit Agreement” in Part I, Item 2 of this Quarterly Report for a description of the Credit Agreement, including the Minimum Cumulative Consolidated EBITDA Covenant and Credit Facilities). We also announced that we would be negotiating with our lenders to resolve this matter, and that we had initiated a process to explore strategic alternatives to strengthen our balance sheet and maximize the value of the Company.

On May 10, 2016, we obtained a temporary limited waiver agreement from certain of the lenders under the Credit Agreement in respect of the Covenant Default, effective from March 31, 2016 through May 31, 2016, wherein such lenders agreed not to consider the Covenant Default an event of default through May 31, 2016.  On May 31, 2016, we obtained a forbearance agreement from certain of the lenders pursuant to which, among other things, such lenders agreed not to pursue default remedies against the Company with respect to the Covenant Default or certain subsequent specified payment defaults. On June 30, 2016, this forbearance was extended through July 17, 2016 pursuant to a second forbearance agreement, and prior to such termination this forbearance period was once again extended through July 20, 2016.


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At the conclusion of the forbearance period, on July 20, 2016 ("Petition Date"), certain of our U.S. operating companies (collectively, the "U.S. Debtors") filed voluntary petitions for reorganization seeking relief under the provisions of Chapter 11 ("Chapter 11") of the United States Bankruptcy Code ("Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of Texas, Houston Division (the "Bankruptcy Court"). These Chapter 11 cases are being administered under the caption "In re: CJ Holding Co., et al., Case No. 16-33590", and we also commenced ancillary proceedings in Canada on behalf of our Canadian subsidiaries (collectively, the "Canadian Debtors") and a provisional liquidation proceeding in Bermuda on behalf of the Company's ultimate parent company (C&J Energy Services Ltd.) and certain Bermudian subsidiaries (collectively, the "Bermuda Debtors" and together with the U.S. Debtors and the Canadian Debtors, the "Debtors")(collectively, the "Chapter 11 Proceeding"). Throughout the Chapter 11 Proceeding, we have continued, and we will continue, to manage and operate our business in the ordinary course as debtors-in-possession under the jurisdiction of the Bankruptcy Court in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

Prior to commencing the Chapter 11 Proceeding, on July 8, 2016, we entered into a Restructuring Support and Lock-Up Agreement (together with all exhibits thereto, the “Restructuring Support Agreement”), with certain lenders (the “Supporting Lenders”) holding approximately 90% of the secured claims and interests arising under the Credit Agreement. The Restructuring Support Agreement contemplates the implementation of a restructuring of the Company through a debt-to-equity conversion of approximately $1.4 billion of secured debt under the Credit Agreement and an equity rights offering, to be effectuated through a plan of reorganization (the “Restructuring Plan”), which will be subject to Bankruptcy Court approval as part of the Chapter 11 Proceeding. The Restructuring Support Agreement contains certain Restructuring Plan-related milestones (the “Milestones”), including deadlines: (a) to file the Restructuring Plan and related disclosure statement; (b) for entry of interim and final orders related to the DIP Facility (as defined and discussed herein); (c) for entry of the disclosure statement order; (d) for entry of the confirmation order; and (e) for the Effective Date to occur. The Supporting Lenders may agree to extend the foregoing Milestones, and the Milestone related to entry of the final order approving the DIP Facility was previously extended.

In accordance with the Restructuring Support Agreement Milestone, on August 19, 2016, we filed the initial Plan of Reorganization and related Disclosure Statement, with the first amendment filed on September 28, 2016 and a second amendment filed on November 3, 2016 (collectively, and as amended by the first and second amendment, the “Restructuring Plan”). The filing of these amendments represented important progress in moving the Company through the Chapter 11 Proceeding.

Recognizing that the pace of a court supervised process is not within our control, we have been working proactively with our stakeholders to facilitate a positive outcome as expeditiously as possible. At this time, the Supporting Lenders together with the appointed fiduciary committee for holders of unsecured claims (the "UCC") support the Restructuring Plan, which we believe provides a fair and equitable recovery to our stakeholders. We are optimistic that we will emerge from the Chapter 11 Proceeding by year-end 2016 or early in the first quarter of 2017.

The Restructuring Plan currently provides, among other things, as follows:

•
Rights Offering:  Certain of the Supporting Lenders (the "Backstop Parties") have agreed to provide an equity rights offering for an investment in the Company in an amount of up to $200 million as part of the approved Restructuring Plan (the “Rights Offering”). The Rights Offering will be consummated on the effective date of the Restructuring Plan (the “Effective Date”) pursuant to a Backstop Commitment Agreement, which will also provide for a commitment premium of 5% of the $200 million committed amount payable in new common equity of the reorganized Company ("New Equity") to the Backstop Parties (the “Backstop Fee”). The Rights Offering shares will be issued at a price that reflects a discount of 20% to the Restructuring Plan value, provided that the Restructuring Plan value will not be greater than $750 million.

•
DIP Facility: Certain of the Supporting Lenders (the “DIP Lenders”) have provided a superpriority secured delayed draw term loan debtor-in-possession financing facility in an aggregate principal amount of up to $100 million (the “DIP Facility”). As further discussed below, on July 25, 2016, the Bankruptcy Court entered an order approving the Debtors’ entry into the DIP Facility on an interim basis, pending a final hearing. On July 29, 2016, we entered into a superpriority secured debtor-in-possession credit agreement, among the Debtors, the DIP Lenders and Cortland Capital Market Services LLC, as Administrative Agent (the “DIP Credit Agreement”), which sets forth the terms and conditions of the DIP Facility. On September 25, 2016, the Bankruptcy Court entered a final order approving entry into the DIP Facility and DIP Credit Agreement. We believe that our current cash balance, along with this additional financing, will provide us with sufficient resources to support our businesses and continue our operations in the ordinary course through

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the Chapter 11 Proceeding. We are required to repay all amounts outstanding under the DIP Facility on the Effective Date of emergence of Chapter 11.

•
Exit Facility: We are evaluating various financing options which will take effect upon emergence from the Chapter 11 Proceeding, including entry into a senior secured revolving asset-based lending credit facility to be arranged and provided by one or more commercial lending institutions in a minimum amount of $100 million. Entry into the Exit Facility will require that the Debtors, the Backstop Parties and certain other Supporting Lenders agree that such financing facility is in the best interest of the reorganized Debtors.

•
New Warrants:  On the Effective Date, the Company will issue new seven-year warrants exercisable on a net-share settled basis into up to 6% of the New Equity at a strike price of $1.55 billion (the “New Warrants”). New Warrants representing up to 2% of the New Equity will be issued to existing holders of C&J common equity, provided that such holders vote as a class to accept the Restructuring Plan, and the remaining New Warrants representing up to 4% of the New Equity will be issued to the Debtors' general unsecured creditors.

•
Distributions:  The Supporting Lenders shall receive all of the New Equity, subject to dilution on account of the Management Incentive Plan (as defined below), the Rights Offering, the Backstop Fee and the New Warrants, along with all of the subscription rights under the Rights Offering. Under the Restructuring Plan, mineral contractor claimants will be paid in full in the ordinary course of business. Additionally, subject to the terms of the Plan, certain other unsecured claimants will share in a $33.0 million cash recovery pool, plus a portion of the New Warrants, as described above.

•
Management Incentive Plan: 10% of the New Equity will be reserved for a management incentive program to be issued to management of the reorganized Company after the Effective Date at the discretion of the board of directors of the reorganized Company (the “Management Incentive Plan”).

•
Governance: The board of directors of the reorganized Company will be appointed by the Lenders and shall include the reorganized Company’s Chief Executive Officer.

•
Releases: The Restructuring Plan contemplates certain releases relating to the Company, the Supporting Lenders, including the Backstop Parties and DIP Lenders, the UCC and its members, and holders of claims and interests, which will take effect upon the Effective Date. Further, all indemnification provisions for current and former directors, officers, managers, employees, attorneys, accountants, investments bankers, and other professionals of the Company, as applicable, will remain in place after the restructuring.

Pursuant to the Restructuring Support Agreement, and as set out in the Restructuring Plan, the Supporting Lenders have agreed to, among other things: (a) use good faith efforts to implement the restructuring; (b) vote all claims and interests held in favor of the Restructuring Plan; (c) with respect to the Backstop Parties, backstop the Rights Offering; (d) support and not object or opt out of the release provisions under the Restructuring Plan so long as such release provisions are consistent with the Restructuring Support Agreement term sheet; and (e) not exercise any right or remedy under the Credit Agreement against an affiliate of the Company that did not file for Chapter 11, subject to certain conditions.

Additionally, as indicated above, we have worked diligently with the UCC to resolve certain issues the UCC raised on behalf of our general unsecured creditors with respect to the Restructuring Plan. Ultimately we were able to resolve such issues with the UCC and the Restructuring Plan reflects a global compromise amongst the Debtors, the UCC and the Supporting Lenders. As a result of this resolution, the UCC has agreed to support confirmation of the Restructuring Plan.
We believe that the compromises and settlements to be implemented pursuant to the Restructuring Plan preserve value by enabling the Debtors to avoid costly and time-consuming litigation with the UCC that could potentially delay emergence from the Chapter 11 Proceeding.

On July 21, 2016, the Bankruptcy Court issued certain interim and final orders with respect to our first-day motions and other operating motions that allow the Company to operate the business in the ordinary course throughout the Chapter 11 Proceeding. The first-day motions sought authorization for, among other things, the payment of certain pre-petition employee expenses and benefits, the use of the Company's existing cash management system, the payment of certain pre-petition amounts to certain critical vendors and mineral lien claimants, the ability to pay certain pre-petition taxes and regulatory fees, the payment of certain pre-petition claims owed on account of insurance policies and programs, and entry into the DIP Facility on an interim basis. With respect to those other first-day motions for which only interim approval had been initially granted, the Bankruptcy Court has since issued final orders on all such motions as of September 30, 2016.


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On November 4, 2016, the Bankruptcy Court approved the Disclosure Statement, finding that the Disclosure Statement contains adequate information as required by the Bankruptcy Code. The Debtors intend to launch solicitation of acceptances of the Restructuring Plan as required by the Bankruptcy Code as soon as reasonably practicable thereafter. A hearing with respect to confirmation of the Restructuring Plan is expected to take place on December 16, 2016, and we expect to emerge from the Chapter 11 Proceeding in the following weeks.

Subject to certain exceptions under the Bankruptcy Code, the filing of the Chapter 11 Proceeding automatically stayed the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the Petition Date. Most creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the Debtors’ property, or to collect on monies owed or otherwise exercise rights or remedies with respect to a pre-petition claim are stayed unless and until the Bankruptcy Court lifts the automatic stay.

Under Section 365 and other relevant sections of the Bankruptcy Code, the Debtors may assume or reject certain executory contracts and unexpired leases, including leases of real property and equipment, subject to the approval of the Bankruptcy Court and certain other conditions, including Supporting Lender approval in accordance with the Restructuring Support Agreement. Generally, the assumption of a contract requires a Debtor to satisfy pre-petition obligations under the contract, which may include payment of pre-petition liabilities in whole or in part.  The assumption of a contract may also result in amendments to its terms. Rejection of a contract is typically treated as a breach occurring as of the moment immediately preceding the Petition Date.

Under Chapter 11, the Restructuring Plan will determine the rights and satisfaction of claims and interests of various creditors and security holders and will be subject to the ultimate outcome of negotiations and the Bankruptcy Court’s decisions through the date on which the Restructuring Plan is confirmed. The Restructuring Plan is subject to revision prior to submission to the Bankruptcy Court for approval at confirmation based upon discussions with the Debtors’ creditors, including the Supporting Lenders and other interested parties, and thereafter in response to further discussions with parties in interest and the Debtors' further analysis. There can be no assurance that the Debtors will be able to secure approval for the Restructuring Plan or any other Chapter 11 plan from the Bankruptcy Court or that any Chapter 11 plan will be accepted by the Debtors’ creditors.

Under the priority scheme established by the Bankruptcy Code, unless creditors agree otherwise, pre-petition liabilities and post-petition liabilities must be satisfied in full before shareholders are entitled to receive any distribution or retain any property under a Chapter 11 plan. The ultimate recovery to creditors and/or shareholders, if any, will not be determined until confirmation of the Restructuring Plan. No assurance can be given as to what values, if any, will be ascribed to each of these constituencies or what types or amounts of distributions, if any, they would receive. The Restructuring Plan could result in holders of certain liabilities and/or securities, including our shareholders, receiving no distribution on account of their interests. Because of such possibilities, there is significant uncertainty regarding the value of the Company's liabilities and securities, including its common shares. At this time, there is no assurance we will be able to restructure as a going concern or successfully implement the Restructuring Plan.

For additional discussion of the known, material risks associated with the Chapter 11 Proceeding and the Company's ability to restructure as a going concern, please see “Risk Factors” in Part II, Item 1A of this Quarterly Report, as well as “Liquidity and Capital Resources” in this Part I, Item 2 of this Quarterly Report.

Going Concern Uncertainty

As discussed above, the extremely depressed market conditions that significantly and negatively impacted our results for the first quarter of 2016 resulted in Covenant Default under our Credit Agreement, which ultimately led to the commencement of the Chapter 11 Proceeding. This ongoing industry downturn also negatively impacted our operational and financial performance for the second and third quarters of 2016. Both the severe, prolonged downturn and Chapter 11 Proceeding raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon, among other things, improvements in market conditions and our ability to improve profitability, our ability to meet certain conditions of the Restructuring Support Agreement and obtain confirmation of the Restructuring Plan or another Chapter 11 plan by the Bankruptcy Court, and our ability to successfully implement the Restructuring Plan or another Chapter 11 plan.

Changes in Management


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During the second and third quarters of 2016, C&J's Board of Directors approved a number of strategic changes to the Company's executive management team as part of a focused effort to ensure the best people were in place to lead the Company through the restructuring process, maximize the value of the business, and capitalize on the Company's strengthened financial position to continue to grow the business following emergence.

Following the June 2016 appointment of a new President and Chief Executive Officer (Mr. Don Gawick), Chief Financial Officer (Mr. Mark Cashiola) and Executive Vice President, General Counsel and Chief Risk & Compliance Officer (Ms. Danielle Hunter), the Board appointed Mr. Patrick Bixenman as the Company’s Chief Administrative Officer, Mr. Everett Michael Hobbs as the Company's Chief Operating Officer, and Mr. Nicholas Petronio to succeed Mr. Hobbs as President of C&J's Well Services division, each effective as of August 22, 2016. Additionally, on October 6, 2016, the Board appointed Mr. Edward Keppler, the President – Drilling & Completion Services, to the position of President – Corporate Operational Development, and appointed Mr. Timothy Wallace, the Company’s Senior Vice President – Sales for the Drilling & Completion Services division, to succeed Mr. Keppler as President of C&J's Completion Services division, each effective immediately. In connection with Mr. Keppler’s appointment, it was determined that Mr. Larry Heidt, the President – Corporate Operational Development & Industry Relations, would maintain the role of President – Industry Relations with an increased focus on business development and client and industry relations.

Appointment of Mr. Pat Bixenman as Chief Administrative Officer. Mr. Bixenman has served as C&J’s President of Research & Technology since October 2012 and continues in such role in addition to serving as Chief Administrative Officer. As Chief Administrative Officer, he now oversees the Company’s Human Resources, Information Technology and Real Estate divisions, among other responsibilities. As President of Research & Technology, Mr. Bixenman oversaw the growth of the Company’s Research & Technology division and recruited more than 100 technology professionals to the Company. Mr. Bixenman also initiated development of drilling products that allowed the Company to enter the directional drilling services business. Prior to joining C&J, Mr. Bixenman was employed by Schlumberger Limited (“Schlumberger”) from 1985 through 2012, where he gained significant technology development and manufacturing experience in wireline logging, coiled tubing, completions tools, artificial lift, drill stem testing, and subsea intervention trees. While employed by Schlumberger, Mr. Bixenman held numerous key management positions, including Engineering Manager, Manufacturing Center Manager and Technology Center Manager. He graduated from Tennessee Technology University with a B.S. in Mechanical Engineering in 1983 and Rice University with a Masters in Mechanical Engineering in 1988.

Appointment of Mr. Mike Hobbs as Chief Operating Officer. Mr. Hobbs previously served as C&J’s President of Well Services since June 2015. In this position, Mr. Hobbs directed all aspects of the Company’s Well Services division, including maintenance, workover and plug and abandonment services, as well as fluid management, rental tool, and salt water disposal services. Prior to his promotion to President of the Well Services division, Mr. Hobbs served as the Company’s Senior Vice President of Corporate Operational Development since October 2012. In that role, Mr. Hobbs focused on structural and strategic issues within each of the Company’s core service lines, including equipment maintenance, operational best practices, corporate systems, facilities and new business opportunities. Mr. Hobbs was Chief Operating Officer of the Company’s wireline division, Casedhole Solutions (“Casedhole Solutions”), at the time C&J acquired Casedhole Solutions in June 2012, a position he had held since 2011. Following C&J’s acquisition of Casedhole Solutions through October 2012, he served as Vice President – Operations of Casedhole Solutions. Mr. Hobbs first joined Casedhole Solutions in April 2010 as Vice President and General Manager for the Southern region, before being promoted to Chief Operating Officer in 2011. Mr. Hobbs has over 30 years of experience in the oilfield service industry, the first fourteen of which were with Schlumberger in numerous operational and management positions in the Permian Basin. After leaving Schlumberger in 1997, Mr. Hobbs founded E.M. Hobbs, Inc. where he participated in the development and implementation of many of the multi-stage completion procedures and techniques that are currently used today within the wireline service industry. Before leaving E.M. Hobbs, Inc. in 2004, Mr. Hobbs grew the company to 21 units in five locations in Texas and New Mexico. E.M. Hobbs, Inc. is now known as E&P Wireline and is owned by Schlumberger.

Appointment of Mr. Nick Petronio as President – Well Services. As President of C&J's Well Services division, Mr. Petronio is responsible for overseeing C&J’s maintenance, workover and plug and abandonment services, as well as fluid management, rental tool, and salt water disposal services businesses. Mr. Petronio previously served as Senior Vice President for Operational Development in C&J’s Well Services division since March 2015. Prior to holding this position, he served as Assistant to the Chairman of Nabors Industries Ltd. (“Nabors”) from 2010 to March 2015. A veteran of the oil and gas industry, Mr. Petronio served as President of Pool Well Services in Houston, a subsidiary of Nabors, from 1999 to 2010. The company operated a fleet of more than 750 workover rigs and 350 oilfield trucks and managed a workforce of 3,400 that provided well services to customers in eight states. The subsidiary was renamed Nabors Well Services Co. in 2005. Mr. Petronio joined Pool Company as Construction Manager in 1978 and held numerous roles of increasing responsibility within the company, including Vice President of Equipment and Environmental Affairs and Senior Vice President of Eastern U.S. Operations before being named President in 1999. Mr. Petronio started his career in 1968 with General Dynamics’

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Electric Boat division before joining Marathon-LeTourneau as a technical manager from 1976 to 1978. He earned a B.S. in Civil Engineering from the University of Rhode Island and a M.S. in Civil Engineering (Applied Mechanics) from the University of Connecticut.

Appointment of Mr. Ed Keppler as President – Corporate Operational Development. As President of Corporate Operational Development, Mr. Keppler focuses on structural and tactical operational issues across all of C&J’s service lines to provide strategic direction and support through the development of standards, processes, and systems to increase efficiency and quality for C&J’s operations. Mr. Keppler previously served as President of C&J's Drilling & Completion Services, a position he was appointed to in March 2015. Prior to assuming the role of President – Drilling & Completion Services, he served as the Company’s Senior Vice President – Corporate Oilfield Operations from July 2013 through March 2015. He previously served as the President of C&J’s wireline business, Casedhole Solutions, from October 2012 through July 2013, having joined Casedhole Solutions as its Vice President and General Manager for the North Region in May 2010 until October 2012. Mr. Keppler first joined C&J with the Company’s acquisition of Casedhole Solutions in June 2012. Prior to joining Casedhole Solutions in May 2010, Mr. Keppler was employed by Schlumberger from 1991 through 2010, where he gained significant wireline experience in the North American market with extensive expertise in cased-hole operations, perforating, open-hole logging, and wellbore formation sampling. While employed by Schlumberger, Mr. Keppler held numerous key management positions, including wireline district manager in six different locations, regional operations manager for the state of Alaska, Engineering Sustaining Manager and Cased-Hole Service Delivery Manager for the U.S. Mr. Keppler’s last position before joining Casedhole Solutions was Global Wireline Technical Support Manager for Weatherford. He graduated from New Mexico State University with a B.S. in Mechanical Engineering in 1990.

Appointment of Mr. Tim Wallace as President – Completion Services. As President of C&J's Completion Services division, Mr. Wallace is responsible for overseeing C&J’s hydraulic fracturing, coiled tubing, casedhole wireline and cementing services businesses. Mr. Wallace previously served as the Company’s Senior Vice President – Sales & Marketing for the Drilling & Completion Services division, a position he was appointed to in January 2016. Before that, Mr. Wallace served as C&J’s Senior Vice President – Casedhole Solutions, C&J’s wireline business, from July 2013 through January 2016. Mr. Wallace first joined C&J with the Company’s acquisition of Casedhole Solutions in June 2012, and from that time through July 2013 he served as C&J’s Vice President – Wireline Operations. Mr. Wallace joined Casedhole Solutions in October 2011 as the Southwest Regional Wireline Operations Manager. Before joining Casedhole Solutions, he spent 28 years with Schlumberger. While at Schlumberger, Mr. Wallace held positions in operations management, sales management, software project management, corporate sales, field sales and field operations at various locations in North America, with extensive international travel. Mr. Wallace graduated from Louisiana Tech University with a B.S. in Petroleum Engineering in 1984.

Reportable Segments
We operate our business in the following three reportable segments:
•Completion Services, which includes the hydraulic fracturing services, cased-hole wireline services, coiled tubing services and other well stimulation services of both Legacy C&J and the C&P Business.
•Well Support Services, which includes the services lines acquired with the C&P Business, specifically including rig services, fluid management services and other special well site services.
•Other Services, which include Legacy C&J’s smaller service lines and divisions, including equipment manufacturing and repair, research and technology, and Middle East operations, as well as the C&P Business’ cementing services. We manage several of our vertically integrated businesses through our research and technology division, including our directional drilling services and products, our data acquisition and control instruments provider and our acquired artificial lift applications provider. Costs associated with general corporate activities and intersegment eliminations are also included in this Other Services segment.
Each of our reportable segments is described in more detail below. For additional financial information about our reportable segments, see Note 7 – Segment Information in Part I, Item 1 “Financial Statements and Supplementary Data” in this Quarterly Report.
Completion Services
Our Completion Services segment consists of the following service lines: (1) hydraulic fracturing; (2) cased-hole wireline, which includes wireline logging, perforating, pressure pumping, well site make-up and pressure testing and other

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complementary services; and (3) coiled tubing and other well stimulation services, including nitrogen and pressure pumping services. The majority of revenue for this segment is generated by our hydraulic fracturing services line.

During the third quarter of 2016, our hydraulic fracturing division deployed, on average, approximately 430.0 thousand horsepower out of a current estimated fleet of approximately 1.0 million horsepower. In both our wireline and coiled tubing divisions, we deployed, on average, approximately 58 wireline trucks and 25 coiled tubing units out of current estimated fleets of approximately 130 trucks and 45 units, respectively. However, not all of our assets are utilized fully, or at all, at any given time, due to, among other things, scheduled maintenance and downtime.  Additionally, in response to the continued challenging market conditions, we have implemented various operational rightsizing measures and aligned our assets with industry demand, which has included stacking or idling unproductive equipment across our asset base within each service line.

Management evaluates our Completion Services segment's operational performance and allocates resources primarily based on Adjusted EBITDA because it provides important information to us about the activity and profitability of our lines of business within this segment. Adjusted EBITDA is a non-GAAP financial measure computed as total earnings (loss) before net interest expense, income taxes, depreciation and amortization, other income (expense), net, net gain or loss on disposal of assets, acquisition-related costs, and non-routine items.

Third quarter 2016 revenue from our Completion Services segment was $132.8 million, representing approximately 57.1% of our total revenue, with Adjusted EBITDA of $(3.6) million; compared to $127.6 million of revenue and $(16.9) million of Adjusted EBITDA in the second quarter of 2016, and $256.9 million of revenue and $(8.6) million of Adjusted EBITDA in the third quarter of 2015.
    
Despite numerous lost job opportunities in the second quarter and at the beginning of the third quarter associated with concerns about our financial condition, announced restructuring and ultimate commencement of the Chapter 11 Proceeding, both overall revenue and Adjusted EBITDA from our Completion Services segment benefited from higher overall utilization and modestly improved pricing levels in most core operating basins. As commodity prices stabilized and the U.S. onshore rig count increased, many of our key customers in core operating basins accelerated completion activity resulting in increasing utilization levels throughout the quarter, and eventually slightly higher pricing levels within all of our core business lines by quarter end. As certain customers began to accelerate the completion of drilled-but-uncompleted wells ("DUCs"), we strategically reallocated hydraulic fracturing resources to meet customer demand and to capture improving margin. Despite the reduction of an additional frac fleet early in the quarter, the decrease in available frac days combined with improved completion job mix, allowed our Completions Services segment to experience improved financial performance sequentially. In both our coiled tubing and wireline divisions, we experienced increases in utilization and slightly better pricing as completion activity increased throughout the third quarter. Additionally, our coiled tubing and wireline operations benefited from increased workover and well maintenance activities.

Moving into the fourth quarter, we currently expect our Completion Services segment to continue to experience improved overall activity levels as many of our core customers continue to increase their rig count and accelerate DUC completion activity. With that said, improving activity levels are dependent upon macroeconomic and commodity price stability. Also, we continue to have conversations with our customers concerning the potential negative effect of seasonally decreased activity levels that are typical in the fourth quarter as capital budgets are exhausted and preparations commence for the new calendar year budgeting process. In our hydraulic fracturing business, we continue to experience higher utilization due to improving activity levels; however, the environment continues to be highly competitive and margins remain pressured. Additionally, if activity levels continue to increase and additional frac spreads return to work, we would expect improvement in our coiled tubing and wireline businesses, as DUC completion activity increases and more drilling rigs returning to the field to drill new wells that will eventually need our completion services. We will continue to manage our businesses through these challenging market conditions, and we will continue our primary focus of meeting the needs of our customers in the safest, most cost efficient way possible, which we believe will best position the Company for future growth and success.
Well Support Services

Our Well Support Services segment, which was acquired in the Merger as part of the C&P Business, consists of the following service lines: (1) rig services, including providing workover and well servicing rigs that are involved in routine repair and maintenance, completions, re-drilling and plug and abandonment operations; (2) fluid management services, including transportation, storage and disposal services for produced fluids and fluids used in the drilling, completion and workover of oil and gas wells; and (3) other special well site services. Our rig services line is the greatest driver of revenue for this segment.


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During the third quarter of 2016, our Well Support Services segment deployed, on average, approximately 140 workover rigs per workday out of an estimated fleet of approximately 495 workover rigs. In our fluid management service line, we deployed, on average, approximately 694 fluid services trucks per workday and approximately 1,286 frac tanks per workday out of estimated fleets of approximately 1,433 trucks and 5,229 tanks, respectively. In our fluid management services line, we continued to utilize approximately 30 salt water disposal wells for fluids disposal purposes. Keep in mind that not all of our assets are utilized fully, or at all, at any given time, due to, among other things, scheduled maintenance and downtime.  Additionally, in response to the continued challenging market conditions, we have implemented various operational rightsizing measures and aligned our assets with industry demand, which has included idling unproductive equipment across our asset base within each service line.

Management evaluates our Well Support Services segment operations’ performance and allocates resources primarily based on activity levels, specifically rig and trucking hours, as well as Adjusted EBITDA. The following table presents rig and trucking hours, along with Adjusted EBITDA, for our Well Support Services segment for the three months ended September 30, 2016 and June 30, 2016 (dollars in millions):
 
 
Three Months Ended
 
 
September 30, 2016
June 30, 2016
 
 
 
 
Revenue
 
$
88.7

$
85.9

Adjusted EBITDA
 
$
7.8

$
5.0

Total rigs
 
495

499

Total rig hours
 
105,199

95,549

Total trucks
 
1,433

1,435

Total truck hours
 
346,662

365,793

During the third quarter of 2016, both revenue and Adjusted EBITDA improved sequentially in our Well Support Services segment primarily due to higher activity levels that resulted in improved utilization throughout the quarter. Despite higher activity levels, pricing remained extremely competitive across all service lines in most operational markets. The commodity price stability experienced in the third quarter of 2016 resulted in a renewed focus by our customer base to increase workover and well maintenance activity, which primarily enhanced the performance of our workover rig, P&A and other specialty service lines. Due to the sluggish nature of the overall recovery within the well service industry, we continued to support utilization and defend market share through pricing concessions in some of the most price competitive basins and further repositioned equipment and resources to areas with better market conditions and greater customer demand. We also continued to exit select product lines in certain basins, close unprofitable facilities and further reduce head count, which helped enhance margins and profitability in the third quarter of 2016.

As we exited the third quarter of 2016, activity levels continued to improve and pricing began to flatten as customers continued to spend more capital on workover and maintenance projects. However, improving activity levels are dependent upon macroeconomic and commodity price stability. Also, we continue to have conversations with our customers concerning the potential negative effect of seasonally decreased activity levels that are typical in our Well Support Services segment during the fourth quarter. We will continue with our strategy of aggressive cost control and focusing on markets and customers that generate positive Adjusted EBITDA. Our near-term strategy continues to focus on enhancing margins and profitability, properly managing capital spending levels and positioning the business to capitalize on opportunities as the market more meaningfully recovers.
Other Services
The Other Services segment is comprised of Legacy C&J’s smaller service lines and divisions, including equipment manufacturing and repair, Middle East operations, and research and technology, as well as the C&P Business' cementing operations. Our specialty chemical sales business, which we sold on June 29, 2016, was also included in this segment through the date of divestiture. We manage several of our smaller businesses through our research and technology division, including our directional drilling services and products, our data acquisition and control instruments provider and our artificial lift applications provider. Also included in the Other Services segment are intersegment eliminations and costs associated with activities of a general corporate nature.

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Third quarter 2016 revenue from our Other Services segment was $11.0 million representing approximately 4.7% of our total revenue, with Adjusted EBITDA of $(22.1) million; compared to $11.7 million of revenue with $(21.4) million of Adjusted EBITDA in the second quarter of 2016, and $19.7 million of revenue with Adjusted EBITDA of $(26.4) million in the third quarter of 2015.
Unlike the improvements witnessed in both our Completion Services and Well Support Services segments, most of the businesses comprising our Other Services Segment continue to be negatively impacted by the muted demand for those services driven by lower overall commodity prices. Although the rig count has increased and commodity prices appear to be stabilizing, most customers are still hesitant to expand their capital budgets for additional services, which continues to negatively affect most of our business lines in this segment. During the third quarter of 2016, we witnessed the most stability in our cementing business line as activity levels increased slightly in both our West Texas and Northeast operating basins.
In our Research & Technology division, we continue to supply more high-quality, low-cost perforating accessories to our casedhole wireline service line. The delivery of perforating products and accessories to our internal wireline business has doubled since year-end 2015, and we currently estimate that we internally supply over a quarter of all direct expendables, which includes perforating guns, perforating accessories and addressable switches.
Through the third quarter of 2016, we continued to focus on rightsizing the businesses within our Other Services segment by scaling back or delaying certain planned initiatives and implementing additional rounds of cost reductions, including further reductions in head count and facilities and terminating certain non-essential initiatives. As previously mentioned, in June 2016, we divested our specialty chemical sales business, and we will continue evaluating opportunities to potentially monetize additional non-core business lines in order to enhance our liquidity position.
    
Operating Overview
Our results of operations are driven primarily by deviations in four interrelated, fluctuating variables: (1) the drilling, completion and production activities of our customers, which directly affects the demand for our services; (2) the price we are able to charge for our services, which is driven by the level of demand for our services and equipment capacity in the market; (3) the cost of products and labor involved in providing our services, and our ability to pass those costs on to our customers; and (4) our activity, or “utilization” levels, and service performance.
Our operating strategy is focused on maintaining high asset utilization levels to maximize revenue generation while controlling cost to gain a competitive advantage and drive returns. We believe that the quality and efficiency of our service execution and aligning with customers who recognize the value that C&J provides through efficiency gains are central to our efforts to support utilization and grow our business. However, asset utilization is not necessarily indicative of our financial and/or operational performance and should not be given undue reliance. Given the volatile and cyclical nature of activity drivers in the U.S. onshore oilfield services industry, coupled with the varying prices we are able to charge for our services and the cost of providing those services, among other factors, operating margins can fluctuate widely depending on supply and demand at a given point in the cycle.
The Baker Hughes U.S. rig count data, which is publicly available on a weekly basis, is widely accepted and used as an indicator of overall E&P company capital spending and resulting oilfield activity levels. Historically, our utilization levels have been highly correlated to U.S. onshore spending by our E&P company customers as a group. Generally, as capital spending by E&P companies increases, drilling, completion and production activity also increases, resulting in increased demand for our services, and therefore more days or hours worked (as the case may be). Conversely, when drilling, completion and production activity levels decline due to lower spending by E&P companies, we generally provide fewer services, which results in fewer days or hours worked (as the case may be). Additionally, during periods of decreased spending by E&P companies, we may be required to discount our rates or provide other pricing concessions to remain competitive and support utilization, which negatively impacts our revenue and operating margins. During periods of pricing weakness for our services, we may not be able to reduce our costs accordingly, and our ability to achieve any cost reductions from our suppliers typically lags behind the decline in pricing for our services, which could further adversely affect our results. 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.”
Management evaluates the performance of our operating segments primarily based on Adjusted EBITDA because it provides important information to us about the activity and profitability of our lines of business within each segment and aids us in analytical comparisons for purposes of, among other things, efficiently allocating our assets and resources. Our management team also monitors asset utilization, among other factors, for purposes of assessing our overall activity levels and customer demand. For our Completion Services operations, we measure our asset utilization levels primarily by the total

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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 Support Services operations, 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. However, 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 cannot be relied on as indicative of our financial or operating performance. For additional information, see “Reportable Segments” in this Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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.
General Industry Trends
The oil and gas industry has traditionally been volatile and is influenced by a combination of long-term, short-term and cyclical trends, including the domestic and international supply and demand for oil and gas, current and expected future prices for oil and gas and the perceived stability and sustainability of those prices, production depletion rates and the resultant levels of cash flows generated and allocated by E&P companies to their drilling, completion and workover budgets. The oil and gas industry is also impacted by general domestic and international economic conditions, political instability in oil producing countries, government regulations (both in the United States and elsewhere), levels of consumer demand, the availability of pipeline capacity, weather conditions, and other factors that are beyond our control. Severe declines and sustained weakness and volatility in commodity prices over the course of 2015, and for most of 2016, and the consequent negative impact on the level of drilling, completion and production activity and capital expenditures by our customers, have adversely affected the demand for our services, and absent a significant rebound in commodity prices and corresponding increase in customer activity, are expected to adversely affect demand for our services in the future. This, in turn, negatively impacts our ability to maintain utilization of assets and negotiate pricing at levels generating sufficient margins, especially in our hydraulic fracturing business.
Demand for our services tends to be extremely volatile and cyclical, as it is a direct function of our customers’ willingness to make operating and capital expenditures to explore for, develop and produce hydrocarbons in the United States and, to a lesser extent, in Western Canada. Our customers’ willingness to undertake such activities and expenditures depends largely upon prevailing industry conditions that are influenced by numerous factors which are beyond our control, including, among other things, current and expected future levels of oil and gas prices and the perceived stability and sustainability of those prices, which, in turn, is driven primarily by the supply of, and demand for, oil and gas. Oil and gas prices, and therefore the level of drilling, completion and workover activity by our customers, historically have been extremely volatile and are expected to continue to be highly volatile. For example, during 2015 and in 2016 to date, oil prices reached and remained at their lowest levels since 2009, declining to as low as $26 per barrel. Natural gas prices declined significantly in 2009 and have remained depressed relative to pre-2009 levels.

Declines or sustained weakness in oil and gas prices influences our customers to curtail their operations, reduce their capital expenditures, and request pricing concessions to reduce their operating costs. The demand for drilling, completion and workover services is driven by available investment capital for such activities and in a lower oil and gas price environment, demand for service and maintenance generally decreases as oil and gas producers decrease their activity and expenditures. Because the type of services that we offer can be easily “started” and “stopped,” and oil and gas producers generally tend to be less risk tolerant when commodity prices are low or volatile, we typically experience a more rapid decline in demand for our services compared with demand for other types of energy services. A prolonged low level of customer activity, such as we have been experiencing over the last two years, adversely affects our financial condition and results of operations.
Competition and Demand for Our Services

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We operate in highly competitive areas of the oilfield services industry with significant potential for excess capacity. Completion and well servicing equipment can be moved from one region to another in response to changes in levels of activity and market conditions, which may result in an oversupply of equipment in an area. Additionally, the demand for our services depends primarily on the level of spending by oil and gas companies for drilling, completion and production activities, which are affected by short-term and long-term trends in oil and natural gas prices and numerous other factors over which we have no control. Utilization and pricing for our services have in the past been negatively affected by increases in supply relative to demand in our core operating areas and geographic markets.
Our revenues and earnings are directly affected by changes in utilization and pricing levels for our services, which fluctuate in response to changes in the level of drilling, completion and workover activity by our customers. Pressure on pricing for our core services, including due to competition and industry and/or economic conditions, may impact, among other things, our ability to maintain utilization and pricing for our services or implement price increases. During periods of declining pricing for our services, we may not be able to reduce our costs accordingly, which could further adversely affect our results. Furthermore, even when we are able to increase our prices, we may not be able to do so at a rate that is sufficient to offset any rising costs. Also, we may not be able to successfully increase prices without adversely affecting our utilization levels. The inability to maintain our utilization and pricing levels, or to increase our prices as costs increase, could have a material adverse effect on our business, financial position and results of operations.

Our competitors include many large and small energy service companies, including some of the largest integrated energy services companies that possess substantially greater financial and other resources than we do. Our larger competitors’ greater resources could allow those competitors to compete more effectively than we can, including by reducing prices for services. Our major competitors for our Completion Services include Halliburton, Schlumberger, Baker Hughes, CalFrac Well Services, Keane, Weatherford International, RPC, Inc., Pumpco, a subsidiary of Superior Energy Services, Frac Tech, and Basic Energy Services, as well as a significant number of regional businesses. Our major competitors for our Well Support Services include Key Energy Services, Basic Energy Services, Superior Energy Services, Precision, Forbes, Pioneer Energy Services, as well as a significant number of regional businesses.

Generally, we believe that the principal competitive factors in the markets that we serve are price, technical expertise, equipment capacity, work force capability, safety record, reputation and experience. Although we believe our customers consider all of these factors, price is often the primary factor in determining which service provider is awarded work, particularly during times of weak commodity prices like we have experienced from late 2014 to date. As this downturn has continued, our customer base has demonstrated a more intense focus on receiving the lowest service cost pricing possible. Additionally, projects for certain of our core service lines are often awarded on a bid basis, which tends to further increase competition based primarily on price. Over the last several quarters, our utilization and pricing levels have been negatively impacted by predatory pricing from certain large competitors, who have elected to operate at negative margins. During healthier market conditions, we believe many of our customers elect to work with us based on the safety, performance and quality of our crews, equipment and services, although even then we must be competitive in our pricing. We seek to differentiate ourselves from our major competitors by our operating philosophy, which is focused on delivering the highest quality customer service and equipment, coupled with superior execution and operating efficiency. As part of this strategy, we target high volume, high efficiency customers with service intensive, 24-hour work, which is where we believe we can differentiate our services from our competitors.

Current Market Conditions and Outlook

The course of 2016 to date has been, on many levels, one of the most difficult and challenging periods in C&J’s history. As we entered 2016, we experienced a severe slowdown in activity across our customer base as operators reacted to the further declines in oil prices and the continuing fall in rig count by delaying or canceling previously scheduled work, resulting in significantly decreased utilization levels across our services lines and operating areas. The significant, negative impact to our first quarter results resulted in the Covenant Default under our Credit Agreement, and ultimately led to the commencement of the Chapter 11 Proceeding discussed under “Recent Developments & Other Matters - Chapter 11 Proceeding and Restructuring Support Agreement” in Part I, Item 2 of this Quarterly Report.
    
The severely challenging market conditions experienced through 2016 to date began to slightly alleviate towards the latter part of the third quarter as commodity prices appeared to be stabilizing and customers began putting more drilling rigs back to work. In our Completion Services segment, we experienced increasing utilization levels as customers accelerated completion activity to take advantage of slightly higher commodity prices. In some cases, we were able to increase pricing slightly within some of our core service lines due to a lack of available service capacity in select core operating basins. In our Well Support Services segment, customers began to allocate more capital towards well maintenance and workover activities as commodity prices stabilized, which particularly enhanced the financial performance of our workover rig, P&A and other

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specialty services business lines. Despite the increased activity levels during the third quarter, the operating environment remains challenging, and we continue to evaluate alternatives to further rightsize our business lines with current market conditions.

Despite improving market conditions throughout the quarter, our third quarter results were negatively impacted by customer reaction to our July 2016 commencement of the Chapter 11 Proceeding, which resulted in numerous lost job opportunities, particularly in our hydraulic fracturing business line, as certain customers simply preferred to work with service providers with less financial uncertainty. We also experienced a similar customer reaction in the second quarter, following our May 2016 announcement of credit facility default and the need to undertake a financial restructuring. We focused on alleviating customer concerns through continuous, transparent and multi-faceted communication, and have been successful in retaining certain core work and customer relationships in spite of significant headwinds.  We have undertaken the same outreach exercise with respect to our vendors in order to preserve critical relationships.
As we moved into the fourth quarter, market conditions have continued to stabilize, and in most of our core service lines, we believe that activity levels should continue to improve as customers increase capital spending. We continue to have conversations with our customers about the potential negative impacts that the typical fourth quarter seasonality could have on our quarterly results. At this point, we are unable to quantify the magnitude of the potential fourth quarter seasonal slowdown. Despite typical fourth quarter seasonality, we are hopeful that higher activity levels combined with cost control and rightsizing measures that we have implemented will continue to result in improved financial performance in the fourth quarter and beyond. Despite the improved financial performance in the third quarter, we continue to manage against an overall lack of visibility beyond the forward month, and a customer base that is highly reactive to the volatile commodity pricing environment and intensely focused on receiving the lowest possible service cost. We will continue to focus on providing high quality oilfield services to all of our customers in the safest, most efficient manner possible, and our continued efforts in that regard have solidified our position as one of the top service providers in each of our core service lines. Additionally, we have maintained the integrity of our organization, including a solid asset base and experienced management team, which is essential to the future growth of our Company. We are cautiously optimistic that the commodity price recovery will continue to unfold as we move into 2017, which should lead to higher activity levels and allow us to enter additional oilfield equipment back into service with core customers in the first half of next year. Absent a continued recovery in commodity prices, we would expect that activity and pricing levels will remain challenged, which could continue to strain our financial and operating results. The ultimate impact of the current industry downturn on our company will depend upon various factors, many of which remain beyond our control.
We are actively monitoring the market and managing our business in line with demand for services, and we will make adjustments as necessary to effectively respond to the challenging conditions. Our top priorities remain to drive revenue by maximizing utilization, improve margins through cost controls, protect and grow market share by focusing on the quality and efficiency of our service execution and ensure we are strategically positioned to capitalize on future market improvement.
Please see “Liquidity and Capital Resources” 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.

Results of Operations
The following is a comparison of our results of operations for the three and nine months ended September 30, 2016 compared to the three and nine months ended September 30, 2015. Our results for the three and nine months ended September 30, 2016 and for the three months ended September 30, 2015 include the financial and operating results of both Legacy C&J and the C&P Business for the entire period. Results for the nine months ended September 30, 2015 include the financial and operating results of Legacy C&J for the entire period and the C&P Business for the period from the Effective Time of the Merger through September 30, 2015. Results for the period prior to March 24, 2015 reflect the financial and operating results of Legacy C&J exclusively, and do not include the financial and operating results of the C&P Business. Accordingly, comparisons of our results for the nine months ended September 30, 2016 to the comparable prior year period may not be meaningful.
Results for the Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015
The following table summarizes the change in our results of operations for the three months ended September 30, 2016 when compared to the three months ended September 30, 2015 (in thousands):
 

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Three Months Ended September 30,
 
 
2016
 
2015
 
$ Change
Completion Services:
 
 
 
 
 
 
Revenue
 
$
132,836

 
$
256,907

 
$
(124,071
)
Operating income (loss)
 
$
(36,700
)
 
$
(409,993
)
 
$
373,293

 
 
 
 
 
 
 
Well Support Services:
 
 
 
 
 
 
Revenue
 
$
88,748

 
$
150,884

 
$
(62,136
)
Operating income (loss)
 
$
(11,015
)
 
$
6,067

 
$
(17,082
)
 
 
 
 
 
 
 
Other Services:
 
 
 
 
 
 
Revenue
 
$
10,953

 
$
19,706

 
$
(8,753
)
Operating loss
 
$
(37,838
)
 
$
(89,412
)
 
$
51,574

 
 
 
 
 
 
 
Combined:
 
 
 
 
 
 
Revenue
 
$
232,537

 
$
427,497

 
$
(194,960
)
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
Direct costs
 
216,841

 
385,879

 
(169,038
)
Selling, general and administrative expenses
 
48,825

 
60,977

 
(12,152
)
Research and development
 
1,797

 
4,916

 
(3,119
)
Depreciation and amortization
 
51,321

 
74,731

 
(23,410
)
Impairment expense
 
—

 
394,191

 
(394,191
)
(Gain) loss on disposal of assets
 
(694
)
 
141

 
(835
)
Operating loss
 
(85,553
)
 
(493,338
)
 
407,785

Other income (expense):
 
 
 
 
 
 
Interest expense, net
 
(8,158
)
 
(28,396
)
 
20,238

Other income (expense), net
 
7,075

 
(2,644
)
 
9,719

Total other income (expense)
 
(1,083
)
 
(31,040
)
 
29,957

Loss before reorganization items and income taxes
 
(86,636
)
 
(524,378
)
 
437,742

 
 
 
 
 
 
 
Reorganization items
 
40,877

 
—

 
40,877

Income tax benefit
 
(21,123
)
 
(69,362
)
 
48,239

Net loss
 
$
(106,390
)
 
$
(455,016
)
 
$
348,626

Revenue
Revenue decreased $195.0 million, or 45.6%, to $232.5 million for the three months ended September 30, 2016, as compared to $427.5 million for the corresponding prior year period. The decrease in revenue was primarily due to (i) a decrease of $124.1 million in our Completion Services segment as a result of significantly lower utilization and pricing levels across our Completion Services segment caused by the extremely competitive market environment given the persistence of depressed levels of U.S. onshore drilling and completion activity (ii) a decrease of $62.1 million in our Well Support Services segment as a result of unprecedented reduced levels of customer activity during the first half of 2016 in areas that typically maintain moderate levels of well support services activity and (iii) a decrease of $8.8 million in our Other Services segment as a result of continued weak demand for our services driven by the persistently low commodity prices characterizing this severe, prolonged industry downturn.

Direct Costs
Direct costs decreased $169.0 million, or 43.8%, to $216.8 million for the three months ended September 30, 2016, compared to $385.9 million for the corresponding prior year period. The decrease in direct costs was primarily due to the corresponding decrease in revenue which was negatively impacted by overall lower utilization across our Completion Services and Well Support Services segments resulting from the extremely competitive market environment caused by the persistence of

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depressed levels of U.S. onshore drilling and completion activity and well support services activity. As utilization fell in our Completion Services segment, we strategically stacked additional equipment, closed unprofitable facilities, reduced head count and aggressively cut costs in order to further lower our operational cost structure. Similarly, in our Well Support Services segment, we exited select product lines in certain basins, closed unprofitable facilities and further reduced head count.
Selling, General and Administrative Expenses (“SG&A”) and Research and Development Expense (“R&D”)
SG&A decreased $12.2 million, or 19.9%, to $48.8 million for the three months ended September 30, 2016, as compared to $61.0 million for the corresponding prior year period. The decrease in SG&A was primarily due to $11.2 million reduction in employee related costs as a result of headcount reductions, $2.6 million reduction in share based compensation, $5.0 million decrease in acquisition-related costs and $1.7 million decrease in other general and administrative expenses as a result of cost cutting initiatives. These amounts were partially offset by $8.3 million in costs related to our restructuring activities as a result of entering into Chapter 11 proceedings.
We also incurred $1.8 million in R&D for the three months ended September 30, 2016, as compared to $4.9 million for the corresponding prior year period. The decrease in R&D was primarily due to our cost control initiatives, which included scaling back our research and technology division and initiatives and delaying certain projects. Currently, we are limiting our investments to those key technologies that are providing our businesses with a competitive advantage by enhancing our operational capabilities and reducing our overall cost structure.
Depreciation and Amortization Expense (“D&A”)
D&A decreased $23.4 million, or 31.3%, to $51.3 million for the three months ended September 30, 2016, as compared to $74.7 million for the corresponding prior year period. The decrease in D&A was primarily the result of significant impairment charges recorded during 2015 and the first half of 2016 due to the steep decline in asset utilization levels related to the continued downturn in the oil and gas industry.
Impairment Expense

Due to the continued downturn in the oil and gas industry, and the resulting sustained weakness in demand for our services, we determined that it was necessary to test goodwill for impairment and to test property, plant and equipment ("PP&E") and other intangible assets for recoverability during the third and fourth quarters of 2015 and again during the first three quarters of 2016. Recoverability testing resulted in no impairment of the PP&E or other intangible assets during the three months ended September 30, 2016 as the value of such assets was recoverable.

Impairment expense for the three months ended September 30, 2015 was $394.2 million and consisted of $380.4 million of goodwill impairment related to the Completion Services and Other Services reporting units and $13.8 million related to other intangible assets.
Interest Expense
Interest expense was $8.2 million for the three months ended September 30, 2016, which decreased $20.2 million from $28.4 million for the corresponding prior year period. The decrease is primarily due to the Company's Chapter 11 Proceeding. Interest expense incurred subsequent to our Chapter 11 filing is recognized only to the extent that it will be paid during the cases or that it is probable that it will be an allowed claim. As a result, we did not accrue interest that we believe is not probable of being treated as an allowed claim in the Chapter 11 Proceeding.
Reorganization Items    
Reorganization items of $40.9 million for the three months ended September 30, 2016 are primarily related to professional fees of $21.5 million and contract termination settlements of $19.5 million, slightly offset by $0.1 million in vendor claims adjustments in connection with our Chapter 11 proceedings.
Income Taxes
We recorded a tax benefit of $21.1 million for the three months ended September 30, 2016, at an effective rate of 16.6%, compared to a tax benefit of $69.4 million for the three months ended September 30, 2015, at an effective rate of 13.2%. The increase in the effective tax rate was primarily due to impairment charges that were not deductible for tax in the prior year.

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Results for the Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015
The following table summarizes the change in our results of operations for the nine months ended September 30, 2016 when compared to the nine months ended September 30, 2015 (in thousands):
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
$ Change
Completion Services:
 
 
 
 
 
 
Revenue
 
$
422,919

 
$
960,360

 
$
(537,441
)
Operating income (loss)
 
$
(224,459
)
 
$
(424,274
)
 
$
199,815

 
 
 
 
 
 
 
Well Support Services:
 
 
 
 
 
 
Revenue
 
$
270,150

 
$
320,102

 
$
(49,952
)
Operating income (loss)
 
$
(352,078
)
 
$
3,075

 
$
(355,153
)
 
 
 
 
 
 
 
Other Services:
 
 
 
 
 
 
Revenue
 
$
34,251

 
$
59,416

 
$
(25,165
)
Operating loss
 
$
(191,867
)
 
$
(179,691
)
 
$
(12,176
)
 
 
 
 
 
 
 
Combined:
 
 
 
 
 
 
Revenue
 
$
727,320

 
$
1,339,878

 
$
(612,558
)
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
Direct costs
 
708,377

 
1,151,522

 
(443,145
)
Selling, general and administrative expenses
 
182,205

 
188,424

 
(6,219
)
Research and development
 
5,959

 
13,311

 
(7,352
)
Depreciation and amortization
 
164,557

 
193,685

 
(29,128
)
Impairment expense
 
430,406

 
394,191

 
36,215

(Gain) loss on disposal of assets
 
4,220

 
(365
)
 
4,585

Operating loss
 
(768,404
)
 
(600,890
)
 
(167,514
)
Other income (expense):
 
 
 
 
 
 
Interest expense, net
 
(155,559
)
 
(57,448
)
 
(98,111
)
Other income (expense), net
 
12,397

 
(1,073
)
 
13,470

Total other income (expense)
 
(143,162
)
 
(58,521
)
 
(84,641
)
Loss before reorganization items and income taxes
 
(911,566
)
 
(659,411
)
 
(252,155
)
 
 
 
 
 
 
 
Reorganization items
 
40,877

 
—

 
40,877

Income tax benefit
 
(126,522
)
 
(108,611
)
 
(17,911
)
Net loss
 
$
(825,921
)
 
$
(550,800
)
 
$
(275,121
)

Revenue
Revenue decreased $612.6 million, or 45.7%, to $727.3 million for the nine months ended September 30, 2016, as compared to $1.3 billion for the corresponding prior year period. The decrease was primarily due to a decrease of $537.4 million in revenue in our Completion Services segment as a result of significantly lower utilization and pricing levels across our Completion Services segment caused by the extremely competitive market environment given the decline in, and persistence of depressed levels of, U.S. onshore drilling and completion activity, partially offset by the fact that revenue for the corresponding prior year period only included C&P Business Completion Services revenue from the Effective Time of the Merger to September 30, 2015. The decrease in revenue in our Well Support Services segment was primarily due to a decrease of $50.0 million as a result of the unprecedented reduced levels of customer activity during the first three quarters of 2016 in areas that typically maintain moderate levels of well support services activity, partially offset by the fact that revenue for the corresponding prior year period only included C&P Business Well Support Services revenue from the Effective Time of the

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Merger to September 30, 2015. The decrease in our Other Services segment was primarily due to a decrease of $25.2 million as a result of continued weak demand for our services driven by the low commodity prices characterizing this severe, prolonged industry downturn.

Direct Costs
Direct costs decreased $443.1 million, or 38.5%, to $708.4 million for the nine months ended September 30, 2016, compared to $1.2 billion for the corresponding prior year period. The decrease in direct costs was primarily due to the corresponding decrease in revenue which was negatively impacted by overall lower utilization levels across our Completion Services and Well Support Services segments resulting from the extremely competitive market environment caused by the continued decline in U.S. onshore drilling and completion activity as well as the unprecedented slowdown in well support services activity, and partially offset by the shorter period for the C&P Business from the Effective Time of the Merger to September 30, 2015, as noted above. As utilization fell in our Completion Services segment, we strategically stacked additional equipment, closed unprofitable facilities, reduced head count and aggressively cut costs in order to further lower our operational cost structure. Similarly, in our Well Support Services segment, we exited select product lines in certain basins, closed unprofitable facilities and further reduced head count.
Selling, General and Administrative Expenses (“SG&A”) and Research and Development Expense (“R&D”)
SG&A decreased $6.2 million, or 3.3%, to $182.2 million for the nine months ended September 30, 2016, as compared to $188.4 million for the corresponding prior year period. The decrease in SG&A was primarily due to a $30.1 million decrease in acquisition-related cost and a $6.9 million decrease in employee related costs as a result of headcount reductions. These amounts are partially offset by $23.7 million in costs related to our restructuring activities as a result of the debt covenant violation and the Chapter 11 proceedings, $1.9 million increase in stock based compensation and the shorter period for the C&P Business from the Effective Time of the Merger to September 30, 2015, as noted above.
We also incurred $6.0 million in R&D for the nine months ended September 30, 2016, as compared to $13.3 million for the corresponding prior year period. The decrease in R&D was primarily due to our cost control initiatives, which included scaling back our research and technology division and initiatives and delaying certain projects. Currently, we are limiting our investments to those key technologies that are providing our businesses with a competitive advantage by enhancing our operational capabilities and reducing our overall cost structure.
Depreciation and Amortization Expense (“D&A”)
D&A decreased $29.1 million, or 15.0%, to $164.6 million for the nine months ended September 30, 2016, as compared to $193.7 million for the corresponding prior year period. The decrease in D&A was primarily the result of significant impairment charges recorded during 2015 and the first half of 2016 due to the steep decline in asset utilization levels related to the continued downturn in the oil and gas industry.
Impairment Expense
    
Due to the continued downturn in the oil and gas industry, and the resulting sustained weakness in demand for our services, we determined that it was necessary to test goodwill for impairment and to test PP&E and other intangible assets for recoverability during the third and fourth quarters of 2015 and again during the first three quarters of 2016. Based on our assessment, we recorded impairment expense for the nine months ended September 30, 2016 of $430.4 million, consisting of $314.3 million of goodwill impairment related to impairment of all remaining goodwill associated with our Well Support Services segment, along with $55.0 million related to other intangible assets and $61.1 million related to PP&E within each of our Completion Services and Other Services segments.

Impairment expense for the nine months ended September 30, 2015 was $394.2 million and consisted of $380.4 million of goodwill impairment related to the Completion Services and Other Services reporting units and $13.8 million related to other intangible assets.
Reorganization Items    
Reorganization items of $40.9 million for the nine months ended September 30, 2016 are primarily related to professional fees of $21.5 million and contract termination settlements of $19.5 million, slightly offset by $0.1 million in vendor claims adjustments in connection with our Chapter 11 proceedings.

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Interest Expense
Interest expense was $155.6 million for the nine months ended September 30, 2016, which increased $98.1 million from $57.4 million for the corresponding prior year period. The increase is primarily due to $91.9 million of accelerated amortization of original issue discount and deferred financing costs, fully amortizing these amounts as of June 30, 2016 as a result of the Restructuring Support Agreement which contemplates the implementation of a restructuring of the Company through a debt-to-equity conversion and equity rights offering, and due to $10 million primarily related to higher levels of borrowings under the Revolving Credit Facility and Term Loan Facilities, partially offset by a reduction of $4.0 million of amortization of deferred financing costs.
Income Taxes
We recorded a tax benefit of $126.5 million for the nine months ended September 30, 2016, at an effective rate of 13.3%, compared to a tax benefit of $108.6 million for the nine months ended September 30, 2015, at an effective rate of 16.5%. The decrease in the effective tax rate was primarily due to valuation allowances applied against certain deferred tax assets, including net operating loss carryforwards, and impairment charges that were not deductible for tax.

Liquidity and Capital Resources
Current Financial Condition and Liquidity
Please "Recent Developments & Other Matters - Chapter 11 Proceeding and Restructuring Support Agreement” in Part I, Item 2 of this Quarterly Report for an explanation of defined terms in this "Liquidity and Capital Resources," and a detailed discussion of the Chapter 11 Proceeding.
Sustained low utilization and pricing levels due to the ongoing industry downturn have had a material, negative impact on our operational and financial performance. We incurred a net loss of $825.9 million for the nine months ended September 30, 2016, with $83.3 million of negative Adjusted EBITDA for that period. As of September 30, 2016, we had a cash balance of approximately $101.4 million, and $75.0 million of available borrowing capacity under our DIP Facility. As of September 30, 2016, we had borrowings totaling $25.0 million associated with the DIP Facility, all of which is classified as a current liability on the consolidated balance sheet.
We used $82.7 million of cash from operations during the nine months ended September 30, 2016. Please see “Financial Condition and Cash Flows” below for information about net cash provided by or used in our operating, investing and financing activities. Capital expenditures totaled $8.2 million during the third quarter of 2016, primarily relating to maintenance that extends the useful life of our existing equipment, compared to $17.8 million during the second quarter of 2016 and $18.6 million during the first quarter of 2016. In response to persistently challenging industry conditions, we significantly scaled back our 2016 capital expenditure plan and have primarily limited it to the maintenance of our active equipment. We currently expect 2016 capital expenditures to total between $60 million and $70 million, compared to $166.3 million in 2015.
In May 2016, we announced the Covenant Default under our Credit Agreement and that we had initiated a process to resolve this matter with the lenders under the Credit Agreement and to explore strategic alternatives to strengthen our balance sheet and maximize the value of the Company. As a result of our efforts, on July 20, 2016, we commenced the Chapter 11 Proceeding, which accelerated our obligations under the Credit Agreement.
As part of the Chapter 11 Proceeding, on July 29, 2016, we entered into the DIP Credit Agreement, providing for the $100 million DIP Facility that is intended to provide the Company with sufficient liquidity to fund the administration of the Chapter 11 Proceeding. On September 25, 2016, the Bankruptcy Court entered an order approving the Debtors’ entry into the
DIP Facility on a final basis. We believe that our current cash balance, along with the additional financing under the DIP Facility, will provide us with sufficient resources to support our businesses and continue our operations in ordinary course through the Chapter 11 Proceeding.
The significant risks and uncertainties related to depressed market conditions, our liquidity and our ongoing Chapter 11 Proceeding raise substantial doubt about the Company’s ability to continue as a going concern. If we cannot continue as a going concern, adjustments to the carrying values and classification of our assets and liabilities and the reported income and expenses could be required and could be material. Please see Note 3 - Debt and Capital Lease Obligations in Part I, Item 1 “Financial Statements” of this Quarterly Report for additional information.
Our ability to continue as a going concern is dependent upon, among other things, improvements in market conditions and our ability to improve profitability, our ability to meet certain conditions of the Restructuring Support Agreement and

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obtain confirmation of the Restructuring Plan or another Chapter 11 plan by the Bankruptcy Court, and our ability to successfully implement the Restructuring Plan or another Chapter 11 plan. Please see “Risk Factors” in Part II, Item 1A of this Quarterly Report for a discussion of potential risks associated with the Chapter 11 Proceeding.

Sources of Liquidity and Capital Resources
Our primary sources of liquidity have historically included cash flows from operations and borrowings under senior secured debt facilities, including our Revolver.  However, future cash flows are subject to a number of variables, and are highly dependent on the drilling, completion and production activity by our customers, which in turn is highly dependent on oil and gas prices.
Following the determination of the Covenant Violation in May 2016, our principal source of liquidity has been limited to cash on hand. As part of the Chapter 11 Proceeding, on July 29, 2016, we entered into the DIP Credit Agreement, providing the $100 million DIP Facility that is intended to provide the Company with sufficient liquidity to fund the administration of the Chapter 11 Proceeding. On September 25, 2016, the Bankruptcy Court entered an order approving the Debtors’ entry into the DIP Facility on a final basis. For additional information about the Chapter 11 Proceeding, please see "Recent Developments & Other Matters - Commencement of Chapter 11 Proceeding and Restructuring Support Agreement" in Part I, Item 2; Note 2 - Chapter 11 Proceeding and Note 3 – Debt and Capital Lease Obligations in Part I, Item 1 “Financial Statements”; and “Risk Factors” in Part II, Item 1A of this Quarterly Report.
As we move through the Chapter 11 Proceeding, our focus is on preserving liquidity by lowering our operating expenses, controlling costs, minimizing capital expenditures and maximizing collection of receivables. Our operating cash flow is likely to continue to be negatively impacted due to the current prolonged downturn in the oil and gas industry. In addition to the cash requirements necessary to fund ongoing operations, we have incurred and continue to incur significant professional fees and other costs in connection with the administration of the Chapter 11 Proceeding. We anticipate that we will continue to incur significant professional fees and costs for the pendency of the Chapter 11 Proceeding.
Our ability to maintain adequate liquidity through the Chapter 11 Proceeding and beyond depends on our ability to successfully implement the Restructuring Plan (or another Chapter 11 plan), successful operation of our business, and appropriate management of operating expenses and capital spending. Although we believe that the DIP Facility together with cash flow from operations and cash on hand will be adequate to meet the operating costs of our existing business, there are no assurances that such will be sufficient to continue to fund our operations or to allow us to continue as a going concern until the Restructuring Plan (or another Chapter 11 plan) is confirmed by the Bankruptcy Court or some other alternative restructuring transaction is approved by the Bankruptcy Court and consummated. We are required to repay all amounts outstanding under the DIP Facility on the Effective Date of emergence of Chapter 11, and we intend to use the proceeds from the $200.0 million Rights Offering to repay such amounts.
As a result of the debt-to-equity conversion feature of the Restructuring Plan, we will emerge from the Chapter 11 Proceeding substantially debt free. We are evaluating various financing options for our reorganized Company following emergence from the Chapter 11 Proceeding. We expect to enter into a senior secured revolving asset-based lending credit facility in a minimum amount of $100 million, subject to the Backstop Parties and certain other Supporting Lenders agreeing that such financing facility is in the best interest of our Company.
Our long-term liquidity requirements, the adequacy of our capital resources and our ability to continue as a going concern are difficult to predict at this time and ultimately cannot be determined until a Chapter 11 plan has been confirmed, if at all, by the Bankruptcy Court. If our future sources of liquidity are insufficient, we could face substantial liquidity constraints and be unable to continue as a going concern and will likely be required to significantly reduce, delay or eliminate capital expenditures, implement further cost reductions, seek other financing alternatives or seek the sale of some or all of our assets. If we are unable to meet our liquidity needs, we may have to take other actions to seek additional financing to the extent available or we could be forced to consider other alternatives to maximize potential recovery for the creditors, including possible sale of the Company or certain material assets pursuant to Section 363 of the Bankruptcy Code, or a liquidation under Chapter 7 of the Bankruptcy Code.
Liquidity Outlook and Future Capital Requirements
The energy services business is capital-intensive, requiring significant investment to maintain, upgrade and purchase equipment to meet our customers’ needs and industry demand. To date, our capital requirements have consisted primarily of, and we anticipate, over the long-term, will continue to be:
 

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•
growth capital expenditures, which are capital expenditures made to acquire additional equipment and other assets, increase our service lines, expand geographically or advance other strategic initiatives for the purpose of growing our business; and
•
capital expenditures related to our existing equipment, such as maintenance and other activities to extend the useful life of partially or fully depreciated assets.    

The successful execution of our long-term growth strategy depends on our ability to generate sufficient cash flows and/or raise additional capital as needed. Historically, we have been able to generate cash flows and our free cash flow and balance sheet have allowed us to be flexible with our approach to organic growth and acquisition opportunities.

Throughout 2015, we experienced a sustained slowdown in activity across our customer base as operators reacted to the rapid decline in commodity prices that began during the fourth quarter of 2014. This resulted in increased competition and pricing pressure across our service lines and operating areas. Customers rapidly began reducing their budgets and slashing drilling and completion activity. Through most of 2016, activity levels across our industry (including our own activity levels) have been severely depressed. Our financial and operating performance for the first three quarters of 2016 was materially and negatively impacted by the severe reduction in demand for our services, with reductions in customer budgets and drilling and completion activity driving severe utilization declines and pricing pressure. Late in the third quarter, we began to experience some slight improvement in market condition, due to more stable commodity pricing with some increase in rig count, which ultimately resulted in improved operational and financial performance. Despite the improving market conditions, we remain concerned about the potential negative effect of seasonally decreased activity levels that are typical in the fourth quarter as capital budgets are exhausted and preparations commence for the new calendar year budgeting process. Although we are optimistic that activity levels will continue to improve with additional commodity pricing stability, the ultimate severity and duration of this downturn remains uncertain and absent a continued recovery in commodity prices, we would expect activity and pricing levels to remain challenged, which could continue to negatively impact our financial and operating results over the near term.

As noted above, our immediate liquidity is greatly threatened as a result of the Chapter 11 Proceeding and by our reduced cash flow from operations. If we are unable to finance our operations on acceptable terms or at all, our business, financial condition and results of operations will be materially and adversely affected. For additional discussion of the known, material risks associated with the Chapter 11 Proceeding and available financing options, please see “Risk Factors” in Part II, Item 1A of this Quarterly Report.

Although our financial results during the current industry downturn have been disappointing, we believe that we have built a strong platform that will enable us to perform at the highest level when the market recovers. With respect to our strategic initiatives, we believe that the strategic investments in vertical integration and our research and technology capabilities that we have made, and our efforts to lower our cost base for key inputs and improve our operational capabilities and efficiencies, will help us manage through this down-cycle. Several of our research and technology initiatives have contributed in helping to generate monthly cost savings to our Completion Services operations and are also helping to generate revenue. Although the financial benefits are still minimal at this time, we believe that these strategic projects will deliver meaningful cost savings to us over the long term. However, given the magnitude of this current industry downturn which has resulted in reduced demand for our services, we are adjusting our business strategy as necessary to effectively respond to the market, including the delay of further investment in certain research and technology projects, and to take the necessary steps to further protect and maximize the value of our Company.

Financial Condition and Cash Flows
The net cash provided by or used in our operating, investing and financing activities is summarized below (in thousands):
 

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Nine Months Ended September 30,
 
 
2016
 
2015
Cash provided by (used in):
 
 
 
 
Operating activities
 
$
(82,744
)
 
$
102,404

Investing activities
 
(15,658
)
 
(802,051
)
Financing activities
 
176,069

 
710,226

Effect of exchange rate on cash
 
(2,156
)
 
2,534

Change in cash and cash equivalents
 
$
75,511

 
$
13,113

Cash Provided by Operating Activities

Net cash from operating activities decreased $185.1 million for the nine months ended September 30, 2016 as compared to the corresponding period in 2015. The decrease in operating cash flow was primarily due to (i) the increase in net loss during the nine months ended September 30, 2016, after excluding the effects of changes in noncash items and (ii) the decline in cash collections of accounts receivable due to higher collection levels during the second and third quarters of 2015 from accounts acquired as part of the Merger, partially offset by positive changes in operating assets and liabilities which included (i) a decrease in the use of cash to satisfy obligations related to accounts payable and accrued liabilities due to higher disbursement levels during the second and third quarters of 2015 from trade payables acquired in connection with the Merger and (ii) a decrease in the use of cash related to accounts payable and lower cash interest payments during the third quarter of 2016 both resulting from the automatic stay associated with the Bankruptcy Petitions.

Cash Used in Investing Activities

Net cash used in investing activities decreased $786.4 million for the nine months ended September 30, 2016 as compared to the corresponding period in 2015. This decrease was primarily due to the cash consideration of $693.6 million paid at the closing of the Merger for the acquisition of the C&P Business during the first quarter of 2015 as well as a decline in capital expenditure purchases as a result of the sustained downturn in the oil and gas industry, partially offset by a $43.4 million purchase price reduction for the C&P Business related to a working capital adjustment during the third quarter of 2015.

Cash Provided by Financing Activities

Net cash provided by financing activities decreased $534.2 million for the nine months ended September 30, 2016 as compared to the corresponding period in 2015. The decrease is primarily related to proceeds received from our Credit Agreement to fund the cash consideration portion of the acquisition of the C&P Business at the closing of the Merger, partially offset by the payoff of the long-term debt of Legacy C&J, both during the first quarter of 2015.

Description of our Indebtedness
Debtor-in-Possession $100 Million Term Loan Facility
Under the terms of the Restructuring Support Agreement, the DIP Lenders agreed to fund the $100 million DIP Facility. The DIP Facility is intended to provide the Debtors with sufficient liquidity to fund the administration of the Chapter 11 Proceeding. The Debtors’ are able to access funds under the DIP Facility only if authorized to do so by the Bankruptcy Court. As of September 25, 2016, the Bankruptcy Court has approved the Debtors’ entry into the DIP Facility on both an interim and final basis.
On July 29, 2016, the Company entered into the “DIP Credit Agreement, which sets forth the terms and conditions of the DIP Facility.
The borrowers under the DIP Facility are the Company and CJ Holding Co. All obligations under the DIP Facility are guaranteed by the Company’s subsidiaries that are debtors in the Bankruptcy cases. Borrowings under the DIP Credit Agreement are generally secured by superpriority priming liens on substantially all of the assets of the borrowers and guarantors.
The DIP Facility is scheduled to mature on March 31, 2017, however the maturity thereof may be accelerated upon the occurrence of various events, including our failure to satisfy any of the Milestones described above. Borrowings under the DIP Facility are non-amortizing.

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Amounts outstanding under the DIP Facility bear interest based on, at the option of the borrower, the London Interbank Offered Rate (“LIBOR”) or an alternative base rate, plus an applicable margin equal to 9.00% in the case of LIBOR loans and 8.00% in the case of base rate loans. The alternative base rate is equal to the highest of (i) the published ‘prime rate’, (ii) the Federal Funds Effective Rate (as defined in the DIP Credit Agreement) plus 0.50% and (iii) LIBOR plus 1.0%.
The DIP Facility also requires that the Company pay various fees to the DIP Lenders, including a commitment fee equal to 5.00% of the unused commitments thereunder.
The DIP Facility may be prepaid from time to time without premium or penalty, except for a 2.00% prepayment penalty payable in the event the DIP facility is refinanced or replaced with the proceeds of another financing during the pendency of the Bankruptcy cases.
The DIP Facility is required to be prepaid under particular circumstances, including (i) in the event of a sale or other disposition of property by C&J or its subsidiaries, in an amount equal to 100% of the net proceeds of such sale or disposition, subject to customary reinvestment rights and other exceptions, and (ii) in the event of an incurrence of debt not permitted under the DIP Credit Agreement, in an amount equal to 100% of the net proceeds of such debt.
We are required under the terms of the DIP Credit Agreement to deliver periodic 13-week budgets. The DIP Credit Agreement contains a covenant requiring our actual receipts and expenditures to remain within a certain variance of the amounts set forth in such budgets.
The DIP Credit Agreement also contains customary restrictive covenants (in each case, subject to exceptions) that limit, among other things, our ability to create, incur, assume or suffer to exist liens or indebtedness, sell or otherwise dispose of assets, make certain restricted payments and investments, enter into transactions with affiliates, make capital expenditures and prepay certain indebtedness. The activities of our subsidiaries that are not debtors in the Bankruptcy cases are extremely limited pursuant to the DIP Credit Agreement.
Continued access to the DIP Facility is dependent upon the Debtors’ compliance with various covenants, including certain milestones. On July 25, 2016, the Bankruptcy Court entered an interim order (the “Interim DIP Order”) approving the Debtors’ entry into the DIP Facility. Under the terms of the Interim DIP Order, the Debtors were authorized to access $25 million in funding under the DIP Facility, and on July 29, 2016, the Company accessed $25 million under the DIP Facility. As described above, the Debtors were not authorized to access the remaining $75 million provided under the DIP Facility until and unless the Bankruptcy Court entered a final order approving the Debtors’ entry into the DIP Facility on a final basis. On September 25, 2016, the Bankruptcy Court entered a final order (the “Final DIP Order”) authorizing the Debtors’ entry into the DIP Facility. In addition to approving the terms of the DIP Facility described above, the Final DIP Order contains a number of significant provisions, including:
•stipulations regarding amounts owed to and potential claims against the Lenders;
•provisions providing the DIP Lenders with superpriority administrative expense claims pursuant to section 364 of the Bankruptcy Code;
•provisions providing the DIP Lenders with replacement liens on any of the Debtors’ unencumbered assets and junior and senior liens on certain of the Debtors’ encumbered assets pursuant to section 364 of the Bankruptcy Code;
•waiver of the automatic stay of section 362 of the Bankruptcy Code and certain other rights under the Bankruptcy Code, including the protections of sections 506(c) and 552(b) of the Bankruptcy Code; and
•provisions providing for “adequate protection” in exchange for consensual use of the Lenders’ collateral, including cash collateral, which protections include replacement liens and superpriority administrative expense claims to the extent of any diminution in the value of the Lenders’ collateral, the payment of certain professionals’ fees, compliance with the Milestones, and certain reporting obligations.
Absent access to the DIP Facility, or other similar financing, there is a risk that the Debtors may not be able to fund the administration of their Chapter 11 Proceeding and ongoing operations.
Description of the Credit Agreement
In connection with the closing of the Merger, we entered into a new credit agreement, dated as of March 24, 2015 (the “Original Credit Agreement”), among C&J, CJ Lux Holdings S.à r.l. (“Luxco”), CJ Holding Co, Bank of America, N.A., as Administrative Agent (in such capacity, the “Administrative Agent”), Swing Line Lender and an L/C Issuer, and the other lenders party thereto. The Original Credit Agreement provided for senior secured credit facilities (collectively, the "Credit Facilities") in an aggregate principal amount of $1.66 billion, consisting of (a) a $600.0 million revolving credit facility ("Revolving Credit Facility" or "Revolver") and (b) a Term Loan B Facility in the aggregate principal amount of $1.06 billion, comprised of two tranches: (i) a tranche consisting of $575.0 million in original aggregate principal amount of term loans

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maturing on March 24, 2020 (the “Five-Year Term Loans”) and (ii) a tranche consisting of a $485.0 million in original aggregate principal amount of term loans maturing on March 24, 2022 (the “Seven-Year Term Loans”).
On September 29, 2015, we entered into a waiver and second amendment (the "Waiver and Second Amendment") and a third amendment (the "Third Amendment" and, together with the Waiver and Second Amendment, the "Amendments") to the Original Credit Agreement (as amended by the Amendments, the "Amended Credit Agreement" or the "Credit Agreement"). The Waiver and Second Amendment, among other things, suspended the covenants related to the quarterly Total Leverage Ratio (as defined below), a quarterly ratio of consolidated EBITDA of C&J and its subsidiaries to consolidated interest expense of C&J and its subsidiaries, and other covenants set forth in the Original Credit Agreement commencing with the fiscal quarter ended September 30, 2015 and running through the fiscal quarter ending June 30, 2017. The Waiver and Second Amendment also provided for new financial covenants that apply in lieu of the quarterly Total Leverage Ratio and Interest Coverage Ratio previously in effect, including the following:
•a quarterly minimum EBITDA covenant, commencing with the quarter ended September 30, 2015 and running through the quarter ending June 30, 2017, based on a negotiated EBITDA test (the "Minimum Cumulative Consolidated EBITDA Covenant"); and
•a quarterly limitation on capital expenditures for the quarter ended December 31, 2015, and annual limitations on capital expenditures for the four fiscal quarter periods ending December 31, 2016 through June 30, 2017.
The borrowers under the Revolving Credit Facility were C&J, Luxco and CJ Holding Co. The borrower under the Term Loan B Facility was CJ Holding Co. All obligations under the Credit Agreement were guaranteed by the Company’s wholly-owned domestic subsidiaries, other than immaterial subsidiaries.
Borrowings under the Revolving Credit Facility were scheduled to mature on March 24, 2020 (except that if any Five-Year Term Loans had not been repaid prior to September 24, 2019, the Revolving Credit Facility was scheduled to mature on September 24, 2019).
Borrowings under the Revolving Credit Facility were non-amortizing. The Term Loan B Facility required the borrower thereunder to make quarterly amortization payments in an amount equal to 1.0% per annum, with the remaining balance payable on the applicable maturity date.
Amounts outstanding under the Revolving Credit Facility bore interest based on, at the option of the borrower, the LIBOR or an alternative base rate, plus an applicable margin based on the ratio of consolidated total indebtedness of C&J and its subsidiaries to consolidated EBITDA of C&J and its subsidiaries for the most recent four fiscal quarter period for which financial statements are available (the “Total Leverage Ratio”). The Revolving Credit Facility also required that the borrowers pay a commitment fee equal to a percentage of unused commitments which varied based on the Total Leverage Ratio.
Five-Year Term Loans outstanding under the Term Loan B Facility bore interest based on, at the option of the borrower, LIBOR (which, in the case of the Term Loan B Facility, was deemed to be no less than 1.0% per annum), plus a margin of 5.5%, or an alternative base rate, plus a margin of 4.5%. Seven-Year Term Loans outstanding under the Term Loan B Facility bore interest based on, at the option of the borrower, LIBOR (which, in the case of the Term Loan B Facility, will be deemed to be no less than 1.0% per annum), plus a margin of 6.25%, or an alternative base rate, plus a margin of 5.25%. The Term Loan B Facility also contained ‘most favored nation’ pricing protection requiring that if the effective yield (giving effect to, among other things, consent fees paid to the lenders) of the Five-Year Term Loans increased by more than 50 basis points, the effective yield of the Seven-Year Term Loans must increase by the same amount less 50 basis points.
The alternative base rate was equal to the highest of (i) the Administrative Agent’s prime rate, (ii) the Federal Funds Effective Rate plus 0.50% and (iii) LIBOR plus 1.0%.
Subject to certain conditions and limitations, the Credit Agreement permitted the borrowers to increase the aggregate commitments under the Revolving Credit Facility in a total principal amount of up to $100.0 million.
The Revolving Credit Facility was permitted to be prepaid from time to time without premium or penalty. Five-Year Term Loans were subject to a prepayment premium of 4% for any voluntary prepayments made on or prior to March 24, 2016 and no prepayment premium thereafter. Seven-Year Term Loans were subject to a prepayment premium of 5% for any voluntary prepayments made on or prior to March 24, 2017 and no prepayment premium thereafter.
Subject to certain conditions and exceptions, the Term Loan B Facility was required to be prepaid under particular circumstances, including (i) in the event that C&J and its subsidiaries generate Excess Cash Flow (as defined in the Credit Agreement) in any fiscal year, in an amount equal to 50% of the Excess Cash Flow for such fiscal year if the Total Leverage Ratio as of the end of such fiscal year is 3.25:1.00 or greater, (ii) in the event of a sale or other disposition of property by C&J or its subsidiaries, in an amount equal to 100% of the net proceeds of such sale or disposition, subject to customary

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reinvestment rights and other exceptions, and (iii) in the event of an incurrence of debt not permitted under the Credit Agreement, in an amount equal to 100% of the net proceeds of such debt.
The Credit Agreement contained customary restrictive covenants (in each case, subject to exceptions) that limited, among other things, our ability to create, incur, assume or suffer to exist liens or indebtedness, sell or otherwise dispose of our assets, make certain restricted payments and investments, enter into transactions with affiliates, make capital expenditures and prepay certain indebtedness.
During the first half of 2016, utilization and commodity price levels continued to fall towards unprecedented levels which negatively impacted our results of operations and caused us to fall out of compliance with the Minimum Cumulative Consolidated EBITDA Covenant measured as of March 31, 2016, which is considered an event of default under the Amended Credit Agreement. On May 10, 2016, we obtained a temporary limited waiver agreement from certain of the lenders in respect of this covenant violation from March 31, 2016 through May 31, 2016, wherein such lenders have agreed to not consider the covenant violation an event of default through May 31, 2016.
On May 31, 2016, the Company obtained a forbearance agreement (the “Forbearance Agreement”) from certain of the lenders pursuant to which, among other things, such lenders agreed not to pursue default remedies against the Company with respect to its breach of the Minimum Cumulative Consolidated EBITDA Covenant or certain specified payment defaults. On June 30, 2016, this forbearance was extended through July 17, 2016 pursuant to a second forbearance agreement (the “Second Forbearance Agreement”), and prior to such termination this forbearance period was once again extended through July 20, 2016. At the end of this forbearance period the Company filed the Bankruptcy Court petitions described above as contemplated by the terms of the Second Forbearance Agreement.

Other Matters
Contractual Obligations
Other than as disclosed in Note 3 - Debt and Capital Lease Obligations in Part I, Item 1 “Financial Statements” of this Quarterly Report, our contractual obligations at September 30, 2016 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2015.  Specifically, the Company’s Restructuring Plan contemplates that approximately $1.3 billion of debt outstanding under the Company’s Credit Agreement would be converted into equity, and as of September 30, 2016, such debt, as well as the contractual interest payment obligations that would have been required under the Credit Agreement, is classified as liabilities subject to compromise.
Notwithstanding the above, under the Bankruptcy Code, we may assume or reject certain executory contracts and unexpired leases, including leases of real property and equipment, subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the assumption of a contract will require that we satisfy any pre-petition obligations under the contract, which may include payment of pre-petition liabilities in whole or in part.  The assumption of a contract may also result in amendments to its terms. Rejection of a contract is typically treated as a breach occurring as of the moment immediately preceding the Petition Date. The disclosures in this Quarterly Report do not reflect all potential changes to our contractual obligations and other commitments that may result from the Chapter 11 Proceeding and activities contemplated by the Restructuring Plan.
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 September 30, 2016.
Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers ("ASU 2015-14"), which deferred the effective date of ASU 2014-09 for all entities by one year and is effective for our fiscal year beginning January 1, 2018.  ASU 2015-14 permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the impact, if any, of adopting this new accounting standard on our results of operations and financial position.


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In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory ("ASU 2015-11"), which changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. ASU 2015-11 is part of the FASB’s simplification initiative and applies to entities that measure inventory using a method other than last-in, first-out ("LIFO") or the retail inventory method. The guidance will require prospective application at the beginning of our first quarter of fiscal 2018, but permits adoption in an earlier period.  We do not expect this ASU to have a material impact on our consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes ("ASU 2015-17”). ASU 2015-17 amends existing guidance on income taxes to require the classification of all deferred tax assets and liabilities as non-current on the balance sheet. We are required to adopt this ASU for years beginning after December 15, 2016, with early adoption permitted, and the guidance may be applied either prospectively or retrospectively. We do not expect this ASU to have a material impact on our consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). ASU 2016-01 improves upon U.S. GAAP by, among other things, (1) requiring equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value, with changes in fair value recognized in net income; (2) simplifying the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) eliminating the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and (4) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. We are required to adopt this ASU for years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact, if any, of adopting this new accounting standard on our results of operations and financial position.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU No. 2016-02 seeks to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. Unlike current U.S. GAAP, which requires only capital leases to be recognized on the balance sheet, ASU No. 2016-02 will require both operating and finance leases to be recognized on the balance sheet. Additionally, the new guidance will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. The amendments in ASU No. 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early application is permitted. We are currently evaluating the impact of adopting this new accounting standard on our results of operations and financial position.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), to simplify certain provisions in stock compensation accounting, including the simplification of accounting for a stock payment's tax consequences. The ASU amends the guidance for classifying awards as either equity or liabilities, allows companies to estimate the number of stock awards they expect to vest, and revises the tax withholding requirements for stock awards. The amendments in ASU No. 2016-09 are effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and early application is permitted. We are currently evaluating the impact of adopting this new accounting standard on our results of operations and financial position.

In May 2016, the FASB issued ASU No. 2016-12, Revenues from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients ("ASU 2016-12"), to clarify in the FASB's revenue recognition standard the assessment of the likelihood that revenue will be collected from a contract, the guidance for presenting sales taxes and similar taxes, and the timing for measuring customer payments that are not in cash. We do not expect this ASU to have a material impact on our consolidated financial statements.

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 results of operations and financial position.


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In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash receipts and Cash Payments: A Consensus of the FASB Emerging Issues Task Force ("ASU 2016-15"), which makes target changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for interim and annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, and early application is permitted. We are currently evaluating the impact of adopting this new accounting standard on our results of operations and financial position.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16"), which requires an entity to recognize the income tax consequences of an intra-entity asset transfer, other than an intra-entity asset transfer of inventory, when the transfer occurs. The ASU is effective for the interim and annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, and early application is permitted. We are currently evaluating the impact of adopting this new accounting standard on our results of operations and financial position.


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2016, 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 our Annual Report on Form 10-K for the year ended December 31, 2015.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures 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.
As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) 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 as of September 30, 2016.
Changes in Internal Controls over Financial Reporting.
No 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) occurred during the quarterly period ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to various legal proceedings and claims incidental to or arising in the ordinary course of our business. Our management does not expect the outcome in any of these known legal proceedings, individually or collectively, to have a material adverse effect on our consolidated financial condition or results of operations.

Shareholder Litigation relating to the Merger

In July 2014, following the announcement that Legacy C&J, Nabors, and New C&J had entered into the Merger Agreement, a putative class action lawsuit was filed by a purported shareholder of Legacy C&J challenging the Merger. The lawsuit is styled City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, et al. (“Plaintiff”) v. Comstock, et al.; C.A. No. 9980-CB, in the Court of Chancery of the State of Delaware, filed on July 30, 2014 (the “Shareholder Litigation”). Plaintiff in the Shareholder Litigation generally alleges that the board of directors for Legacy C&J breached fiduciary duties of loyalty, due care, good faith, candor and independence by allegedly approving the Merger Agreement at an unfair price and through an unfair process. Plaintiff alleges that the Legacy C&J board directors, or certain of them (i) failed to fully inform themselves of the market value of Legacy C&J, maximize its value and obtain the best price reasonably available for Legacy C&J, (ii) acted in bad faith and for improper motives, (iii) erected barriers to discourage other strategic alternatives and (iv) put their personal interests ahead of the interests of Legacy C&J shareholders. The Shareholder Litigation further alleges that Legacy C&J, Nabors and New C&J aided and abetted the alleged breaches of fiduciary duties by the Legacy C&J board of directors.

On October 29, 2015, Plaintiff filed an amended complaint naming additional defendants and generally alleging, in addition to the allegations described above, that (i) the special committee of the Legacy C&J board of directors and its advisors improperly conducted the court-ordered solicitation that the Delaware Supreme Court vacated and (ii) the proxy statement filed in connection with the Merger contains alleged misrepresentations and omits allegedly material information concerning the Merger and court-ordered solicitation process. The Shareholder Litigation asserts, in addition to the claims described above, claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty against the special committee of the Legacy C&J board of directors, its financial advisor Morgan Stanley, and certain employees of Legacy C&J. Following the death of Josh Comstock, our founder and former Chief Executive Officer and Chairman of the Board of Directors, Plaintiff substituted the executor of Mr. Comstock’s estate in place of Mr. Comstock as a defendant in the Shareholder Litigation.

The defendants in the Shareholder Litigation filed motions to dismiss the amended complaint. On August 24, 2016, the Court of Chancery of the State of Delaware granted defendants’ motions and dismissed the Shareholder Litigation in its entirety with prejudice. On September 22, 2016, Plaintiffs filed a Notice of Appeal to the Delaware Supreme Court, appealing the dismissal of the Shareholder Litigation. Plaintiffs’ appeal is pending.

We cannot predict the outcome of this or any other lawsuit that might be filed, nor can we predict the amount of time and expense that will be required to resolve the Shareholder Litigation. We believe the Shareholder Litigation is without merit and we intend to defend against it vigorously.

U.S. Department of Justice Criminal Investigation into Pre-Merger Incident

There is a pending criminal investigation led by the United States Attorney’s Office for the District of North Dakota in connection with a fatality that occurred at a C&P Business facility in Williston, North Dakota on October 3, 2014 - notably prior to the Company's acquisition of the C&P Business in the Merger.  We are cooperating fully with the investigation, and will continue to do so.   At this time, the Company cannot predict the outcome of the investigation.



ITEM 1A. RISK FACTORS
In addition to the information set forth in this Quarterly Report, including under the section titled “Cautionary Note Regarding Forward-Looking Statements,” in Part I, Financial Information, you should carefully consider the information set forth in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2016, and our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2016, each of 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. Additional risks and

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uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes share repurchase activity for the nine months ended September 30, 2016:
 
Period
 
Total Number
of Shares
Purchased (a)
 
Average
Price
Paid Per
Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Program
 
Maximum Number of
Shares that may yet
be Purchased Under
Such Program
January 1 - January 31
 
6,800

 
$
4.76

 
—

 
—

February 1 - February 28
 
120,618

 
$
2.19

 
—

 
—

March 1 - March 31
 
63,582

 
$
1.77

 
—

 
—

April 1 - April 30
 
8,065

 
$
1.92

 
—

 
—

May 1 - May 31
 
970

 
$
0.84

 
—

 
—

June 1 - June 30
 
105,593

 
$
0.55

 
—

 
—

July 1 - July 31
 
4,429

 
$
0.56

 
—

 
—

August 1 - August 31
 
—

 
$
—

 
—

 
—

September 1 - September 30
 
—

 
—

 
—

 
—

 
(a)
Represents shares that were withheld by the Company 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Please see "Recent Developments & Other Matters - Commencement of Chapter 11 Proceeding and Restructuring Support Agreement" in Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operation"; Note 2 - Chapter 11 Proceeding and Note 3 – Debt and Capital Lease Obligations in Part I, Item 1 “Financial Statements”; and “Risk Factors” in Part II, Item 1A of this Quarterly Report, which information is incorporated in this Part II, Item 3 by reference.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

ITEM 5. OTHER INFORMATION
None.

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ITEM 6. EXHIBITS
The exhibits required to be filed or furnished by Item 601 of Regulation S-K are listed below.

2.1
 
Agreement and Plan of Merger, dated as of June 25, 2014, by and among Nabors Industries Ltd., Nabors Red Lion Limited and C&J Energy Services, Inc. (incorporated herein by reference to Exhibit 2.1 to C&J Energy Services, Inc.’s Current Report on Form 8-K, filed on July 1, 2014 (File No. 001-35255)).
3.1
 
Memorandum of Association of Nabors Red Lion Limited (incorporated herein by reference to Exhibit 3.1 to Nabors Red Lion Limited’s Registration Statement on Form S-4, dated September 29, 2014 (Registration No. 333-199004)).
3.2
 
Amended and Restated Bye-laws of C&J Energy Services Ltd., dated March 24, 2015. (incorporated herein by reference to Exhibit 3.1 to C&J Energy Services Ltd.’s Current Report on Form 8-K12G3, filed on March 25, 2015 (File No. 000-55404)).
10.1
 
Restructuring Support and Lock-Up Agreement, dated as of July 8, 2016, by and among C&J Energy Services Ltd. and its direct and indirect subsidiaries that are parties to the Credit Agreement and certain Lenders party thereto. (incorporated herein by reference to Exhibit 10.1 to C&J Energy Services, Ltd.’s Current Report on Form 8-K, filed on July 11, 2016 (File No. 000-55404)).
10.2
 
First Amendment to Restructuring Support and Lock-Up Agreement, dated as of July 14, 2016, by and among C&J Energy Services Ltd. and its direct and indirect subsidiaries that are parties to the Credit Agreement and certain Lenders party thereto. (incorporated herein by reference to Exhibit 10.1 to C&J Energy Services, Ltd.’s Current Report on Form 8-K, filed on July 18, 2016 (File No. 000-55404)).
10.3
 
Superpriority Secured Debtor-in-Possession Credit Agreement, dated as of July 29, 2016, by and among the Company, the other Debtors party thereto, the lenders party thereto and Cortland Capital Market Services, LLC, as administrative agent (incorporated herein by reference to Exhibit 10.1 to C&J Energy Services, Ltd.’s Current Report on Form 8-K, filed on August 3, 2016 (File No. 000-55404)).
+ 10.4
 
Employment Agreement by and between C&J Energy Services Ltd. and Patrick Bixenman (incorporated herein by reference to Exhibit 10.1 to C&J Energy Services, Ltd.’s Current Report on Form 8-K, filed on August 22, 2016 (File No. 000-55404)).
+ 10.5
 
Employment Agreement by and between C&J Energy Services Ltd. and Everett Michael Hobbs (incorporated herein by reference to Exhibit 10.2 to C&J Energy Services, Ltd.’s Current Report on Form 8-K, filed on August 22, 2016 (File No. 000-55404)).
+ 10.6
 
Employment Agreement by and between C&J Energy Services Ltd. and Nicholas Petronio(incorporated herein by reference to Exhibit 10.3 to C&J Energy Services, Ltd.’s Current Report on Form 8-K, filed on August 22, 2016 (File No. 000-55404)).
+10.7
 
Employment Agreement by and between C&J Energy Services Ltd. and Timothy Wallace (incorporated herein by reference to Exhibit 10.1 to C&J Energy Services, Ltd.’s Current Report on Form 8-K, filed on October 11, 2016 (File No. 000-55404)).
* 31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
* 31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
** 32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
** 32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
* 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

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*
Filed herewith
**
Furnished herewith in accordance with Item 601(b)(32) of Regulation S-K.
+
Management contract or any compensatory plan, contract or arrangement.

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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 Ltd.
 
 
 
 
 
 
 
 
Date:
November 7, 2016
By:
 
/s/ Donald J. Gawick
 
 
 
 
 
 
 
 
Donald J. Gawick
 
 
 
 
 
 
Chief Executive Officer, President and Director
 
 
 
 
 
 
(Principal Executive Officer)
 
 
 
 
 
 
 
 
 
 
By:
 
/s/ Mark C. Cashiola
 
 
 
 
 
 
 
 
Mark C. Cashiola
 
 
 
 
 
 
Chief Financial Officer
 
 
 
 
 
 
(Principal Financial Officer)

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EXHIBIT INDEX
 
2.1
 
Agreement and Plan of Merger, dated as of June 25, 2014, by and among Nabors Industries Ltd., Nabors Red Lion Limited and C&J Energy Services, Inc. (incorporated herein by reference to Exhibit 2.1 to C&J Energy Services, Inc.’s Current Report on Form 8-K, filed on July 1, 2014 (File No. 001-35255)).
3.1
 
Memorandum of Association of Nabors Red Lion Limited (incorporated herein by reference to Exhibit 3.1 to Nabors Red Lion Limited’s Registration Statement on Form S-4, dated September 29, 2014 (Registration No. 333-199004)).
3.2
 
Amended and Restated Bye-laws of C&J Energy Services Ltd., dated March 24, 2015. (incorporated herein by reference to Exhibit 3.1 to C&J Energy Services Ltd.’s Current Report on Form 8-K12G3, filed on March 25, 2015 (File No. 000-55404)).
10.1
 
Restructuring Support and Lock-Up Agreement, dated as of July 8, 2016, by and among C&J Energy Services Ltd. and its direct and indirect subsidiaries that are parties to the Credit Agreement and certain Lenders party thereto. (incorporated herein by reference to Exhibit 10.1 to C&J Energy Services, Ltd.’s Current Report on Form 8-K, filed on July 11, 2016 (File No. 000-55404)).
10.2
 
First Amendment to Restructuring Support and Lock-Up Agreement, dated as of July 14, 2016, by and among C&J Energy Services Ltd. and its direct and indirect subsidiaries that are parties to the Credit Agreement and certain Lenders party thereto. (incorporated herein by reference to Exhibit 10.1 to C&J Energy Services, Ltd.’s Current Report on Form 8-K, filed on July 18, 2016 (File No. 000-55404)).
10.3
 
Superpriority Secured Debtor-in-Possession Credit Agreement, dated as of July 29, 2016, by and among the Company, the other Debtors party thereto, the lenders party thereto and Cortland Capital Market Services, LLC, as administrative agent (incorporated herein by reference to Exhibit 10.1 to C&J Energy Services, Ltd.’s Current Report on Form 8-K, filed on August 3, 2016 (File No. 000-55404)).

+ 10.4
 
Employment Agreement by and between C&J Energy Services Ltd. and Patrick Bixenman (incorporated herein by reference to Exhibit 10.1 to C&J Energy Services, Ltd.’s Current Report on Form 8-K, filed on August 22, 2016 (File No. 000-55404)).
+ 10.5
 
Employment Agreement by and between C&J Energy Services Ltd. and Everett Michael Hobbs (incorporated herein by reference to Exhibit 10.2 to C&J Energy Services, Ltd.’s Current Report on Form 8-K, filed on August 22, 2016 (File No. 000-55404)).
+ 10.6
 
Employment Agreement by and between C&J Energy Services Ltd. and Nicholas Petronio(incorporated herein by reference to Exhibit 10.3 to C&J Energy Services, Ltd.’s Current Report on Form 8-K, filed on August 22, 2016 (File No. 000-55404)).
+ 10.7
 
Employment Agreement by and between C&J Energy Services Ltd. and Timothy Wallace (incorporated herein by reference to Exhibit 10.1 to C&J Energy Services, Ltd.’s Current Report on Form 8-K, filed on October 11, 2016 (File No. 000-55404)).

-78-

 
 
* 31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
* 31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
** 32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
** 32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
* 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.
+
Management contract or any compensatory plan, contract or arrangement.

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C&J Energy Services, Inc. Reports