UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

(MARK ONE)


☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended ~~September 30, 2018~~March 31, 2019

	or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


	Commission File Number: 001‑38390

Cactus, Inc.

(Exact name of registrant as specified in its charter)

Delaware	35‑2586106
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

920 Memorial City Way, Suite 300 Houston, Texas (Address of principal executive offices)	77024 (Zip Code)

(713) 626‑8800

(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 ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

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

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☑

Smaller reporting company ☐

Emerging growth company ☑

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

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

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, par value $0.01	WHD	New York Stock Exchange

As of ~~November 1, 2018,~~May 7, 2019, the registrant had ~~37,646,562~~46,780,909 shares of Class A common stock, $0.01 par value per share, and ~~37,243,210~~28,329,012 shares of Class B common stock, $0.01 par value per share, outstanding.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10‑Q (the “Quarterly Report”) contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward‑looking statements, although not all forward‑looking statements contain such identifying words. These forward‑looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. These forward‑looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events.

Forward‑looking statements may include statements about:

demand for our products and services, which is affected by, among other things, changes in the price of, and demand for, crude oil and natural gas in domestic and international markets;

the level of growth in number of rigs, pad sizes, well spacings and associated well count and lack of takeaway capacity in areas such as the Permian Basin;

the level of fracturing ~~activity and the availability of fracturing equipment and pressure pumping services;~~activity;

the size and timing of orders;

availability of raw materials;

transportation differentials associated with reduced capacity in and out of the storage hub in Cushing, Oklahoma;

expectations regarding raw materials, overhead and operating costs and margins;

availability of skilled and qualified workers;

potential liabilities such as warranty and product liability claims arising out of the installation, use or misuse of our products;

the possibility of cancellation of orders;

our business strategy;

our financial strategy, operating cash flows, liquidity and capital required for our business;

our future revenue, income and operating performance;

the termination of relationships with major customers or suppliers;

laws and regulations, including environmental regulations, that may increase our costs, limit the demand for our products and services or restrict our operations;

disruptions in the political, regulatory, economic and social conditions domestically or internationally;

increased import tariffs assessed on products from China and imported raw materials used in the manufacture of our goods in the United States;

the significance of future ~~TRA~~ liabilities ~~that arise from redemption~~under the tax receivable agreement we entered into with certain current or past direct and indirect owners of ~~CW Units;~~

~~a failure of~~Cactus LLC in connection with our ~~information technology infrastructure or any significant breach of security;~~initial public offering;

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a failure of our information technology infrastructure or any significant breach of security;

potential uninsured claims and litigation against us;

competition within the oilfield services industry;

our dependence on the continuing services of certain of our key managers and employees; ~~and~~

plans, objectives, expectations and intentions contained in this Quarterly Report that are not ~~historical.~~historical; and

our ability to successfully remediate any material weakness in our internal control over financial reporting and disclosure controls and procedures.

Although forward-looking statements reflect our good faith beliefs at the time they are made, forward-looking statements involve known and unknown risks, uncertainties and other factors, including the factors described under Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, this Quarterly Report and in our other filings with the SEC, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements.

Should one or more of the risks or uncertainties described in this Quarterly Report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward‑looking statements.

All forward‑looking statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward‑looking statements that we or persons acting on our behalf may issue.

Except as otherwise required by applicable law, we disclaim any duty to update any forward‑looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Quarterly Report.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

CACTUS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)


	September 30,		December 31,		March 31,		December 31,
	2018		2017		2019		2018
	(in thousands, except per share data)				(in thousands, except per share data)
Assets
Current assets
Cash and cash equivalents	$	41,981	$	7,574	$	88,116	$	70,841
Accounts receivable, net		105,941		84,173
Accounts receivable, net of allowance of $578 and $576						107,873		92,269
Inventories		85,321		64,450		108,182		99,837
Prepaid expenses and other current assets		9,336		7,732		11,028		11,558
Total current assets		242,579		163,929		315,199		274,505
Property and equipment, net		135,391		94,654		148,856		142,054
Operating lease right-of-use assets, net						25,110		—
Goodwill		7,824		7,824		7,824		7,824
Deferred tax asset, net		179,265		—		244,359		159,053
Other noncurrent assets		613		49		1,285		1,308
Total assets	$	565,672	$	266,456	$	742,633	$	584,744
Liabilities and Equity
Current liabilities
Accounts payable	$	44,261	$	35,080	$	44,847	$	42,047
Accrued expenses and other current liabilities		17,442		10,559		15,932		15,650
Capital lease obligations, current portion		7,194		4,667
Current maturities of long-term debt		—		2,568
Current portion of liability related to tax receivable agreement						9,574		9,574
Finance lease obligations, current portion						6,956		7,353
Operating lease liabilities, current portion						6,772		—
Total current liabilities		68,897		52,874		84,081		74,624
Capital lease obligations, net of current portion		9,021		7,946
Deferred tax liability, net		1,094		416		1,244		1,036
Liability related to tax receivable agreement		161,797		—
Long-term debt, net		—		241,437
Liability related to tax receivable agreement, net of current portion						214,968		138,015
Finance lease obligations, net of current portion						7,225		8,741
Operating lease liabilities, net of current portion						18,754		—
Total liabilities		240,809		302,673		326,272		222,416
Commitments and contingencies
Stockholders' / Members' equity (deficit)
Members' equity (deficit)		—		(36,299)
Preferred stock, $0.01 par value, 10,000 shares authorized, none issued and outstanding as of September 30, 2018		—		—
Class A common stock, $0.01 par value, 300,000 shares authorized, 37,647 shares issued and outstanding as of September 30, 2018		377		—
Class B common stock, $0.01 par value, 215,000 shares authorized, 37,243 shares issued and outstanding as of September 30, 2018		—		—
Stockholders' equity
Preferred stock, $0.01 par value, 10,000 shares authorized, none issued and outstanding						—		—
Class A common stock, $0.01 par value, 300,000 shares authorized, 46,391 and 37,654 shares issued and outstanding						464		377
Class B common stock, $0.01 par value, 215,000 shares authorized, 28,718 and 37,236 shares issued and outstanding						—		—
Additional paid-in capital		127,604		—		189,902		126,418
Retained earnings		34,759		—		78,490		51,683
Accumulated other comprehensive income (loss)		(788)		82
Total stockholders' equity attributable to Cactus Inc. and members' equity (deficit)		161,952		(36,217)
Accumulated other comprehensive loss						(259)		(820)
Total stockholders' equity attributable to Cactus Inc.						268,597		177,658
Non-controlling interest		162,911		—		147,764		184,670
Total stockholders' and members' equity (deficit)		324,863		(36,217)
Total stockholders' equity						416,361		362,328
Total liabilities and equity	$	565,672	$	266,456	$	742,633	$	584,744

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

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CACTUS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2018		2017		2018		2017		2019		2018
	(in thousands, except per share data)								(in thousands, except per share data)
Revenues
Product revenue	$	79,388	$	53,680	$	211,595	$	131,963	$	86,640	$	58,926
Rental revenue		38,135		21,199		102,224		52,979		38,497		29,145
Field service and other revenue		33,135		21,148		90,492		51,465		33,738		27,039
Total revenues		150,658		96,027		404,311		236,407		158,875		115,110

Costs and expenses
Cost of product revenue		46,816		33,873		128,897		86,564		53,018		37,066
Cost of rental revenue		15,349		10,686		41,477		28,173		17,791		12,176
Cost of field service and other revenue		25,309		16,313		70,084		41,011		26,906		21,537
Selling, general and administrative expenses		11,051		7,096		30,016		20,533		12,668		9,114
Total costs and expenses		98,525		67,968		270,474		176,281		110,383		79,893
Income from operations		52,133		28,059		133,837		60,126		48,492		35,217

Interest expense, net		(270)		(5,279)		(3,370)		(15,451)
Interest income (expense), net										23		(2,852)
Other income (expense), net		—		—		(4,305)		—		(1,042)		(4,305)
Income before income taxes		51,863		22,780		126,162		44,675		47,473		28,060
Income tax expense		8,215		479		14,564		942
Income tax expense (benefit)										(973)		1,652
Net income	$	43,648	$	22,301	$	111,598	$	43,733	$	48,446	$	26,408
Less: pre-IPO net income attributable to Cactus LLC		—		22,301		13,648		43,733		—		13,648
Less: net income attributable to non-controlling interest		24,976		—		63,191		—		21,639		9,007
Net income attributable to Cactus Inc.	$	18,672	$	—	$	34,759	$	—	$	26,807	$	3,753

Earnings per Class A Share - basic	$	0.52	$	—	$	1.15	$	—
Earnings per Class A Share - diluted	$	0.52	$	—	$	1.14	$	—
Earnings per Class A share - basic									$	0.69	$	0.14
Earnings per Class A share - diluted									$	0.59	$	0.14

Weighted average Class A Shares outstanding - basic		35,821		—		30,182		—
Weighted average Class A Shares outstanding - diluted		36,229		—		30,522		—
Weighted average Class A shares outstanding - basic										38,719		26,450
Weighted average Class A shares outstanding - diluted										75,246		26,648

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

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CACTUS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2018		2017		2018		2017		2019		2018
	(in thousands)								(in thousands)
Net income	$	43,648	$	22,301	$	111,598	$	43,733	$	48,446	$	26,408
Foreign currency translation		(519)		173		(870)		456		270		239
Comprehensive income	$	43,129	$	22,474	$	110,728	$	44,189	$	48,716	$	26,647
Less: pre-IPO comprehensive income attributable to Cactus LLC		—		22,474		13,928		44,189		—		13,928
Less: comprehensive income attributable to non-controlling interest		24,679		—		62,453		—		21,786		8,981
Comprehensive income attributable to Cactus Inc.	$	18,450	$	—	$	34,347	$	—	$	26,930	$	3,738

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

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CACTUS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)



													Accumulated																		Accumulated
	Members'		Class A			Class B			Additional				Other		Non-		Total		Members'		Class A			Class B			Additional				Other		Non-		Total
	Equity		Common Stock			Common Stock			Paid-In		Retained		Comprehensive		controlling		Equity		Equity		Common Stock			Common Stock			Paid-In		Retained		Comprehensive		controlling		Equity
(in thousands)	(Deficit)		Shares	Amount		Shares	Amount		Capital		Earnings		Income (Loss)		Interest		(Deficit)		(Deficit)		Shares	Amount		Shares	Amount		Capital		Earnings		Income (Loss)		Interest		(Deficit)
Balance at December 31, 2018																			$	—	37,654	$	377	37,236	$	—	$	126,418	$	51,683	$	(820)	$	184,670	$	362,328
Correction to equity reclassification related to prior equity offering																				—	—		—	—		—		14,035		—		488		(14,523)		—
Member distributions																				—	—		—	—		—		—		—		—		(235)		(235)
Effect of CW Unit redemptions (Note 1)																				—	8,518		85	(8,518)		—		43,899		—		(50)		(43,934)		—
Adjustment to deferred tax asset from CW Unit redemptions																				—	—		—	—		—		(8,232)		—		—		—		(8,232)
Additional paid-in capital related to tax receivable agreement																				—	—		—	—		—		13,580		—		—		—		13,580
Equity award vestings																				—	219		2	—		—		(1,474)		—		—		—		(1,472)
Other comprehensive income																				—	—		—	—		—		—		—		123		147		270
Stock-based compensation																				—	—		—	—		—		1,676		—		—		—		1,676
Net income																				—	—		—	—		—		—		26,807		—		21,639		48,446
Balance at March 31, 2019																			$	—	46,391	$	464	28,718	$	—	$	189,902	$	78,490	$	(259)	$	147,764	$	416,361

Balance at December 31, 2017	$	(36,299)	—	$	—	—	$	—	$	—	$	—	$	82	$	—	$	(36,217)	$	(36,299)	—	$	—	—	$	—	$	—	$	—	$	82	$	—	$	(36,217)
Member distributions prior to IPO		(26,000)	—		—	—		—		—		—		—		—		(26,000)		(26,000)	—		—	—		—		—		—		—		—		(26,000)
Net income prior to IPO and Reorganization		13,648	—		—	—		—		—		—		—		—		13,648		13,648	—		—	—		—		—		—		—		—		13,648
Effect of IPO and Reorganization (Note 1)		48,651	26,450		265	48,440		—		71,196		—		—		130,861		250,973
Effect of IPO and Reorganization																				48,651	26,450		265	48,440		—		71,195		—		—		130,861		250,972
Member distributions after IPO		—	—		—	—		—		—		—		—		(5,848)		(5,848)		—	—		—	—		—		—		—		—		(41)		(41)
Effect of Follow-on Offering (Note 1)		—	11,197		112	(11,197)		—		24,472		—		—		(25,293)		(709)
Additional paid-in capital related to tax receivable agreement		—	—		—	—		—		28,552		—		—		—		28,552		—	—		—	—		—		11,116		—		—		—		11,116
Other comprehensive (loss)		—	—		—	—		—		—		—		(870)		—		(870)
Other comprehensive income																				—	—		—	—		—		—		—		239		—		239
Stock-based compensation		—	—		—	—		—		3,384		—		—		—		3,384		—	—		—	—		—		834		—		—		—		834
Net income after IPO and Reorganization		—	—		—	—		—		—		34,759		—		63,191		97,950		—	—		—	—		—		—		3,753		—		9,007		12,760
Balance at September 30, 2018	$	—	37,647	$	377	37,243	$	—	$	127,604	$	34,759	$	(788)	$	162,911	$	324,863
Balance at March 31, 2018																			$	—	26,450	$	265	48,440	$	—	$	83,145	$	3,753	$	321	$	139,827	$	227,311

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

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CACTUS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine Months Ended September 30,				Three Months Ended March 31,
	2018		2017		2019		2018
	(in thousands)				(in thousands)
Cash flows from operating activities
Net income	$	111,598	$	43,733	$	48,446	$	26,408
Reconciliation of net income to net cash provided by operating activities
Depreciation and amortization		21,829		16,976		8,881		6,621
Debt discount and deferred loan cost amortization		229		1,314		42		219
Stock-based compensation		3,384		—		1,676		834
Inventory obsolescence		932		618		224		451
Loss on disposal of assets		1,759		115		863		29
Deferred income taxes		11,762		167		(2,796)		963
Loss on debt extinguishment		4,305		—		—		4,305
Changes in operating assets and liabilities:
Accounts receivable		(21,761)		(40,647)		(15,597)		(419)
Inventories		(22,866)		(25,630)		(8,875)		(5,594)
Prepaid expenses and other assets		(3,835)		(4,380)		2,156		(56)
Accounts payable		8,108		20,834		192		792
Accrued expenses and other liabilities		6,906		6,410		737		4,012
Operating lease liabilities						(1,710)		—
Net cash provided by operating activities		122,350		19,510		34,239		38,565

Cash flows from investing activities
Capital expenditures		(55,720)		(22,327)
Patent expenditures		—		(8)
Capital expenditures and other						(14,655)		(16,127)
Proceeds from sale of assets		1,313		908		808		440
Net cash used in investing activities		(54,407)		(21,427)		(13,847)		(15,687)

Cash flows from financing activities
Principal payments on long-term debt		(248,529)		(1,927)		—		(248,529)
Payment of deferred financing costs		(576)		—
Payments on capital leases		(4,456)		(1,682)		(1,846)		(1,266)
Net proceeds from IPO and Follow-on Offering		828,168		—
Net proceeds from equity offerings						—		469,621
Distributions to members		(31,848)		—		(235)		(26,041)
Redemption of CW Units		(575,681)		—		—		(216,425)
Repurchase of shares						(1,474)		—
Net cash used in financing activities		(32,922)		(3,609)		(3,555)		(22,640)

Effect of exchange rate changes on cash and cash equivalents		(614)		62		438		48

Net increase (decrease) in cash and cash equivalents		34,407		(5,464)
Net increase in cash and cash equivalents						17,275		286

Cash and cash equivalents
Beginning of period		7,574		8,688		70,841		7,574
End of period	$	41,981	$	3,224	$	88,116	$	7,860

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

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CACTUS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands, except share and per share data, or as otherwise indicated)

1. Organization and Nature of Operations

Description of Business

Cactus, Inc. (“Cactus Inc.”) and its consolidated subsidiaries, including Cactus Wellhead, LLC (“Cactus LLC”) are primarily engaged in the design, manufacture and sale of wellhead and pressure control equipment. In addition, we maintain a fleet of frac valves and ancillary equipment for short-term rental, as well as offer repair and refurbishment services and the provision of service crews to assist in the installation and operations of pressure control systems. We operate through 15 U.S. service centers located in Texas, Pennsylvania, Oklahoma, North Dakota, New Mexico, Louisiana, ~~Pennsylvania, North Dakota,~~Colorado and Wyoming, and ~~Colorado, and one service center~~ in Eastern Australia, with our corporate headquarters located in Houston, Texas.

Cactus Inc. was incorporated on February 17, 2017 as a Delaware corporation for the purpose of completing an initial public offering of equity and related ~~transactions.~~transactions, which was completed on February 12, 2018 (our “IPO”). Cactus Inc. is a holding company whose only material asset is an equity interest consisting of units representing limited liability company interests in Cactus LLC (“CW Units”). Cactus Inc. became the sole managing member of Cactus LLC upon completion of our IPO. Cactus LLC is a Delaware limited liability company and was formed on July 11, 2011. Except as otherwise indicated or required by the context, all references to “Cactus,” “we,” “us” and “our” refer to Cactus Inc. and its consolidated subsidiaries (including Cactus LLC) following the completion of our ~~initial public offering~~IPO and Cactus LLC and its consolidated subsidiaries prior to the completion of our ~~initial public offering.~~

~~Initial Public Offering~~

On February 12, 2018, we completed the initial public offering of 23,000,000 shares of Class A common stock (our “IPO”), par value $0.01 per share, at a price to the public of $19.00 per share. We received net proceeds of $408.0 million after deducting underwriting discounts and commissions and $2.8 million in 2018 offering expenses of our IPO. We also paid $2.2 million in offering expenses during 2017 that were recorded to prepaid expenses in the consolidated balance sheet as of December 31, 2017. On February 14, 2018, we completed the sale of an additional 3,450,000 shares of Class A common stock pursuant to the exercise in full by the underwriters of their option to purchase additional shares of Class A common stock (the “Option”), from which we received an additional $61.6 million of net proceeds after deducting underwriting discounts and commissions. We contributed all of the net proceeds of our IPO (including from the Option) to Cactus LLC in exchange for units in Cactus LLC (“CW Units”). Cactus Inc. is a holding company who is the sole managing member of Cactus LLC.

Cactus LLC used the total $469.6 million of net proceeds (including net proceeds from the Option) to (i) repay all of the borrowings outstanding under its term loan facility, including accrued interest, of $251.0 million and (ii) redeem $216.4 million of CW Units from certain direct and indirect owners of Cactus LLC. The remaining $2.2 million was held by Cactus LLC to cover previously paid offering expenses in 2017.

As the sole managing member of Cactus LLC, Cactus Inc. operates and controls all of the business and affairs of Cactus LLC and conducts its business through Cactus LLC and its subsidiaries. As a result, Cactus Inc. consolidates the financial results of Cactus LLC and its subsidiaries and reports non-controlling interest related to the portion of CW Units not owned by Cactus Inc., which reduces net income attributable to holders of Cactus Inc.’s Class A ~~stockholders. As of September 30, 2018, Cactus Inc. owned 50.3% of Cactus LLC.~~common stock, par value $0.01 per share (“Class A common stock”).

~~Tax Receivable Agreement~~

~~In connection with our IPO, we entered into a tax receivable agreement (the “TRA”) with certain direct and indirect owners~~Redemptions of CW Units ~~(the “TRA Holders”). The TRA generally provides for the payment by Cactus Inc.~~

Pursuant to the TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax or franchise tax that Cactus Inc. actually realizes or is deemed to realize in certain circumstances. Cactus Inc. will retain the benefit of the remaining 15% of these net cash savings. See Note 2 for further details of the TRA.

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~~Reorganization~~

~~In connection with our IPO, we completed a series of reorganization transactions (the “Reorganization”), including the following:~~

~~(a)~~

~~all of the membership interests in Cactus LLC were converted into a single class of CW Units;~~

~~(b)~~

~~Cactus Inc. contributed the net proceeds of our IPO to Cactus LLC in exchange for 23,000,000 CW Units;~~

~~(c)~~

Cactus LLC used the net proceeds of our IPO that it received from Cactus Inc. to repay the borrowings outstanding, plus accrued interest, under its term loan facility and to redeem 8,667,841 CW Units from the owners thereof;

~~(d)~~

Cactus Inc. issued and contributed a total of 51,889,772 shares of its Class B common stock, par value $0.01 per share, equal to the number of outstanding CW Units held by the owners thereof following the redemption described in (c) above to Cactus LLC (the Class B common stock has no economic interest and does not share in cash dividends or liquidation rights, but entitles its holders to one vote on all matters to be voted on by Cactus’ shareholders generally);

~~(e)~~

Cactus LLC distributed to each of the owners that continued to own CW Units following our IPO one share of Class B common stock for each CW Unit such owner held following the redemption described in (c) above;

~~(f)~~

~~Cactus Inc. contributed the net proceeds from the exercise of the Option to Cactus LLC in return for 3,450,000 additional CW Units, and~~

~~(g)~~

~~Cactus LLC used the net proceeds from the Option to redeem 3,450,000 CW Units from the owners thereof, and Cactus Inc. canceled a corresponding number of shares of Class B common stock.~~

~~Other IPO related items~~

~~In conjunction with our IPO, we also:~~

~~(a)wrote off $2.2 million of prepaid IPO costs incurred in 2017 as a reduction of additional paid-in capital;~~

~~(b)wrote off $4.3 million in unamortized debt discount and deferred loan costs related to the repayment of the term loan;~~

~~(c)issued 737,493 shares of restricted stock units and began recording stock-based compensation;~~

(d)recorded a deferred tax asset of $74.1 million related to the step-up in basis, a liability from the TRA (defined above) of $63.0 million representing 85% of the expected net cash tax savings from the step-up in basis that will be paid to TRA Holders, and recorded $11.1 million as additional paid-in capital;

~~(e)reset the previous accumulated deficit in Cactus LLC to zero; and~~

~~(f)recorded $130.9 million of non-controlling interest representing the portion of CW Units not owned by Cactus Inc.~~

Prior to our IPO, on January 25, 2018, Cactus LLC paid a cash distribution of $26.0 million to pre-IPO owners. This distribution was funded by borrowing under a revolving credit facility. The purpose of the distribution was to provide funds to these owners to pay their federal and state tax liabilities associated with taxable income recognized by them for periods prior to the completion of our IPO as a result of their ownership interests in Cactus LLC. The borrowings under this revolving credit facility were repaid during the first quarter of 2018.

~~Follow-on Offering~~

On July 16, 2018, we completed a public offering of 11,196,562 shares (consisting of 10,000,000 base shares and 1,196,562 shares sold pursuant to the underwriters’ option to purchase additional shares) of Class A common stock (the “Follow-on Offering”) at $33.25 per share and received $359.3 million of net proceeds after deducting underwriting discounts. Cactus Inc. contributed these net proceeds to Cactus LLC in exchange for CW Units. Cactus LLC then used the net proceeds to redeem 11,196,562 CW Units from certain of the other owners of Cactus LLC, and Cactus Inc. canceled corresponding shares of Class B common stock. In conjunction with the redemption of these CW Units, we recorded a deferred tax asset of $116.2 million related to the step-up in basis, a liability from the TRA of $98.8 million representing 85% of the expected net cash savings from the step-up in basis that will be paid to TRA Holders and recorded $17.4 million as additional paid-in capital.

~~Offering expenses related to the Follow-on Offering were $0.7 million, which were recorded within equity, and were borne by Cactus Inc.~~

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In conjunction with the Follow-on Offering and the additional ownership Cactus Inc. acquired in Cactus LLC, $25.2 million of equity was reclassified to Cactus Inc. from non-controlling interest representing the additional CW Units acquired and $0.1 million related to the cancelation of Class B common stock.

After these transactions and as of September 30, 2018, Cactus Inc. has outstanding 37,646,562 shares of Class A common stock (representing 50.3% of the total voting power) and 37,243,210 shares of Class B common stock (representing 49.7% of the total voting power). There was no change in the total aggregate number of shares of Class A common stock and Class B common stock outstanding of 74,889,772 following the completion of the Follow-on Offering.

2.~~Preparation of Interim Financial Statements and Other Items~~

~~Basis of Presentation~~

The unaudited and condensed consolidated financial statements (“consolidated financial statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. These consolidated financial statements include the accounts of Cactus Inc. and its wholly owned subsidiaries. Accordingly, these consolidated financial statements do not include all information or notes required by generally accepted accounting principles for annual financial statements and should be read together with our Annual Report for Form 10‑K for the year ended December 31, 2017. All significant intercompany transactions and balances have been eliminated upon consolidation.

In our opinion, the consolidated financial statements include all adjustments, which are of a normal recurring nature, unless otherwise disclosed, necessary for a fair statement of the consolidated financial statements for the interim periods. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.

As discussed in Note 1, as a result of our IPO and Reorganization, Cactus Inc. is the sole managing member of Cactus LLC and consolidates entities in which it has a controlling financial interest. The Reorganization was considered a transaction between entities under common control. As a result, the financial statements for periods prior to our IPO and the Reorganization have been adjusted to combine the previously separate entities for presentation purposes. However, Cactus Inc. had no operations or assets and liabilities prior to our IPO. As such, for periods prior to the completion of our IPO, the consolidated financial statements represent the historical financial position and results of operations of Cactus LLC and its subsidiaries. For periods after the completion of our IPO, the financial position and results of operations include those of Cactus and report the non-controlling interest related to the portion of CW Units not owned by Cactus Inc.

~~Limitation of Members’ Liability~~

~~Under the terms of~~ the First Amended and Restated Limited Liability Company Operating Agreement ~~dated as of January 29, 2018~~ of Cactus LLC (the ~~“LLC~~“Cactus LLC Agreement”), ~~the members~~each holder of ~~Cactus LLC are not obligated for debt, liabilities, contracts or other obligations of Cactus LLC. Profits and losses are allocated to members as defined in the LLC Agreement.~~

~~Policy for Interim Period Tax Allocation~~

For interim income tax reporting we estimate our annual effective tax rate and apply it to our year-to-date ordinary income. The tax effects of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are reported in the interim period in which they occur. Our IPO closed on February 12, 2018, and the annual effective tax rate is determined considering the periods before and after our IPO. Accordingly, net income attributable to non-controlling interest includes its share of respective income tax expense, which is not subject to U.S. federal and state income tax expense, and net income attributable to Cactus Inc. includes its share of respective income tax expense, which does include U.S. federal and state income tax expense.

Upon completion of our IPO, Cactus Inc. owned 35.3% of Cactus LLC and non-controlling interest owned 64.7% of Cactus LLC. Upon completion of the Follow-on Offering, Cactus Inc. owns 50.3% of Cactus LLC and non-controlling

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interest owns 49.7% of Cactus LLC. Accordingly, Cactus Inc. recognized a greater share of income of Cactus LLC for the period subsequent to the Follow-on Offering and therefore recorded higher U.S. federal and state income tax expense.

~~Income Taxes~~

~~Cactus Inc. is a corporation and is subject to U.S. federal as well as state income tax related to its ownership percentage in Cactus LLC.~~

Cactus LLC is a limited liability company treated as a partnership for U.S. federal income tax purposes and files a U.S. Return of Partnership Income, which includes both our U.S. and foreign operations. Consequently, the members of Cactus LLC are taxed individually on their share of earnings for U.S. federal and state income tax purposes. Additionally, our operations in both Australia and China are subject to local country income taxes.

~~Domestic and foreign components of income before income taxes for the three and nine months ended September 30, 2018 are as follows:~~

Three Months Ended
September 30,

Nine Months Ended
September 30,

2018

2018
Pre-IPO Domestic

$
—

$
13,370
Post-IPO Domestic

49,277

106,906
Pre-IPO Foreign

—

512
Post-IPO Foreign

2,586

5,374
Income before income taxes

$
51,863

$
126,162

~~The provision for income tax for the three and nine months ended September 30, 2018 consisted of:~~

Three Months Ended September 30,

Nine Months Ended September 30,


2018

2018
Current:




Federal

$
(828)

$
—
State

693

1,331
Foreign

682

1,471
Total current income taxes

547

2,802
Deferred:

Federal

6,212

9,451
State

1,074

1,633
Foreign

382

678
Total deferred income taxes

7,668

11,762
Total provision for income taxes

$
8,215

$
14,564

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~~The effective income tax rate was different from the statutory U.S. federal income tax rate for the three and nine months ended September 30, 2018 due to the following:~~

Three Months Ended
September 30,

Nine Months Ended September 30,


2018

2018
Income taxes at 21% statutory tax rate

$
10,891

$
26,494
Net difference resulting from:




Profit of Cactus LLC pre-IPO not subject to U.S. federal tax

—

(2,808)
Profit of non-controlling interest not subject to U.S. federal tax

(4,979)

(13,185)
Foreign earnings subject to different tax rates

(298)

(122)
State income taxes

1,511

2,527
Foreign withholding taxes

382

678
Change in valuation allowance

(104)

(106)
Other

812

1,086
Total provision for income taxes

$
8,215

$
14,564

~~The components of deferred tax assets and liabilities are as follows:~~

September 30,
2018

December 31,
2017
Investment in Cactus LLC

$
179,265

$
—
Foreign loss carryforwards

383

489
Deferred tax assets

179,648

489
Valuation allowance

(383)

(489)
Deferred tax asset, net

$
179,265

$
—

Foreign withholding taxes

$
1,094

$
416
Deferred tax liability, net

$
1,094

$
416

~~Stock-based Compensation~~

We measure the cost of equity-based awards based on the grant date fair value and we allocate the compensation expense over the corresponding service period, which is usually the vesting period, using the straight-line method. All grant date fair value is expensed immediately for awards that are fully vested as of the grant date.

~~In conjunction with our IPO, we granted 737,493 restricted stock unit awards under our long-term incentive plan (the “LTIP”~~CW Units (“CW Unit Holder”) with a grant date fair value of $19.00. The majority of these awards vest over a three year period. On May 31, 2018, we granted 29,656 restricted stock unit awards under the LTIP with a grant date fair value of $33.72 and a seven year vesting period. On September 21, 2018, we granted 5,450 restricted stock unit awards under the LTIP with a grant date fair value of $36.70 and a three year vesting period. During the three and nine months ended September 30, 2018, we recorded $1.3 million and $3.4 million, respectively of stock-based compensation expense mostly included in selling, general and administrative expenses. As of September 30, 2018, there was $11.8 million of unrecognized compensation cost related to these unvested restricted stock unit awards, which is expected to be recognized over a weighted average period of 2.7 years.

~~Significant Customers~~

For the nine months ended September 30, 2018, one customer represented 11% of consolidated revenues, and no other customers represented 10% or more of our consolidated revenues during the period. For the nine months ended

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~~September 30, 2017, one customer represented 11% of our consolidated revenues, and no other customers represented 10% or more of our consolidated revenues during this period.~~

~~Significant Vendors~~

We purchase a significant portion of supplies, equipment and machined components from a single vendor. For the nine months ended September 30, 2018 and 2017, purchases from this vendor totaled $36.4 million and $~~24.5~~ million, respectively. These figures represent approximately 22%, for the respective periods, of total third party vendor purchases of raw materials, finished products, equipment, machining and other services. Amounts due to the vendor included in accounts payable in the consolidated balance sheets as of September 30, 2018 and December 31, 2017 totaled $10.8 million and $7.4 million, respectively.

~~Use of Estimates~~

The preparation of consolidated financial statements in conformity with 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include but are not limited to estimated losses on accounts receivables, estimated realizable value on excess and obsolete inventory, estimates related to fair value of reporting units for purposes of assessing goodwill and other indefinite-lived intangible assets for impairment, assessments of all long-lived assets for possible impairment, estimates of warranty liabilities and estimates of deferred tax assets related to the step-up in basis under the TRA and the associated liability under the TRA. Actual results could differ from those estimates.

~~Tax Receivable Agreement~~

~~Pursuant to the LLC Agreement, each TRA Holder will,~~has, subject to certain limitations, ~~have~~ the right (the “Redemption Right”) to cause Cactus LLC to acquire all or at least a minimum portion of its CW Units for, at Cactus LLC’s election, (x) shares of our Class A common stock at a redemption ratio of one share of Class A common stock for each CW Unit redeemed, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions, or (y) an equivalent amount of cash. Alternatively, upon the exercise of the Redemption Right, Cactus Inc. (instead of Cactus LLC) will have the right (the “Call Right”) to acquire each tendered CW Unit directly from the exchanging CW Unit Holder for, at its election, (x) one share of Class A common stock, subject to conversion rate adjustments for stock splits, stock dividends and reclassifications and other similar transactions, or (y) an equivalent amount of cash. In connection with any redemption of CW Units pursuant to the Redemption Right or our Call Right, the corresponding number of shares of Class B common stock, par value $0.01 per share (“Class B common stock”), will be canceled. The following is a rollforward of ownership of CW Units, reflecting redemptions of CW Units occurring since our IPO:


	No. of CW Units
CW Units held by legacy CW Unit Holders as of February 7, 2018		60,557,613
IPO		(12,117,841)
July 2018 follow-on offering		(11,196,562)
Other CW Unit redemptions		(7,068)
CW Units held by legacy CW Unit Holders as of December 31, 2018		37,236,142
March 2019 Secondary Offering		(8,473,913)
Other CW Unit redemptions		(43,820)
CW Units held by legacy CW Unit Holders as of March 31, 2019		28,718,409

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On March 19, 2019, Cactus Inc. entered into an underwriting agreement by and among the Company, Cactus LLC, certain selling stockholders of the Company (the “Selling Stockholders”) and the underwriters named therein, providing for the offer and sale of Class A common stock by the Selling Stockholders (the “March 2019 Secondary Offering”). As described in the prospectus supplement dated March 19, 2019 and filed with the Securities and Exchange Commission on March 20, 2019, in connection with the March 2019 Secondary Offering, certain Selling Stockholders owning CW Units exercised their Redemption Right with respect to 8,473,913 CW Units, together with a corresponding number of shares of Class B common stock, as provided in the Cactus LLC Agreement. The March 2019 Secondary Offering closed on March 21, 2019, at which time, in exercise of its Call Right, Cactus Inc. acquired the redeemed CW Units and a corresponding number of shares of Class B common stock (which shares of Class B common stock were then canceled) and issued 8,473,913 shares of Class A common stock to the underwriters at the direction of the redeeming Selling Stockholders, as provided in the Cactus LLC Agreement. In addition, certain other Selling Stockholders sold 26,087 shares of Class A common stock in the March 2019 Secondary Offering, which shares were owned by them directly prior to the closing of this offering. The Company did not receive any of the proceeds from the sale of common stock in the March 2019 Secondary Offering. The Company incurred $1.0 million in offering expenses which were recorded in other income (expense), net, in the consolidated statement of income for the three months ended March 31, 2019.

As a result of the March 2019 Secondary Offering and other CW Unit redemptions during the first quarter of 2019, Cactus Inc. increased its ownership in Cactus LLC and accordingly increased its equity by $43.9 million from the non-controlling interest. We also recorded additional liability under the TRA (defined below).

During the quarter ended March 31, 2019, we corrected for misstatements of equity between Cactus Inc. and non-controlling interest related to our July 2018 follow-on offering to reduce non-controlling interest by $14.5 million and increase additional paid-in capital by $14.0 million and accumulated other comprehensive income by $0.5 million. This relates to immaterial errors associated with the ownership percentage change used in the underlying calculation giving effect to the offering. This correction had no impact to total assets, total liabilities, total equity or on our consolidated results of operations or cash flows. These corrections were not material to any prior period consolidated financial statements.

Ownership

As of March 31, 2019, Cactus Inc. owned 61.8% of Cactus LLC, and as of December 31, 2018, Cactus Inc. owned 50.3% of Cactus LLC.

As of March 31, 2019, Cactus Inc. had outstanding 46,390,804 shares of Class A common stock (representing 61.8% of the total voting power) and 28,718,409 shares of Class B common stock (representing 38.2% of the total voting power).

Tax Receivable Agreement

In connection with our IPO, we entered into a tax receivable agreement (the “TRA”) with certain direct and indirect owners of Cactus LLC (the “TRA Holders”). The TRA generally provides for the payment by Cactus Inc. to the TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax or franchise tax that Cactus Inc. actually realizes or is deemed to realize in certain circumstances. Cactus Inc. will retain the benefit of the remaining 15% of these net cash savings. See Note 2 for further details of the TRA.

2.Preparation of Interim Financial Statements and Other Items

Basis of Presentation

The unaudited condensed consolidated financial statements (“consolidated financial statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. These consolidated financial statements include the accounts of Cactus Inc. and its wholly owned subsidiaries. Accordingly, these consolidated financial statements do not include all information or notes required by generally accepted accounting principles for annual financial statements and should be read together with our Annual Report on Form 10‑K for the year ended December 31, 2018. All significant inter-company transactions and balances have been eliminated upon consolidation.

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The consolidated financial statements include all adjustments, which are of a normal recurring nature, unless otherwise disclosed, necessary for a fair statement of the consolidated financial statements for the interim periods. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.

As discussed in Note 1, as a result of our IPO and related equity transactions (the “Reorganization”), Cactus Inc. is the sole managing member of Cactus LLC and consolidates the financial results of Cactus LLC and its subsidiaries and reports a non-controlling interest related to the portion of CW Units not owned by Cactus Inc., which reduces net income attributable to holders of Class A common stock. The Reorganization was considered a transaction between entities under common control. As a result, the financial statements for periods prior to our IPO and the Reorganization have been adjusted to combine the previously separate entities for presentation purposes.

Limitation of Members’ Liability

Under the terms of the Cactus LLC Agreement, the members of Cactus LLC are not obligated for debt, liabilities, contracts or other obligations of Cactus LLC. Profits and losses are allocated to members as defined in the Cactus LLC Agreement.

Interim Period Tax Allocation

For interim income tax reporting we estimate our annual effective tax rate and apply it to our year-to-date ordinary income. The tax effects of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are reported in the interim period in which they occur. Net income attributable to Cactus Inc. includes Cactus Inc.’s share of income tax expense, which includes U.S. federal and state income tax expense, and net income attributable to non-controlling interest includes non-controlling interests’ share of income tax expense, which is not subject to U.S. federal and state income tax expense.

Stock-based Compensation

We measure the cost of equity-based awards based on the grant date fair value, and we allocate the compensation expense over the corresponding service period, which is usually the vesting period, using the straight-line method. All grant date fair values are expensed immediately for awards that are fully vested as of the grant date.

Significant Customers

For the three months ended March 31, 2019, one customer represented 12% of consolidated revenues, and no other customers represented 10% or more of our consolidated revenues during the period. For the three months ended March 31, 2018, one customer represented 11% of our consolidated revenues, and no other customers represented 10% or more of our consolidated revenues during this period.

Significant Vendors

We purchase a significant portion of supplies, equipment and machined components from a single vendor. For the three months ended March 31, 2019 and 2018, purchases from this vendor totaled $12.7 million and $10.4 million, respectively. These figures represent approximately 20% and 21% for the respective periods of our total third-party vendor purchases of raw materials, finished products, equipment, machining and other services. Amounts due to the vendor included in accounts payable in the consolidated balance sheets as of March 31, 2019 and December 31, 2018 totaled $6.7 million and $5.0 million, respectively.

Use of Estimates

The preparation of consolidated financial statements in conformity with 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include but are not limited to estimated losses on accounts receivable, estimated realizable value on excess and obsolete inventory, estimates related to fair value of reporting units for purposes of assessing goodwill and other indefinite-lived intangible assets for impairment, assessments of all long-lived

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assets for possible impairment and estimates of deferred tax assets related to the step-up in basis under the TRA and the associated liability under the TRA. Actual results could differ from those estimates.

Tax Receivable Agreement

As discussed above, pursuant to the Cactus LLC Agreement, each TRA Holder has, subject to certain limitations, the right to cause Cactus LLC to acquire all or at least a minimum portion of its CW Units for, at Cactus LLC’s election, (x) shares of our Class A common stock at a redemption ratio of one share of Class A common stock for each CW Unit redeemed, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions, or (y) an equivalent amount of cash. Alternatively, upon the exercise of the Redemption Right, Cactus Inc. (instead of Cactus LLC) will have the Call Right to acquire each tendered CW Unit directly from the exchanging TRA Holder for, at its election, (x) one share of Class A common stock, subject to conversion rate adjustments for stock splits, stock dividends and reclassifications and other similar transactions, or (y) an equivalent amount of cash. In connection with any redemption of CW Units pursuant to the Redemption Right or our Call Right, the corresponding number of shares of Class B common stock will be canceled.

Cactus LLC has made for itself (and for each of its direct or indirect subsidiaries that is treated as a partnership for U.S. federal income tax purposes and that it controls) an election under Section 754 of the Internal Revenue Code (the “Code”) that ~~will be~~became effective ~~for~~in 2018 and for each taxable year in which a redemption of CW Units pursuant to the Redemption Right or the Call Right occurs. Pursuant to the Section 754 election, redemptions of CW Units pursuant to the Redemption Right or the Call Right are expected to result in adjustments to the tax basis of the tangible and intangible assets of Cactus LLC. These adjustments will be allocated to Cactus Inc. In addition, the repayment of borrowings outstanding under the Cactus LLC term loan facility in connection with our IPO resulted in adjustments to the tax basis of the tangible and intangible assets of Cactus LLC, a portion of which will be allocated to Cactus Inc following its acquisition or deemed acquisition of CW Units from the CW Unit Holders. Such adjustments to the tax basis of the tangible and intangible assets of Cactus LLC would not have been available to Cactus Inc. absent its acquisition or deemed acquisition of CW Units pursuant to the exercise of the Redemption Right or the Call Right. In addition, the repayment of borrowings outstanding under the Cactus LLC term loan facility resulted in adjustments to the tax basis of the tangible and intangible assets of Cactus LLC, a portion of which was allocated to Cactus Inc.

These basis adjustments are expected to increase (for tax purposes) Cactus Inc.’s depreciation and amortization deductions and may also decrease Cactus Inc.’s gains (or increase its losses) on future dispositions of certain assets to the extent tax basis is allocated to those assets. Such increased deductions and losses and reduced gains may reduce the amount of tax that Cactus Inc. would otherwise be required to pay in the future.

The TRA ~~will~~ generally ~~provide~~provides for the payment by Cactus Inc. to ~~each~~the TRA ~~Holder~~Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that Cactus Inc. actually realizes or is deemed to realize in certain circumstances as a result of (i) certain increases in tax basis that occur as a result of Cactus Inc.’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such TRA Holder’s CW Units in connection with our IPO or any subsequent offering, or pursuant to ~~the~~any other exercise of the Redemption Right or the Call Right, (ii) certain

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increases in tax basis resulting from the repayment of borrowings outstanding under Cactus LLC’s term loan facility in connection with our IPO and (iii) imputed interest deemed to be paid by Cactus Inc. as a result of, and additional tax basis arising from, any payments Cactus Inc. makes under the TRA. We will retain the benefit of the remaining 15% of the cash savings.

The payment obligations under the TRA are Cactus Inc.’s obligations and not obligations of Cactus LLC, and we expect that the payments we will be required to make under the TRA will be substantial. We have determined that it is more likely than not that actual cash tax savings will be realized by Cactus Inc. from the tax benefits resulting from the ~~Reorganization, our IPO and~~CW Unit redemptions pursuant to the ~~Follow-on Offering.~~Redemption Right or the Call Right. Accordingly, the TRA is expected to result in future payments, and we have recorded a total liability from the TRA of ~~$161.8~~$224.5 million included in the current portion and long-term portion of the liability related to tax receivable agreement in the consolidated balance sheet as of ~~September 30, 2018.~~March 31, 2019. Future ~~exchanges~~redemptions of CW Units ~~creates~~will create additional liability and ~~follows~~follow the same accounting procedures. Estimating the amount and timing of payments that may become due under the TRA is by its nature ~~imprecise.~~ imprecise and the assumptions used in the estimate can change.

For purposes of the TRA, net cash savings in tax generally will be calculated by comparing Cactus Inc.’s actual tax liability (determined by using the actual applicable U.S. federal income tax rate and an assumed combined state and local income tax rate) to the amount it would have been required to pay had it not been able to utilize any of the tax benefits subject to the TRA. The amounts payable, as well as the timing of any payments under the TRA, are dependent

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upon significant future events and assumptions, including the timing of the redemption of CW Units, the price of our Class A common stock at the time of each redemption, the extent to which such redemptions are taxable transactions, the amount of the redeeming unit holder’s tax basis in its CW Units at the time of the relevant redemption, the depreciation and amortization periods that apply to the increase in tax basis, the amount and timing of taxable income we generate in the future and the U.S. federal, state and local income tax rate then applicable, and the portion of Cactus Inc.’s payments under the TRA that constitute imputed interest or give rise to depreciable or amortizable tax basis.

A delay in the timing of redemptions of CW Units, holding other assumptions constant, would be expected to decrease the discounted present value of the amounts payable under the TRA as the benefit of the depreciation and amortization deductions would be delayed and the estimated increase in tax basis could be reduced as a result of allocations of Cactus LLC taxable income to the redeeming unit holder prior to the redemption. Stock price increases or decreases at the time of each redemption of CW Units would be expected to result in a corresponding increase or decrease in the undiscounted amounts payable under the TRA in an amount equal to 85% of the tax-effected change in price. The amounts payable under the TRA are dependent upon Cactus Inc. having sufficient future taxable income to utilize the tax benefits on which it is required to make payments under the TRA. If Cactus Inc.’s projected taxable income is significantly reduced, the expected payments would be reduced to the extent such tax benefits do not result in a reduction of Cactus Inc.’s future income tax liabilities.

It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding liability from the TRA. Moreover, there may be a negative impact on our liquidity if, as a result of timing discrepancies or otherwise, (i) the payments under the TRA exceed the actual benefits we realize in respect of the tax attributes subject to the TRA or (ii) distributions to Cactus Inc. by Cactus LLC are not sufficient to permit Cactus Inc. to make payments under the TRA after it has paid its taxes and other obligations. The payments under the TRA will not be conditional on a holder of rights under the TRA having a continued ownership interest in either Cactus LLC or Cactus Inc.

In addition, although we are not aware of any issue that would cause the Internal Revenue Service (“IRS”) or other relevant tax authorities to challenge potential tax basis increases or other tax benefits covered under the TRA, the TRA Holders will not reimburse us for any payments previously made under the TRA if such basis increases or other benefits are subsequently disallowed, except that excess payments made to any such holder will be netted against payments otherwise to be made, if any, to such holder after our determination of such excess. As a result, in such circumstances, Cactus Inc. could make payments that are greater than its actual cash tax savings, if any, and may not be able to recoup those payments.

We account for any amounts payable under the TRA in accordance with Accounting Standard Codification (“ASC”) Topic 450, Contingencies. We will recognize subsequent changes to the measurement of the liability from the TRA in the income statement as a component of income before taxes. In the case of any changes to any valuation allowance associated with the underlying tax asset, given the link between the tax savings generated and the recognition of the liability from the TRA (i.e., one is recorded based on 85% of the other), and the explicit guidance in ASC 740-20-45-11(g) which requires that subsequent changes in a valuation allowance established against deferred tax assets that arose due to change in tax basis as a result of a transaction among or with shareholders to be recorded in the income statement

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as opposed to equity, we believe recording of the corollary adjustment to the liability from the TRA in the income statement is appropriate.

The term of the TRA commenced upon completion of our IPO and will continue until all tax benefits that are subject to the TRA have been utilized or expired, unless we exercise our right to terminate the TRA. In the event that the TRA is not terminated, the payments under the TRA are anticipated to commence in 2019 and to continue for 16 years after the date of the last redemption of CW Units. Accordingly, it is expected that payments will continue to be made under the TRA for more than 25 years. If we elect to terminate the TRA early (or it is terminated early due to certain mergers, asset sales, other forms of business combinations or other changes of control), our obligations under the TRA would accelerate and we would be required to make an immediate payment equal to the present value of the anticipated future payments to be made by us under the TRA (determined by applying a discount rate of one-year LIBOR plus 150 basis points) and such payment is expected to be substantial. The calculation of anticipated future payments will be based upon certain assumptions and deemed events set forth in the TRA, including the assumptions that (i) we have sufficient taxable income to fully utilize the tax benefits covered by the TRA and (ii) any CW Units (other than those held by Cactus Inc.) outstanding on the termination date are deemed to be redeemed on the termination date. Any early

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termination payment may be made significantly in advance of the actual realization, if any, of the future tax benefits to which the termination payment relates. Assuming no material changes in the relevant tax law, we expect that if the TRA were terminated as of September 30, 2018, the estimated termination payments, based on the assumptions discussed above, would be approximately $~~383.4~~ ~~million (calculated using a discount rate equal to one-year LIBOR plus 150 basis points, applied against an undiscounted liability of $546.0 million).~~

The TRA provides that in the event that we breach any of our material obligations under the TRA, whether as a result of (i) our failure to make any payment when due (including in cases where we elect to terminate the TRA early, the TRA is terminated early due to certain mergers, asset sales, or other forms of business combinations or changes of control or we have available cash but fail to make payments when due under circumstances where we do not have the right to elect to defer the payment, as described below), (ii) our failure to honor any other material obligation under it or (iii) by operation of law as a result of the rejection of the TRA in a case commenced under the U.S. Bankruptcy Code or otherwise, then the TRA Holders may elect to treat such breach as an early termination, which would cause all our payment and other obligations under the TRA to be accelerated and become due and payable applying the same assumptions described above.

As a result of either an early termination or a change of control, we could be required to make payments under the TRA that exceed ~~our~~the actual cash tax savings under the TRA. In these situations, our obligations under the TRA could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, or other forms of business combinations or changes of control.

Decisions we make in the course of running our business, such as with respect to mergers, asset sales, other forms of business combinations or other changes in control, may influence the timing and amount of payments that are received by the TRA Holders under the TRA. For example, the earlier ~~disposition~~disposal of assets following a redemption of CW Units may accelerate payments under the TRA and increase the present value of such payments, and the ~~disposition~~disposal of assets before a redemption of CW Units may increase the TRA Holders’ tax liability without giving rise to any rights of the TRA Holders to receive payments under the TRA. Such effects may result in differences or conflicts of interest between the interests of the TRA Holders and other shareholders.

Payments generally are due under the TRA within five business days following the finalization of the schedule with respect to which the payment obligation is calculated. However, interest on such payments will begin to accrue from the due date (without extensions) of our U.S. federal income tax return for the period to which such payments relate until such payment due date at a rate equal to one-year LIBOR plus 150 basis points. Except in cases where we elect to terminate the TRA early or it is otherwise terminated as described above, generally we may elect to defer payments due under the TRA if we do not have available cash to satisfy our payment obligations under the TRA. Any such deferred payments under the TRA generally will accrue interest from the due date for such payment until the payment date at a rate of one-year LIBOR plus 550 basis points. However, interest will accrue from the due date for such payment until the payment date at a rate of one-year LIBOR plus 150 basis points if we are unable to make such payment as a result of limitations imposed by our credit facility. We have no present intention to defer payments under the TRA.

Because we are a holding company with no operations of our own, our ability to make payments under the TRA is dependent on the ability of Cactus LLC to make distributions to us in an amount sufficient to cover our obligations under

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the TRA. This ability, in turn, may depend on the ability of Cactus LLC’s subsidiaries to make distributions to it. The ability of Cactus LLC, its subsidiaries and other entities in which it directly or indirectly holds an equity interest to make such distributions will be subject to, among other things, the applicable provisions of Delaware law (or other applicable jurisdiction) that may limit the amount of funds available for distribution and restrictions in relevant debt instruments issued by Cactus LLC or its subsidiaries and other entities in which it directly or indirectly holds an equity interest. Additionally, distributions made by Cactus LLC are generally ~~require~~required to be made pro-rata ~~distribution~~ among all of its members, including legacy CW Unit Holders, which could be significant. To the extent that we are unable to make payments under the TRA for any reason, such payments will be deferred and will accrue interest until paid.

Emerging Growth Company status

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

~~Recent Accounting Pronouncements~~

~~Standards Adopted~~

In August 2016, the FASB issued ASU No. 2016-15, Cash Flow Statement (Topic 250). This new guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice, including: debt prepayment or debt extinguishment costs, settlement of zero coupon debt instruments or other debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We adopted this ASU on January 1, 2018. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the current revenue recognition guidance. The ASU is based on the principle that revenue is recognized to depict the transfer of goods and services to customers in the amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new standard is effective for public companies for the fiscal years beginning after December 31, 2017 using one of two retrospective application methods. We adopted this ASU on January 1, 2018 using the modified retrospective method. The adoption of this pronouncement did not have a material impact on our consolidated financial statements. See Note 5.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this standard provide a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the integrated set of assets and activities is not a business. The new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is allowed for transactions for which the acquisition date occurs before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance and for transactions in which a subsidiary is

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deconsolidated or a group of assets is derecognized before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance. Entities will be required to apply the guidance prospectively when adopted. We adopted this ASU on January 1, 2018. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.

Recent Accounting Pronouncements

Standards ~~Not Yet~~ Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), ~~to increase transparency~~which amends the FASB Accounting Standards Codification (“ASC”) and ~~comparability among organizations by recognizing~~creates Topic 842, Leases. On January 1, 2019, we adopted ASC Topic 842, which is effective for interim and annual reporting periods beginning on or after December 15, 2018. This Topic requires balance sheet recognition of lease assets and lease liabilities for leases classified as operating leases under previous GAAP. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

To adopt Topic 842, we elected the modified retrospective approach and as of January 1, 2019, there was no cumulative-effect adjustment required to the opening balance of retained earnings. We completed a review of contracts representative of our business and assessed the terms under the new standard. Adoption of the standard resulted in the recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases on our consolidated balance sheets, but did not have a material impact on our consolidated statements of income and consolidated statements of comprehensive income or consolidated statements of cash flows. Our accounting for finance leases remained substantially unchanged.

Adoption of this standard resulted in the recognition of operating lease right-of-use assets of $25.3 million, reversal of previously recorded deferred rent of $0.5 million, and corresponding operating short-term and long-term lease liabilities of $6.2 million and $19.6 million, respectively, on the consolidated balance sheet as of January 1, 2019. Disclosures related to the amount, timing and ~~disclosing key information about leasing arrangements. Under~~uncertainty of cash flows arising from leases are included in Note 7.

In addition, we utilized the ~~new standard,~~package of practical expedients permitted under the transition guidance within the standard. The expedient package allowed us to not reassess whether existing contracts contained a lease, ~~is defined as a contract, or part~~to not reassess the lease classification of ~~a contract, that conveys~~existing leases, and to not consider the ~~right~~initial direct cost for existing leases. In addition to ~~control~~the package of practical expedients, we also utilized expedients allowing for the exclusion of leases with terms of less than twelve months across all asset classes, the portfolio approach to determine discount rates, the election to not separate non-lease components from lease components and to not apply the use of ~~identified assets for~~hindsight to the existing lease population.

As a ~~period~~lessor, recognition of ~~time in exchange for consideration. This new~~lease revenue associated with short-term equipment rentals remained consistent with previous guidance ~~will require~~and the adoption of this standard did not have a ~~lessee to recognize a right-of-use asset and a lease liability for both financing and operating leases. The original guidance required application~~significant impact on ~~a modified retrospective basis with the earliest period presented.~~ our consolidated statements of income.

In ~~July~~February 2018, the FASB issued ASU ~~2018-11, Targeted Improvements~~2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this update allow a reclassification from accumulated other comprehensive income (loss) to ~~ASC 842, which provides an additional transition method~~retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that ~~permits changes to be applied by means~~requires that the effect of a ~~cumulative-effect adjustment recorded~~change in ~~retained earnings as of the beginning of the fiscal year of adoption.~~tax laws or rates be included in income from continuing operations is not affected. The ~~new guidance will be~~amendments in this update also require certain disclosures about stranded tax effects. The amendments in this update are effective for fiscal years beginning after December 15, 2018 and ~~we plan to elect the transition option provided under~~interim periods within those fiscal years. We adopted this ASU ~~2018-11. We are currently in the process~~on January 1, 2019. The adoption of ~~quantifying the impact~~ this pronouncement ~~will~~did not have an impact on our consolidated financial statements based on our lease portfolios and accumulating all the necessary information required to account for the leases under the new standard. We expect a material amount of assets and liabilities will be recorded on our consolidated balance sheet with an immaterial effect to our retained earnings upon adoption. The future minimum lease payments under noncancelable operating leases were $22.3 million as of September 30, 2018. We plan to elect to exclude from the balance sheet short-term contracts of one year or less and plan to elect the package of practical expedients allowed under the new standard. statements.

Standards Not Yet Adopted

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other, which simplifies the accounting for goodwill impairment by eliminating Step 2 of the current goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the new standard, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance should be adopted for

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annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the adoption of this pronouncement will have a material impact on our consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this update allow a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update also require certain disclosures about stranded tax effects. The amendments in this update are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact this pronouncement will have on our consolidated financial statements.

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3. Inventories

Inventories consist of the following:


	September 30,		December 31,		March 31,		December 31,
	2018		2017		2019		2018
Raw materials	$	2,010	$	1,532	$	1,890	$	1,925
Work-in-progress		5,687		3,590		4,254		3,582
Finished goods		77,624		59,328		102,038		94,330
	$	85,321	$	64,450	$	108,182	$	99,837

4. ~~Long-term Debt~~Property and Equipment

~~Long-term debt~~Property and equipment consists of the following:

September 30,

December 31,

2018

2017

Term loan

$
—

$
248,529

Less:

Current portion

—

(2,568)

Unamortized debt discount and deferred loan costs

—

(4,524)

Long-term debt, net

$
—

$
241,437


	March 31,		December 31,
	2019		2018
Land	$	3,646	$	3,614
Buildings and improvements		20,368		20,803
Machinery and equipment		49,132		47,606
Finance lease right-of-use asset		24,674		25,165
Rental equipment		135,980		124,002
Furniture and fixtures		1,672		1,623
Computers and software		3,214		3,094
Gross property and equipment		238,686		225,907
Less: Accumulated depreciation		(102,441)		(96,412)
Net property and equipment		136,245		129,495
Construction in progress		12,611		12,559
Total property and equipment, net	$	148,856	$	142,054

5. Long-term Debt

We had no long-term debt outstanding as of March 31, 2019 and December 31, 2018.

Credit Agreement

On August 21, 2018, Cactus LLC entered into a five-year senior secured asset-based revolving credit facility with a syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent for such lenders and as an issuing bank and swingline lender (the “ABL Credit Facility”). The ABL Credit Facility provides for $75.0 million in revolving commitments, up to $15.0 million of which is available for the issuance of letters of credit. Subject to certain terms and conditions set forth in the ABL Credit Facility, Cactus LLC may request additional revolving commitments in an amount not to exceed $50.0 million, for a total of up to $125.0 million in revolving commitments.

The ABL Credit Facility matures on August 21, 2023. The maximum amount that Cactus LLC may borrow under the ABL Credit Facility is subject to a borrowing base, which is based on a percentage of eligible accounts receivable and eligible inventory, subject to reserves and other adjustments. At March 31, 2019, in accordance with the terms of our borrowing base, we had access to the full $75.0 million revolving credit facility capacity.

The ABL Credit Facility replaced Cactus LLC’s prior credit agreement, dated as of July 31, 2014, with Credit Suisse AG, as administrative agent, collateral agent and issuing bank, and the other lenders party thereto (the “Prior

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Credit Agreement”). The Prior Credit Agreement provided for a term loan tranche in an aggregate principal amount of $275.0 million, the outstanding balance of which was repaid in full in February 2018 with the net proceeds of our IPO, and a revolving credit facility (the “Prior Revolving Credit Facility”) of up to $50.0 million with a $10.0 million sublimit for letters of credit. The Prior Credit Agreement was terminated concurrently with the effectiveness of, and as a condition of entering into, the ABL Credit Facility. No loans or letters of credit under the Prior Credit Agreement were outstanding at the time of, or were repaid in connection with, such termination. The Prior Credit Agreement was scheduled to mature on July 31, 2019.

Cactus LLC’s obligations under the ABL Credit Facility are secured by liens on Cactus LLC’s assets, other than equipment, intellectual property and real estate. Any subsidiary of Cactus LLC that is considered material pursuant to the ABL Credit Facility will be required to (i) guarantee on an unconditional basis all of Cactus LLC’s obligations under the ABL Credit Facility and (ii) grant a lien to secure such guarantee on its assets, other than equipment, intellectual property and real estate.

Borrowings under the ABL Credit Facility bear interest at Cactus LLC’s option at either (i) the Alternate Base Rate (as defined therein) (“ABR”), or (ii) the Adjusted LIBO Rate (as defined therein) (“Eurodollar”), plus, in each case, an applicable margin. Letters of credit issued under the ABL Credit Facility accrue fees at a rate equal to the applicable margin for Eurodollar borrowings. The applicable margin ranges from 0.50% to 1.00% per annum for ABR borrowings and 1.50% to 2.00% per annum for Eurodollar borrowings and, in each case, is based on the average quarterly

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availability under the ABL Credit Facility for the immediately preceding fiscal quarter. The unused portion of the ABL Credit Facility is subject to a commitment fee that varies from 0.250% to 0.375% per annum, according to the average quarterly availability under the ABL Credit Facility for the immediately preceding fiscal quarter.

The ABL Credit Facility contains various covenants and restrictive provisions that limit Cactus LLC’s and each of its subsidiaries’ ability to, among other things:

incur additional indebtedness and create liens;

make investments or loans;

enter into asset sales;

make certain restricted payments and distributions; and

engage in transactions with affiliates.

The ABL Credit Facility also requires Cactus LLC to maintain a fixed charge coverage ratio of 1.0 to 1.0 based on the ratio of EBITDA (as defined therein) minus Unfinanced Capital Expenditures (as defined therein) to Fixed Charges (as defined therein) during certain periods, including when availability under the ABL Credit Facility is under certain levels. If Cactus LLC fails to perform its obligations under the ABL Credit Facility, (i) the commitments under the ABL Credit Facility could be terminated, (ii) any outstanding borrowings under the ABL Credit Facility may be declared immediately due and payable and (iii) the lenders may commence foreclosure or other actions against the collateral.

~~As of September 30,~~At March 31, 2019 and December 31, 2018, ~~we had~~although there were no borrowings outstanding under the ABL Credit ~~Facility. As of December 31, 2017, we had $248.5 million of borrowings outstanding under the term loan tranche of the Prior Credit Agreement, no borrowings outstanding under the Prior Revolving Credit~~ Facility, ~~and no outstanding letters of credit.~~

~~At September 30, 2018, although there were no borrowings outstanding,~~ the applicable margin on our Eurodollar borrowings was 1.5% plus an adjusted base rate of one or three month LIBOR. ~~At December 31, 2017, the weighted average interest rate for the borrowings under the Prior Credit Agreement was 7.3%.~~

As of ~~September 30,~~March 31, 2019 and December 31, 2018, we were in compliance with all covenants under the ABL Credit ~~Facility and as of December 31, 2017, we were in compliance with all covenants under the Prior Credit Agreement.~~Facility.

Loss on Debt Extinguishment

During the first quarter of 2018, we recorded a $4.3 million loss on early extinguishment of debt in conjunction with the repayment of the term loan portion of the Prior Credit Agreement with a portion of the net proceeds from our IPO. The loss consists of the write-off of the unamortized balance of debt discount and deferred loan costs of $2.1 million and ~~$2.2~~

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$2.2 million, respectively. The loss on debt extinguishment is included under other income (expense), net, in the consolidated statements of income.

5.6. Revenue

~~Accounting Policy~~

We account for revenue in accordance with Topic 606, which we adopted on January 1, 2018, using the modified retrospective method. The adoption of Topic 606 did not have a material impact on the timing or amounts of revenue recognized in our unaudited condensed consolidated financial statements and therefore did not have a material impact on our financial position, results of operations, equity or cash flows as of the adoption date or for the nine months ended September 30, 2018. Furthermore, we expect the impact of the adoption of the new standard to be immaterial to our revenue and gross profit on an ongoing basis. We did not recognize any cumulative-effect adjustment to retained earnings upon adoption as the impact was immaterial. Also, the comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

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Revenue Recognition

The majority of our revenues are derived from short-term contracts. Product sales generally do not include right of return or other significant post-delivery obligations. Revenues are recognized when we satisfy a performance obligation by transferring control of the promised goods or services to our customers at a point in time, in an amount specified in the contract with our customer and that reflects the consideration we expect to be entitled to in exchange for those goods or services. We also assess our ~~customer’s~~customers’ ability and intention to pay, which is based on a variety of factors including our ~~customer’s~~customers’ historical payment experience and financial condition. Payment terms and conditions vary, although terms generally include a requirement of payment within 30 days. Revenues are recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. We elected to treat shipping and handling associated with outbound freight as a fulfillment cost instead of as a separate performance obligation. We recognize the cost for shipping and handling when incurred as an expense in cost of sales.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer under Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts with customers contain a single performance obligation to provide agreed-upon products or services. For contracts with multiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price. In accordance with Topic 606, we do not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.

All of our contracts are less than one year in duration. We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

Disaggregation of Revenue

We disaggregate revenue from contracts with customers into three revenue categories: (i) product revenues, (ii) rental revenues and (iii) field service and other revenues. Approximately 99% of our revenues are from the United States. For the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, we derived ~~52%~~55% of our total revenues from the sale of our products, 24% of our total revenues from rental and 21% of our total revenues from field service and other. This compares to 51% of our total revenues from the sale of our products, 25% of our total revenues from rental and ~~23%~~24% of our total revenues from field service and ~~other.~~other for the three months ended March 31, 2018.

Contract Balances

We perform our obligations under contracts with our customers by transferring services and products in exchange for consideration. The timing of our performance ~~often differs~~can differ from the timing of invoicing and our ~~customer’s payment,~~customers’ payments, which ~~results~~can result in the recording of unbilled revenue and deferred revenue. Amounts in the consolidated balance sheet as of ~~September 30, 2018~~March 31, 2019 representing unbilled revenue within accounts receivable, net, were ~~$28.7~~$20.3 million, and amounts representing deferred revenue within accrued expenses and other current liabilities were ~~$1.2~~$1.6 million. This compares to an unbilled revenue balance of ~~$24.7~~$26.8 million and a deferred revenue balance of ~~$0.8~~$1.1 million as of December 31, ~~2017.~~2018.

Contract Costs

We do not incur any material costs of obtaining contracts.

~~6. Related Party Transactions~~

Prior to our IPO, we were party to a management services agreement with two Cactus LLC members, whereby Cactus paid an annual management fee totaling approximately $0.3 million, payable in four installments, each to be paid quarterly in advance, prorated for any partial year. In conjunction with our IPO, the management services agreement terminated pursuant to its terms. Management fee expenses for the nine months ended September 30, 2018 and 2017 were $0.1 million and $0.2 million, respectively. There were no outstanding balances due as of September 30, 2018 or December 31, 2017 under the management services agreement.

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7. Leases

We have operating and finance leases for real estate, apartments, forklifts, vehicles and trucks, and other equipment under non-cancellable agreements whose initial terms typically range from two to 10 years, including reasonably certain renewal options. We determine if these contracts are or contain a lease at inception and review the facts and circumstances of the arrangement to classify the leased asset as operating or finance under Topic 842. To assess whether a contract is or contains a lease, we consider whether (i) explicitly or implicitly identified assets have been deployed in the contract and (ii) whether we obtain substantially all the economic benefits from the use of that underlying asset and direct how and for what purpose the asset is used during the term of the contract.

The portion of active leases within our portfolio classified as operating leases under the new standard are included in operating lease right-of-use assets and short-term and long-term operating lease liabilities in our consolidated balance sheet. The finance leases portion of the active lease agreements are included in property and equipment and short-term and long-term finance lease obligations in our consolidated balance sheet. The ROU assets represent our right to use the underlying asset for the lease term and lease liabilities represent our obligation to make minimum lease payments arising from the lease for the duration of the lease term.

Certain of our leases include one or more options to renew, with renewal terms that can extend the lease term from one to 10 years or greater. The exercise of lease renewal options is typically at our discretion. Additionally, many leases contain early termination clauses, however, in our active lease agreements, early termination typically requires the concurrence of both parties to the lease. The measurement of the lease term includes options to extend or renew the lease when it is reasonably certain that we will exercise that option. We do not have leases that include options to purchase leased property or that provide for the automatic transfer of ownership of leased property to the Company, residual value guarantees, or the incurrence by the Company of other restrictions or covenants.

To determine the present value of future minimum lease payments, we use the implicit rate when readily determinable; however, many of our leases do not provide an implicit rate, therefore to determine the present value of minimum lease payments we use our incremental borrowing rate based on the information available at commencement date of the lease. Our finance lease agreements typically include an interest rate that is used to determine the present value of future lease payments.

Under Topic 842, minimum lease payments are expensed on a straight-line basis over the term of the lease, including reasonably certain renewal options. In addition, some leases may require additional contingent or variable lease payments based on factors specific to the individual agreement. Variable lease payments for which we are typically responsible include payment of real estate taxes and maintenance expenses. These payments are expensed as incurred and recorded as variable lease costs.

The following are the components of operating and finance lease costs:


		Three Months Ended March 31, 2019
Finance lease cost:
Amortization of right-of-use asset	$	1,881
Interest expense		203
Operating lease cost		1,865
Short-term lease cost		175
Variable lease cost		127
Sublease income		(99)
Total lease cost	$	4,152

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The following is supplemental cash flow information for our operating and finance leases:


		Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	$	203
Operating cash flows from operating leases		1,710
Financing cash flows from finance leases		1,846
Total	$	3,759

Right-of-use assets obtained in exchange for new lease obligations:
Operating leases		1,407
Finance leases		216
Total	$	1,623

The following is the aggregate future lease payments for operating and finance leases as of March 31, 2019:


		Operating		Finance
2019 (remaining)	$	5,880	$	6,320
2020		6,801		6,684
2021		4,352		2,553
2022		3,221		76
2023		2,257		-
Thereafter		6,566		-
Total undiscounted lease payments		29,077		15,633
Less: Imputed interest		3,551		1,452
Present value of lease payments	$	25,526	$	14,181

The following represents the aggregate future lease payments for operating leases under ASC 840 as of December 31, 2018:


		Operating
2019	$	6,638
2020		4,618
2021		3,487
2022		2,195
2023		1,426
Thereafter		3,339
	$	21,703

The following represents the average lease terms and discount rates for our operating and finance lease portfolio as of March 31, 2019:


	Three Months Ended March 31, 2019
Weighted average remaining lease term:
Finance leases	1.91	years
Operating leases	5.59	years

Weighted average discount rate
Finance leases	11.95	%
Operating leases	4.52	%

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As a lessor, we rent a fleet of frac valves and ancillary equipment for short-term rental periods, typically one to two months. Our lessor portfolio consists mainly of operating leases with onshore unconventional oil and gas wells and are utilized during the drilling, completion and production phases of our customers’ wells. At this time, most lessor agreements contain less than three-month terms with no renewal options that are reasonably certain to exercise, or early termination options based on established terms specific to the individual agreement. See Note 6 for disaggregation of revenue.

8. Income Taxes

Cactus Inc. is a corporation and is subject to U.S. federal as well as state income tax related to its ownership percentage in Cactus LLC.

For the three months ended March 31, 2019, the Company recognized a tax benefit of $1.0 million (-2.0% effective tax rate), which includes an $8.2 million release of our valuation allowance as discussed below. This is compared to an income tax expense of $1.7 million (5.9% effective tax rate) for the three months ended March 31, 2018. In addition to the partial release of our valuation allowance, the Company’s effective tax rate is lower than the statutory federal rate of 21% primarily due to the fact that Cactus Inc. is only subject to federal and state income tax on its share of income of Cactus LLC. Income relating to non-controlling interest is not subject to U.S. federal or state tax.

We record uncertain tax positions on the basis of a two-step process in which (1) we determine whether it is more-likely-than-not the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions meeting the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. The Company does not have any uncertain tax positions as of March 31, 2019.

We recognize deferred tax assets to the extent we believe these assets are more-likely-than-not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations.

Based upon our cumulative earnings history and forecasted future sources of taxable income, we believe that we will be able to realize the majority of our U.S. deferred tax assets in the future. We do not expect to realize the portion of our deferred tax asset for our investment in Cactus LLC that may only be realizable through the sale or liquidation of the investment and our ability to generate sufficient capital gains. However, as a result of the March 2019 Secondary Offering, we released $8.2 million of our valuation allowance and recorded a tax benefit of $8.2 million related to the realizable portion of the deferred tax asset. As of March 31, 2019, we have a valuation allowance of $19.4 million against this portion of the deferred tax asset. We have also recorded a valuation allowance of $1.8 million against our U.S. foreign tax credits. The foreign net operating losses have an indefinite carryforward period. We have recorded a full valuation allowance of $0.6 million against the deferred tax assets associated with the foreign net operating loss carryforwards and other items due to the uncertainty of realization.

9.Related Party Transactions

From time to time, we rent a plane under dry-lease from a company owned by a member of Cactus LLC. These transactions are under short-term rental arrangements. During the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ expense recognized in connection with these rentals totaled $0.1 million for the respective periods. ~~For the nine months ended September 30, 2018 and 2017, expense recognized in connection with these rentals totaled $0.3 million and $0.~~2 ~~million, respectively.~~ As of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017, we~~2018, Cactus LLC owed less than $0.1 million, respectively, to the related party which ~~are~~is included in accounts payable in the consolidated balance sheets.

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We are also party to a TRA with certain direct and indirect holders of CW Units, including certain of our officers, directors and employees. These TRA Holders have the right in the future to receive 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that Cactus Inc. actually realizes or is deemed to ~~realize.~~realize in certain circumstances. The total TRA liability ~~from the TRA~~ as of ~~September 30, 2018~~March 31, 2019 was ~~$161.8~~$224.5 million. The estimated annual amounts and timing of this liability is presented in Note 10.

Distributions made by Cactus LLC are generally ~~require~~required to be made pro-rata ~~distribution~~ among all of its members. For the three ~~and nine~~ months ended ~~September 30, 2018,~~March 31, 2019, Cactus LLC made $1.6 million and $3.8 million, respectively, in distributions to Cactus Inc. to cover its quarterly estimated tax payment to the IRS. Cactus LLC also made an aggregate $1.6 million and $5.8 million in pro-rata distributions to its other members over the same periods.

paid a cash distribution of $0.2 million. Prior to our IPO, ~~on January 25, 2018,~~ Cactus LLC paid a cash distribution of $26.0 million to pre-IPO ~~owners.~~owners on January 25, 2018. This distribution was funded by borrowing under ~~a revolving credit facility.~~the Prior Revolving Credit Facility. The purpose of the distribution was primarily to provide funds to these owners to pay their federal and state tax liabilities associated with taxable income recognized by them for periods prior to the completion of our IPO as a result of their ownership interests in Cactus LLC. The borrowings under ~~this revolving credit facility~~the Prior Revolving Credit Facility were repaid during the first quarter of 2018.

7.10. Commitments and Contingencies

~~Operating Leases and Capital Leases~~

~~We lease certain facilities, vehicles, equipment, office and manufacturing space under noncancelable operating leases which expire at various dates through 2029. We are also party~~Liability Related to month-to-month leases that can be canceled at any time. Total rent expense related to operating leases for the three and nine months ended September 30, 2018 was $2.0 million and $5.7 million, respectively, compared to total rent expense of $1.8 million and $5.4 million for the three and nine months ended September 30, 2017, respectively.

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We also lease vehicles under capital leases. These leases are typically three years in duration and have no guaranteed residual values. Amounts included within property and equipment under capital leases as of September 30, 2018 and December 31, 2017 are as follows:

September 30,

December 31,

2018

2017

Cost

$
23,580

$
15,557

Accumulated depreciation

(6,884)

(2,672)

Net

$
16,696

$
12,885

Tax Receivable Agreement

The following table presents our contractual obligations for ~~the periods subsequent to September 30, 2018, including future minimum annual lease payments, including executory costs and interest, and the~~ payments of the liability related to the ~~TRA:~~TRA for periods subsequent to March 31, 2019:


	Operating Leases		Capital Leases		Liability related to TRA		Total		Liability related to TRA
Remainder of 2018	$	1,671	$	2,018	$	—	$	3,689
2019		5,538		8,167		12,170		25,875
Remainder of 2019									$	9,574
2020		4,485		6,205		8,215		18,905		14,019
2021		3,461		1,874		8,405		13,740		11,776
2022		2,176		—		8,601		10,777		12,036
2023										12,280
Thereafter		5,002		—		124,406		129,408		164,857
	$	22,333	$	18,264	$	161,797	$	202,394	$	224,542

Because we are a holding company with no operations of our own, our ability to make payments under the TRA is dependent on the ability of Cactus LLC to make distributions to Cactus Inc. in an amount sufficient to cover its obligations under the TRA. Distributions made by Cactus LLC are generally required to be made pro-rata among all of its members.

Legal Contingencies

We are involved in various disputes arising in the ordinary course of business. Management does not believe the outcome of these disputes will have a material adverse effect on our consolidated financial position or consolidated results of operations.

8.11. Employee Benefit Plans

401K Plan

Our employees within the United States are eligible to participate in a 401(k) plan (the “Plan”) sponsored by us. These employees are eligible to participate upon employment hire date and ~~obtaining~~reaching the age of eighteen. All eligible employees may contribute a percentage of their compensation subject to a maximum imposed by the Code. We match 100% of the first 3% of gross pay contributed by each employee and 50% of the next 4% of gross pay contributed by each employee. We may also make additional non-elective employer contributions at our discretion under the Plan. Similar benefit plans exist for employees of our foreign subsidiaries. During the three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ employer matching contributions totaled ~~$1.0~~$1.1 million and ~~$0.6~~$0.8 million, respectively. ~~For the nine months ended September 30, 2018 and 2017, employer matching contributions totaled $2.6 million and $1.5 million, respectively. Historically, we~~We have not made non-elective employer contributions under the Plan.

~~9. Supplemental Cash Flow Information~~

~~Non-cash investing and financing activities were as follows:~~

Nine Months Ended September 30,

2018

2017
Property and equipment acquired under capital lease

$
8,199

$
8,531
Property and equipment in payables

3,001

2,115

2019

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~~In conjunction with~~12. Stock-based Compensation

Long-term Incentive Plan

Prior to the completion of our IPO, ~~we issued~~the Company adopted the long-term incentive plan (“LTIP”) to incentivize individuals providing services to us or our affiliates. The LTIP provides for the grant, from time to time, at the discretion of our compensation committee of our board of directors, of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents, other stock-based awards, cash awards, substitute awards and ~~contributed~~performance awards. Any individual who is our officer or employee or an officer or employee of any of our affiliates, and any other person who provides services to us or our affiliates, including members of our board of directors, will be eligible to receive awards under the LTIP at the discretion of our board of directors.

Restricted Stock Units

Restricted stock units (“RSU’s”) granted pursuant to the LTIP are expected to be settled in shares of the Company's Class BA common stock ~~to owners~~if they vest.

The following table is a summary of ~~CW Units equal~~restricted stock unit activity for the three months ended March 31, 2019:


	Three Months Ended March 31, 2019
	No. of Stock Units		Weighted Average Grant Date Fair Value
	(in thousands)
Nonvested as of December 31, 2018		782	$	19.84
Granted		204	$	37.37
Vested		(264)	$	19.00
Nonvested as of March 31, 2019		722	$	25.11

Stock-based Compensation

During the three months ended March 31, 2019 and 2018, we recorded $1.7 million and $0.8 million, respectively, of stock-based compensation expense primarily in selling, general and administrative expenses. There was approximately $16.8 million of unrecognized compensation expense relating to the ~~number~~unvested RSU’s as of ~~outstanding CW Units held by~~March 31, 2019. The unrecognized compensation expense will be recognized over the ~~owners thereof. The Class B common stock has no economic interest and does not share in cash dividends or liquidation rights.~~weighted average remaining vesting period of 2.5 years.

~~10.~~13. Earnings ~~Per~~per Share

Basic earnings per share of Class A common stock is calculated by dividing the net income attributable to Cactus Inc. during the period by the weighted average number of shares of Class A common stock outstanding during the same period. Diluted earnings per share of Class A common stock is calculated by dividing the net income attributable to Cactus Inc. during that period by the weighted average number of common shares outstanding assuming all potentially dilutive shares were issued.

~~Dilution for~~The Company uses the ~~period includes~~“if-converted” method to determine the potential dilutive effect of outstanding CW Units (and corresponding shares of its outstanding Class B common stock), and the treasury stock method to determine the potential dilutive effect of unvested restricted stock units ~~under the treasury method~~ assuming that the proceeds will be used to purchase shares of Class A common stock.

There were no shares of Class A common stock or Class B common stock outstanding prior to February 12, 2018, therefore no earnings per share information has been presented for any period prior to that date.

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The following table summarizes the basic and diluted earnings per share ~~calculations:~~calculations (shares in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2018		2017		2018		2017		2019		2018
Numerator:
Net income attributable to Cactus Inc.(1)	$	18,672	$	—	$	34,759	$	—	$	26,807	$	3,753
Denominator:
Weighted average Class A shares outstanding—basic		35,821		—		30,182		—		38,719		26,450
Effect of dilutive shares ~~(1)~~(2)		408				340				36,527		198
Weighted average Class A shares outstanding—diluted ~~(1)~~(2)		36,229				30,522		—		75,246		26,648

Earnings per Class A Share—basic	$	0.52	$	—	$	1.15	$	—
Earnings per Class A Share—diluted (1)	$	0.52	$	—	$	1.14	$	—
Earnings per Class A share—basic									$	0.69	$	0.14
Earnings per Class A share—diluted (1) (2)									$	0.59	$	0.14

(1)

Under the if-converted method, the numerator is adjusted in the calculation of diluted earnings per share to include $17.5 million of additional income attributable to non-controlling interest adjusted for a corporate effective tax rate of 24%.

(2)

Diluted earnings per share for the ~~periods presented~~three months ended March 31, 2019 includes 36,292 shares of Class B common stock assuming conversion, plus the dilutive effect of 235 shares of restricted stock unit awards. Diluted earnings per share for the three months ended March 31, 2018 excludes ~~37,243,210~~48,440 shares of Class B common stock as the effect would be anti-dilutive.

14. Supplemental Cash Flow Information

Non-cash investing and financing activities were as follows:


	Three Months Ended March 31,
	2019		2018
Property and equipment acquired under capital lease	$	216	$	3,092
Property and equipment in payables		3,643		4,512

In conjunction with our IPO, we issued and contributed shares of Class B common stock to owners of CW Units equal to the number of outstanding CW Units held by such owners. The Class B common stock has no economic interest and does not share in cash dividends or liquidation rights.

During the first quarter of 2019, we issued 8,517,733 shares of Class A common stock pursuant to redemptions of CW Units by holders thereof.

15. Subsequent Events

In April 2019, certain CW Unit Holders redeemed 0.4 million CW Units pursuant to the Redemption Right, together with a corresponding number of shares of the Class B common stock of the Company, par value $0.01 per share. The Company acquired the redeemed CW Units and a corresponding number of shares of Class B Common Stock (which shares of Class B common stock were then canceled) and issued 0.4 million shares of Class A common stock to the CW Unit Holders. Pursuant to the TRA, these CW Units redeemed will create additional liability and follow the same accounting procedures described in Note 2.

In April 2019, Cactus LLC distributed $5.8 million to Cactus Inc. to fund a portion of its expected 2019 TRA liability payments and made pro-rata distributions to its other members totaling $3.6 million.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Except as otherwise indicated or required by the context, all references in this Quarterly Report to the “Company,” “Cactus,” “we,” “us” and “our” refer to (i) Cactus, Inc. (“Cactus Inc.”) and its consolidated subsidiaries (including Cactus LLC) following the completion of our initial public offering on February 12, 2018 (our “IPO”), unless we state otherwise or the context otherwise requires and (ii) Cactus Wellhead, LLC (“Cactus LLC”) and its consolidated subsidiaries prior to the completion of our IPO. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes. The following discussion contains “forward-looking statements” that reflect our plans, estimates, beliefs and expected performance. Our actual results may differ materially from those anticipated as discussed in these forward-looking statements as a result of a variety of risks and uncertainties, including those described above in “Cautionary Note Regarding Forward-Looking Statements” and included elsewhere in this Quarterly Report, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements except as otherwise required by law.

Executive Summary

We design, manufacture, sell and rent a range of highly engineered wellhead and pressure control equipment. Our products are sold and rented principally for onshore unconventional oil and gas wells and are utilized during the drilling, completion ~~(including fracturing)~~ and production phases of our customers’ wells. In addition, we provide field services for all of our products and rental items to assist with the installation, maintenance and handling of the wellhead and pressure control equipment.

Our principal products include our Cactus SafeDrill® wellhead systems, as well as frac stacks, zipper manifolds and production trees that we design and manufacture. Every oil and gas well requires a wellhead, which is installed at the onset of the drilling process and which remains with the well through its entire productive life. The Cactus SafeDrill® wellhead systems employ technology which allows technicians to land and secure casing strings more safely from the rig floor reducing the need to descend into the cellar. We believe we are a market leader in the application of such technology, with thousands of our products sold and installed across the United States since 2011. During the completion phase of a well, we rent frac stacks, zipper manifolds and other high‑pressure equipment that are used for well control and for managing the transmission of frac fluids and proppants during the hydraulic fracturing process. These severe service applications require robust and reliable equipment. For the subsequent production phase of a well, we sell production trees that regulate hydrocarbon production, which are installed on the wellhead after the frac stack has been removed. In addition, we provide mission‑critical field services for all of our products and rental items, including 24‑hour service crews to assist with the installation, maintenance and safe handling of the wellhead and pressure control equipment. Finally, we provide repair services for all of the equipment that we sell or rent.

Our innovative wellhead products and pressure control equipment are developed internally. We believe our close relationship with our customers provides us with insight into the specific issues encountered in the drilling and completion processes, allowing us to provide them with highly tailored product and service solutions. We have achieved significant market share, as measured by the percentage of total active U.S. onshore rigs that we follow (which we define as the number of active U.S. onshore drilling rigs to which we are the primary provider of wellhead products and corresponding services during drilling), and brand name recognition with respect to our engineered products, which we believe is due to our focus on safety, reliability, cost effectiveness and time saving features. We optimize our products for pad drilling (i.e., the process of drilling multiple wellbores from a single surface location) to reduce rig time and provide operators with significant efficiencies that translate to cost savings at the wellsite.

Our manufacturing and production facilities are located in Bossier City, Louisiana and Suzhou, China. While both facilities can produce our full range of products, our Bossier City facility has advanced capabilities and is designed to support time‑sensitive and rapid turnaround orders, while our facility in China is optimized for longer lead time orders and outsources its machining requirements. Both our United States and China facilities are licensed to the latest API 6A specification for both wellheads and valves and API Q1 and ISO9001:2015 quality management systems.

We operate 15through service centers in the United States, which are strategically located in the key oil and gas producing regions, including the Permian, SCOOP/STACK, Marcellus, Utica, Eagle Ford, Bakken, ~~and~~among other active oil and gas

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regions in the United ~~States. We also have one service center~~States, and in Eastern Australia. These service centers support our field services and provide equipment assembly and repair services.

~~Market Factors~~ Our manufacturing and ~~Trends~~

~~Demand for our products~~production facilities are located in Bossier City, Louisiana and services depends primarily upon the general level of activity in the oil and gas industry, including the number of drilling rigs in operation, the number of oil and gas wells being drilled, the depth and drilling conditions of these wells, the number of well completions and the level of well remediation activity, the volume of production and the corresponding capital spending by oil and natural gas companies. Oil and gas activity is in turn heavily influenced by, among other factors, oil and gas prices locally and worldwide, which have historically been volatile.

Through September 30, 2018, the year-to-date weekly average U.S. onshore rig count as reported by Baker Hughes was 998 rigs. The weekly average U.S. onshore rig count for the full year 2017 was 853 rigs. These rig counts are a material increase relative to the full year 2016 weekly average of 483 rigs.

The key market factor impacting our product sales is the number of wells drilled, as each well requires an individual wellhead assembly, and after completion, the installation of an associated production tree. We measure our product sales activity levels versus our competitors’ by the number of rigs that we are supporting on a monthly basis as a proxy for wells drilled. Each active drilling rig produces different levels of revenue based on the customer’s drilling plan, which includes factors such as the number of wells drilled per pad, the time taken to drill each well, the number and size of casing strings, the working pressure, material selection and the complexity of the wellhead system chosen by the customer and the rate at which production trees are eventually deployed. All of these factors may be influenced by the oil and gas region in which our customer is operating. While these factors may lead to differing revenues per rig, they allow us to forecast our product needs and anticipated revenue levels based on general trends in a given region and with a specific customer.

Our rental revenues are primarily dependent on the number of wells completed (i.e., hydraulically fractured) and the number of fracture stages per well. Rental revenues and prices are more dependent on overall industry activity levels in the short‑term than product sales. This is due to the more competitive and price‑sensitive nature of the rental market with more participants having access to completions‑focused rental equipment. We believe, however, that the current number of drilled but uncompleted wells (“DUCs”) and any increases thereto, particularly resulting from near-term takeaway issues, could ultimately provide additional opportunities although we recognize that not all DUCs may be completed.

Service and other revenues are closely correlated to revenues from product sales and rentals, as items sold or rented almost always have an associated service component. Nearly all service sales are offered in connection with a product sale or rental. Therefore, the market factors and trends of product sales and rental revenues similarly impact the associated levels of service and other revenues generated.

Also, our business experiences seasonality during the fourth quarter due to holidays and customers managing their budgets as the year closes out. This can lead to lower activity in our three revenue categories.

On September 21, 2018, the U.S. Trade Representative (‘‘USTR’’) determined to modify its prior actions in its investigation into certain acts, policies, and practices of the Government of China related to technology transfer, intellectual property, and innovation pursuant to Section 301 by imposing additional tariffs on products ofSuzhou, China. Substantially all of the products that we import through our Chinese supply chain are subject to the tariffs that took effect on September 24, 2018. In the three months ended September 30, 2018, we estimate that 50% of our inventory received was sourced through our Chinese supply chain. These aforementioned tariffs have been set at a level of 10% until the end of the year, at which point, in the absence of further action by the USTR, the tariffs will increase to 25%. We believe that we should be able to recover a significant portion of the increased costs from the 10% tariffs that took effect on September 24, 2018, and that they should not have a material adverse effect on our results of operations. We believe that a combination of factors should mitigate the impact of the anticipated increase in the tariff rate to 25% on our results of operations, including, among other things, our negotiations with customers and suppliers, favorable currency exchange expectations and our expected future growth. Accordingly, we believe the anticipated increase in the tariff rate to 25% should not have a material adverse effect on our results of operations; however, there remains significant uncertainty as to the degree of any adverse impact.

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~~How We Generate Our Revenues~~

Our revenues are derived from three sources: products, rentals, and field service and other. Product revenues are primarily derived from the sale of wellhead systems and production trees. Rental revenues are primarily derived from the rental and associated repair of equipment used for well control during the completion process as well as the rental of drilling tools. Field service and other revenues are primarily earned when we provide installation and other field services for both product sales and equipment rental. Additionally, other revenues are derived from providing repair and reconditioning services to customers that have previously installed our products on their wellsite. Items sold or rented generally have an associated service component. As a result, there is some level of correlation between field service and other revenues and revenues from product sales and rentals.

In the ~~nine~~three months ended ~~September 30,~~March 31, 2019, we derived 55% of our total revenues from the sale of our products, 24% of our total revenues from rental and 21% of our total revenues from field service and other. In the three months ended March 31, 2018, we derived ~~52%~~51% of our total revenues from the sale of our products, 25% of our total revenues from rental and 23% of our total revenues from field service and other. In the nine months ended September 30, 2017, we derived 56% of our total revenues from the sale of our products, 22% of our total revenues from rental and 22%24% of our total revenues from field service and other. We have predominantly domestic operations, with 99% of our total sales for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively, earned from U.S. operations.

~~Substantially all of our sales are made on a call‑out basis, wherein our clients issue requests~~Market Factors and Trends

Demand for ~~goods and/or services as their operations require. Such goods and/or services are most often priced in accordance with a preapproved price list.~~

~~Generally, we attempt to raise prices as our costs increase or additional features are provided. However, the actual pricing of~~ our products and services ~~is impacted by a~~depends primarily upon the general level of activity in the oil and gas industry, including the number of ~~factors, including competitive pricing pressure,~~drilling rigs in operation, the number of oil and gas wells being drilled, the depth and drilling conditions of these wells, the number of well completions and associated frac crews operating, the level of ~~utilized capacity~~well remediation activity, and the volume of production and the corresponding capital spending by oil and natural gas companies. Oil and gas activity is in turn heavily influenced by, among other factors, oil and gas prices locally and worldwide, which have historically been volatile.

Oil supply markets tightened in 2017 and through the third quarter of 2018, driving 2018 average West Texas Intermediate (“WTI”) crude oil ~~service sector, capital discipline within our client base, maintenance~~prices higher. However, during the fourth quarter of ~~market share~~2018, crude oil prices declined following concerns over slowing worldwide demand and ~~general market conditions.~~

~~Costs~~the granting of ~~Conducting Our Business~~

~~The principal elements~~waivers to several purchasers of cost of sales for products are the direct and indirect costs to manufacture and supply the product, including labor, materials, machine time, lease expense related to our facilities and freight. The principal elements of cost of sales for rentals are the direct and indirect costs of supplying rental equipment, including depreciation, repairs specifically performed on such rental equipment and freight. The principal elements of cost of sales for field service and other are labor, equipment depreciation and repair, equipment lease expense, fuel and supplies.

~~As discussed above, substantially all~~Iranian oil. In response, many of the ~~products that we import through our Chinese supply chain are subject~~larger publicly traded exploration and production (“E&P”) companies announced plans to the tariffs that took effect on September 24, 2018. These aforementioned tariffs have been set at a level of 10% until the end of the year, at which point, in the absence of further action by the USTR, the tariffs will increase to 25%, and will therefore cause the costs of our products to increase. reduce

Selling, general and administrative expense is comprised of costs such as sales and marketing, engineering expenses, general corporate overhead, business development expenses, compensation expense, stock-based compensation expense, IT expenses, safety and environmental expenses, legal and professional expenses and other related administrative functions.

Interest expense, net is currently comprised primarily of interest expense associated with our Prior Credit Agreement (as defined below), our ABL Credit Facility (as defined below) and capital leases. A portion of the net proceeds of our IPO were used to repay the borrowings outstanding under our term loan facility in February 2018.

~~Factors Affecting the Comparability of Our Financial Condition and Results of Operations~~

~~Our historical financial condition and results of operations for the periods presented may not be comparable, either from period to period or going forward, for the following reasons:~~

~~Selling, General and Administrative Expenses.~~ We expect to incur additional selling, general and administrative expenses as a result of being a publicly traded company. These costs include expenses associated with our annual and quarterly reporting, tax return preparation expenses, Sarbanes‑Oxley

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compliance expenses, audit fees, legal fees, directors and officers insurance, investor relations expenses, administration expenses relating to a tax receivable agreement (the “TRA”) with certain direct and indirect owners of units (“CW Units”) in Cactus LLC (the “TRA Holders”) and registrar and transfer agent fees. We also expect to incur greater stock-based compensation expense related to equity awards granted by Cactus Inc. These increases in selling, general and administrative expenses are not reflected in our historical financial statements prior to our IPO, other than a portion of these costs incurred in 2017 in preparation of becoming a public company and historical compensation expense related to equity awards granted as a private company.

their capital budgets year-over-year for 2019 which may reduce the amount of planned drilling and completion activity in 2019. Despite a return to more balanced global oil markets and higher crude prices thus far in 2019, E&P companies may be reluctant to increase capital spending plans. We are well positioned to respond to increased demand for our products and rental equipment but are also prepared to pull back and react to weaker customer demand.

For the three months ended March 31, 2019, the weekly average U.S. onshore rig count as reported by Baker Hughes was 1,021 rigs. The weekly average U.S. onshore rig counts for the full year 2018 and 2017 were 1,011 rigs and 853 rigs, respectively. The U.S. onshore rig count as of March 31, 2019 was 981, below the year-to-date average of 1,021. To the extent the rig count remains at levels below year-to-date 2019 and 2018 levels, there may be reduced demand for our products and services. However, given the recovery in crude oil prices thus far in 2019, drilling activity declines are generally expected to moderate and potentially increase modestly later in 2019.

The key market factors impacting our product sales are the number of wells drilled and placed on production, as each well requires an individual wellhead assembly, and after completion, the installation of an associated production tree. We measure our product sales activity levels versus our competitors by the number of rigs that we are supporting on a monthly basis as a proxy for wells drilled. While numerous factors may lead to differing revenues per rig, we are able to broadly forecast our product needs and anticipated revenue levels based on general trends in a given region and with specific customers. Increases in horizontal wells drilled as a percentage of total wells drilled, the shift towards pad drilling, and an increase in the number of wells drilled per rig are all favorable trends that we believe enhance the demand for our products relative to the active rig count.

Our rental revenues are primarily dependent on the number of wells completed (i.e., hydraulically fractured), the number of wells on a well pad and the number of fracture stages per well. Well completion activity generally follows the level of drilling activity. We believe that the current number of drilled but uncompleted wells (“DUCs”), particularly resulting from near-term takeaway issues that are likely to be resolved later this year, could ultimately provide additional opportunities although we recognize that not all DUCs will be completed and that certain customers may elect to maintain an increased inventory of DUCs to provide production flexibility.

Service and other revenues are closely correlated to revenues from product sales and rentals, as items sold or rented almost always have an associated service component. Therefore, the market factors and trends of product sales and rental revenues similarly impact the associated levels of service and other revenues generated.

Our business experiences some seasonality during the fourth quarter due to holidays and customers managing their budgets as the year concludes. This can lead to lower activity in our three revenue categories as well as lower margins, particularly in field services due to reduced labor utilization.

Recent Developments

Reference is made to the disclosure in our Annual Report on Form 10-K for the year ended December 31, 2018 (our “2018 Annual Report”) under the headings “Part I. Item 1.—Business—Costs of Conducting our Business—Impact of Section 301 of the Trade Act of 1974 (“Section 301”)” and “Item 1.A. Risk Factors—The outcome of final actions under Section 301 of the Trade Act of 1974 may adversely affect our business.” During the week of May 5, 2019, President Trump and the U.S. Trade Representative indicated that tariffs on $200 billion of products imported from China would be raised from 10% to 25% effective on May 10, 2019 unless a trade agreement is reached.

~~Corporate Reorganization.~~ The historical consolidated financial statements are based on the financial statements of our accounting predecessor, Cactus LLC and its subsidiaries, prior to our reorganization in connection with our IPO. As a result, the historical consolidated financial data may not provide an accurate indication of what our actual results would have been if such transactions had been completed at the beginning of the periods presented or of what our future results of operations are likely to be. In addition, we entered into a TRA with the TRA Holders. This agreement generally provides for the payment by us to the TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize or are deemed to realize in certain circumstances in periods after our IPO as a result of certain increases in tax basis and imputed interest. We will retain the benefit of the remaining 15% of such net cash savings. See Note 2 of the Notes to Condensed Consolidated Financial Statements.

~~Income Taxes.~~ Cactus Inc. is a corporation and is subject to U.S. federal income taxes (currently at a statutory rate of 21% of pretax earnings, as adjusted by the Code), as well as state and local income taxes, on its share of income of Cactus LLC. Consequently, we will report income tax expense or benefit attributable to U.S. federal income taxes for periods following our IPO. Our accounting predecessor is a limited liability company that is treated as a partnership for U.S. federal income tax purposes, and therefore is not subject to U.S. federal income taxes. Accordingly, no provision for U.S. federal income taxes has been made in our historical results of operations prior to our IPO because taxable income was passed through to Cactus LLC’s members.

~~Long‑term Incentive Plan.~~ To incentivize individuals providing services to us or our affiliates, our board adopted a long‑term incentive plan (the “LTIP”) prior to the completion of our IPO. The LTIP provides for the grant, from time to time, at the discretion of our compensation committee of our board of directors, of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents, other stock‑based awards, cash awards, substitute awards and performance awards. Any individual who is our officer or employee or an officer or employee of any of our affiliates, and any other person who provides services to us or our affiliates, including members of our board of directors, will be eligible to receive awards under the LTIP at the discretion of our board of directors. In connection with our IPO, we issued 0.7 million restricted stock unit awards, which will vest over one to three years, to certain of our directors, officers and employees. Additional awards are expected to be granted from time to time. We recognize stock-based compensation expense over the vesting terms related to the respective issuance.

~~Non-controlling Interest~~. As a result of our IPO and a series of related reorganization transactions in connection with the IPO (the “Reorganization”), Cactus Inc. is the sole managing member of Cactus LLC and consolidates entities in which it has a controlling financial interest. The Reorganization was considered a transaction between entities under common control. As a result, the financial statements for periods prior to our IPO and the Reorganization have been adjusted to combine the previously separate entities for presentation purposes. However, Cactus Inc. had no operations or assets and liabilities prior to our IPO. As such, for periods prior to the completion of our IPO, the consolidated financial statements represent the historical financial position and results of operations of Cactus LLC and its subsidiaries. For periods after the completion of our IPO, the financial position and results of operations include those of Cactus and report the non-controlling interest related to the portion of CW Units not owned by Cactus Inc. All Class B common stock is held by non-controlling interest owners.

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Consolidated Results of Operations

Three Months Ended ~~September 30, 2018~~March 31, 2019 Compared to Three Months Ended ~~September 30, 2017~~March 31, 2018

The following table presents summary consolidated operating results for the periods indicated:


	Three Months Ended								Three Months Ended
	September 30,								March 31,
	2018		2017		$ Change		% Change		2019		2018		$ Change		% Change
	(in thousands)								(in thousands)
Revenues
Product revenue	$	79,388	$	53,680	$	25,708	47.9	%	$	86,640	$	58,926	$	27,714	47.0	%
Rental revenue		38,135		21,199		16,936	79.9			38,497		29,145		9,352	32.1
Field service and other revenue		33,135		21,148		11,987	56.7			33,738		27,039		6,699	24.8
Total revenues		150,658		96,027		54,631	56.9			158,875		115,110		43,765	38.0
Costs and expenses
Cost of product revenue		46,816		33,873		12,943	38.2			53,018		37,066		15,952	43.0
Cost of rental revenue		15,349		10,686		4,663	43.6			17,791		12,176		5,615	46.1
Cost of field service and other revenue		25,309		16,313		8,996	55.1			26,906		21,537		5,369	24.9
Selling, general and administrative expenses		11,051		7,096		3,955	55.7			12,668		9,114		3,554	39.0
Total costs and expenses		98,525		67,968		30,557	45.0			110,383		79,893		30,490	38.2
Income from operations		52,133		28,059		24,074	85.8			48,492		35,217		13,275	37.7

Interest expense, net		(270)		(5,279)		(5,009)	(94.9)
Interest income (expense), net										23		(2,852)		(2,875)	(100.8)
Other income (expense), net										(1,042)		(4,305)		(3,263)	(75.8)
Income before income taxes		51,863		22,780		29,083	127.7			47,473		28,060		19,413	69.2
Income tax expense		8,215		479		7,736	1,615.0
Income tax expense (benefit)										(973)		1,652		(2,625)	(158.9)
Net income	$	43,648	$	22,301	$	21,347	95.7	%	$	48,446	$	26,408	$	22,038	83.5	%

Revenues

Product revenue for the three months ended ~~September 30, 2018~~March 31, 2019 was ~~$79.4~~$86.6 million, an increase of ~~$25.7~~$27.7 million, or ~~48%~~47%, from ~~$53.7~~$58.9 million for the three months ended ~~September 30, 2017.~~March 31, 2018. The increase was primarily attributable to increased sales of wellhead and production related equipment due to our increased market share and greater ~~volume of product sales associated with an increase in U.S. onshore~~drilling activity ~~compared to the same period in 2017. U.S. onshore activity is generally measured in number of wells drilled and drilling rig count.~~from customers. The quarterly average U.S. onshore rig count increased ~~11%~~8% to ~~1,029~~1,021 rigs for the three months ended ~~September 30, 2018~~March 31, 2019 compared to ~~924~~948 rigs for the same period in ~~2017.~~2018. Additionally, the number of rigs followed by Cactus increased 19% to ~~282~~297 rigs during the ~~third~~first quarter ~~2018~~2019 compared to ~~237~~250 rigs for the ~~third~~first quarter ~~2017.~~2018. The term “rigs followed” represents the approximate number of active U.S. onshore drilling rigs to which we were the primary provider of wellhead products and corresponding services during drilling. Product revenue has historically tracked the rig count and has increased significantly due to the greater number of rigs and drilling activity conducted onshore in the U.S. including the increase in the number of wells being drilled. We have also seen an increase in the sale of production trees as more wells are put on production.

Rental revenue for the three months ended ~~September 30, 2018~~March 31, 2019 was ~~$38.1~~$38.5 million, an increase of ~~$16.9~~$9.4 million, or ~~80%~~32%, from ~~$21.2~~$29.1 million for the three months ended ~~September 30, 2017.~~March 31, 2018. The increase was primarily attributable to ~~higher utilization related to continued strength~~increased investment in ~~demand placed on~~ our rental fleet ~~and the significant increase in the capacity~~that enabled us to take advantage of ~~our rental fleet due to the investment in rental assets throughout 2018.~~greater completion activity from customers.

Field service and other revenue for the three months ended ~~September 30, 2018~~March 31, 2019 was ~~$33.1~~$33.7 million, an increase of ~~$12.0~~$6.7 million, or ~~57%~~25%, from ~~$21.1~~$27.0 million for the three months ended ~~September 30, 2017.~~March 31, 2018. The increase was primarily attributable to the higher demand for these services following the increase in our product and rental revenue, as field service is closely correlated with ~~both of~~ these activities.

Costs and expenses

Cost of product revenue for the three months ended ~~September 30, 2018~~March 31, 2019 was ~~$46.8~~$53.0 million, an increase of ~~$12.9~~$16.0 million, or ~~38%~~43%, from ~~$33.9~~$37.1 million for the three months ended ~~September 30, 2017.~~March 31, 2018. The increase was largely attributable to an increase in product sales volume driven by higher demand for our products.

Cost of rental revenue for the three months ended March 31, 2019 was $17.8 million, an increase of $5.6 million, or 46%, from $12.2 million for the three months ended March 31, 2018. The increase was largely attributable to higher

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attributable to greater costs of goods sold associated with the increase in product sales volume as a result of the higher demand for our products. Gross profit during the third quarter of 2018 includes the benefit of increased sourcing of product from our Suzhou facility as well as improved operating efficiencies.

Cost of rental revenue for the three months ended September 30, 2018 was $15.3 million, an increase of $4.7 million, or 44%, from $10.7 million for the three months ended September 30, 2017. The increase was primarily due to higher depreciation expense ~~and~~on a larger rental fleet, increased repair costs associated with a larger and more active rental ~~fleet. Gross profit improved period over period due to better utilization~~fleet, and an increase in costs associated with the deployment of ~~our fleet as a result of increased completions activity.~~assets into the field.

Cost of field service and other revenue for the three months ended ~~September 30, 2018~~March 31, 2019 was ~~$25.3~~$26.9 million, an increase of ~~$9.0~~$5.4 million, or ~~55%~~25%, from ~~$16.3~~$21.5 million for the three months ended ~~September 30, 2017.~~March 31, 2018. The increase was ~~primarily~~largely attributable to higher payroll costs due to additional field personnel and higher volume driven operating ~~costs due to activity increases.~~costs.

Selling, general and administrative expense for the three months ended ~~September 30, 2018~~March 31, 2019 was ~~$11.1~~$12.7 million, an increase of ~~$4.0~~$3.6 million, or ~~56%~~39%, from ~~$7.1~~$9.1 million for the three months ended ~~September 30, 2017.~~March 31, 2018. The increase was ~~primarily due~~largely attributable to higher payroll and incentive compensation costs associated with our overall growth as well as higher stock-based compensation ~~expense~~expenses related to equity awards and other costs associated with being a public company.

Interest ~~expense,~~income (expense), net. Interest income, net for the three months ended March 31, 2019 was less than $0.1 million, compared to interest expense, net of $2.9 million for the three months ended March 31, 2018. The change is primarily due to the repayment of our previous term loan in mid-February 2018 in conjunction with our IPO.

Other income (expense), net. Other expense, net for the three months ended ~~September 30, 2018 was $0.3~~March 31, 2019 relates to $1.0 million in offering expenses associated with the secondary offering of our Class A common stock in March 2019 by certain selling stockholders. This compares to a ~~decrease~~$4.3 million loss on early extinguishment of ~~$5.0 million, or 95%, from $5.3 million~~debt for the three months ended ~~September 30, 2017. The decrease is due to~~March 31, 2018, recorded in conjunction with the repayment of our previous term loan ~~in mid-February 2018 in connection~~ with a portion of the net proceeds from our IPO. See Note 1 of the Notes to Condensed Consolidated Financial Statements for further details of the March 2019 Secondary Offering.

Income tax ~~expense.~~expense, (benefit). Cactus Inc. is subject to federal as well as state income tax on its share of income of Cactus LLC. Our operations prior to our IPO were not subject to U.S. federal income tax at an entity level. Income tax ~~expense~~benefit for the three months ended ~~September 30, 2018~~March 31, 2019 was ~~$8.2~~$1.0 million ~~(15.8% effective tax rate)~~ compared to ~~$0.5~~an income tax expense of $1.7 million ~~(2.1%~~(5.9% effective tax rate) for the three months ended ~~September 30, 2017.~~March 31, 2018. The ~~change was primarily attributable~~overall tax benefit recorded during the three months ended March 31, 2019 is due to ~~Cactus Inc. incurring U.S. federal income~~the release of $8.2 million of our valuation allowance in conjunction with the March 2019 Secondary Offering as a portion of our deferred tax ~~on its share of income of~~asset for our investment in Cactus LLC ~~during~~became realizable. In addition to the ~~quarter. The~~partial release of our valuation allowance, our effective tax rate is lower than the federal statutory rate of 21% as Cactus Inc. is only subject to federal and state income tax on its share of income of Cactus LLC. As of ~~September 30, 2018,~~March 31, 2019, Cactus Inc. owned ~~50.3% of Cactus LLC.~~

~~Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017~~

~~The following table presents summary consolidated operating results for the periods indicated:~~

Nine Months Ended

September 30,


2018

2017

$ Change

% Change

(in thousands)

Revenues









Product revenue

$
211,595

$
131,963

$
79,632

60.3
%
Rental revenue

102,224

52,979

49,245

93.0

Field service and other revenue

90,492

51,465

39,027

75.8

Total revenues

404,311

236,407

167,904

71.0

Costs and expenses









Cost of product revenue

128,897

86,564

42,333

48.9

Cost of rental revenue

41,477

28,173

13,304

47.2

Cost of field service and other revenue

70,084

41,011

29,073

70.9

Selling, general and administrative expenses

30,016

20,533

9,483

46.2

Total costs and expenses

270,474

176,281

94,193

53.4

Income from operations

133,837

60,126

73,711

122.6

Interest expense, net

(3,370)

(15,451)

(12,081)

(78.2)

Other income (expense), net

(4,305)

—

4,305

100.0

Income before income taxes

126,162

44,675

81,487

182.4

Income tax expense

14,564

942

13,622

1,446.1

Net income

$
111,598

$
43,733

$
67,865

155.2
%

~~Table of Contents~~

~~Revenues~~

Product revenue for the nine months ended September 30, 2018 was $211.6 million, an increase of $79.6 million, or 60%, from $132.0 million for the nine months ended September 30, 2017. The increase was primarily attributable to a significant increase in U.S. onshore activity compared to the same period in 2017. Overall, the number of drilling rigs operating has increased significantly as well as the number of wells drilled, which has increased the volume of our wellhead sales. We have also seen an increase in the sale of production trees as more wells are put on production.

Rental revenue for the nine months ended September 30, 2018 was $102.2 million, an increase of $49.2 million, or 93%, from $53.0 million for the nine months ended September 30, 2017. The increase was primarily attributable to higher utilization related to increased demand for our growing rental fleet and improved pricing.

Field service and other revenue for the nine months ended September 30, 2018 was $90.5 million, an increase of $39.0 million, or 76%, from $51.5 million for the nine months ended September 30, 2017. The increase was primarily attributable to higher demand for these services following the increase in our product and rental revenue, as field service is closely correlated with both of these activities.

~~Costs and expenses~~

Cost of product revenue for the nine months ended September 30, 2018 was $128.9 million, an increase of $42.3 million, or 49%, from $86.6 million for the nine months ended September 30, 2017. The increase was driven by the increase in product sales volume as a result of higher demand for our products.

Cost of rental revenue for the nine months ended September 30, 2018 was $41.5 million, an increase of $13.3 million, or 47%, from $28.2 million for the nine months ended September 30, 2017. The increase was primarily due to higher depreciation expense and repair costs associated with a larger, more active fleet.

Cost of field service and other revenue for the nine months ended September 30, 2018 was $70.1 million, an increase of $29.1 million, or 71%, from $41.0 million for the nine months ended September 30, 2017. The increase was primarily attributable to higher payroll costs due to additional field personnel and higher operating costs due to activity increases.

Selling, general and administrative expense for the nine months ended September 30, 2018 was $30.0 million, an increase of $9.5 million, or 46%, from $20.5 million for the nine months ended September 30, 2017. The increase was primarily due to higher payroll and incentive compensation costs associated with our overall growth, as well as higher stock-based compensation expense related to equity awards issued in conjunction with our IPO, and increased costs associated with being publicly traded.

~~Interest expense, net.~~ Interest expense, net for the nine months ended September 30, 2018 was $3.4 million, a decrease of $12.1 million, or 78%, from $15.5 million for the nine months ended September 30, 2017. The decrease is due to the repayment of our term loan in mid-February 2018 in connection with our IPO.

~~Other income (expense), net.~~ Other income (expense), net for the nine months ended September 30, 2018 relates to a $4.3 million loss on debt extinguishment related to the write off of the unamortized balance of debt discount and deferred loan costs in connection with the repayment of our term loan with a portion of the net proceeds of our IPO.

~~Income tax expense.~~ Income tax expense for the nine months ended September 30, 2018 was $14.6 million (11.5% effective tax rate) compared to $0.9 million (2.1% effective tax rate) for the nine months ended September 30, 2017. The change was primarily attributable to Cactus Inc. incurring U.S. federal income tax on its share of income61.8% of Cactus LLC ~~during the periods subsequent~~compared to ~~our IPO and Follow-on Offering in~~35.3% as of March 31, 2018.

Liquidity and Capital Resources

~~In February 2018, we completed~~Our ability to satisfy our IPO. We received net proceeds of $469.6 million from the sale of 26,450,000 shares of Class A common stock in our IPO (including the sale of 3,450,000 additional shares of Class A common stock pursuantliquidity requirements, including cash distributions to the ~~exercise~~holders of units representing limited liability company interests in ~~full by the underwriters of~~Cactus LLC (“CW Units”) to fund their ~~option~~respective income tax liabilities relating to ~~purchase additional shares of Class A common stock (the “Option”)). We contributed all~~their share of the ~~net proceeds~~income of ~~our IPO and the Option to~~ Cactus LLC ~~in exchange for~~

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~~CW Units. Cactus LLC used (i) $251.0 million of~~and to fund liabilities related to the ~~net proceeds to repay all of the borrowings outstanding, plus accrued interest, under our term loan facility and (ii) $216.4 million to redeem CW Units from~~tax receivable agreement (the “TRA”), that we entered into with certain current or past direct and indirect owners of Cactus ~~LLC. The remaining $2.2 million was held~~LLC (the “TRA Holders”), depends on our future operating performance, which is affected by ~~Cactus LLC to cover previously paid offering expenses.~~prevailing economic conditions, market conditions in the E&P industry, availability and cost of raw materials, and financial, business and other factors, many of which are beyond our control.

~~In July~~At March 31, 2019 and December 31, 2018, we ~~completed a public follow-on offering~~had $88.1 million and $70.8 million, respectively, of ~~11,196,562 shares (consisting of 10,000,000 base shares~~cash and 1,196,562 shares pursuant to the underwriters’ option to purchase additional shares) of Class A common stock (the “Follow-on Offering”) and received $359.3 million of net proceeds. Cactus Inc. contributed the net proceeds to Cactus LLC in exchange for CW Units. Cactus LLC then used the net proceeds to redeem 11,196,562 CW Units from certain of the other owners of Cactus LLC, and Cactus Inc. canceled corresponding shares of Class B common stock. No proceeds from this Follow-on Offering were retained by Cactus.

~~On August 21, 2018, Cactus LLC entered into~~cash equivalents. At March 31, 2019, we had no borrowings outstanding under the ABL Credit Facility ~~a five-year senior secured asset-based facility which provides for~~and we had $75.0 million ~~in revolving commitments, up to $15.0 million~~ of ~~which is~~ available ~~for the issuance of letters of credit. The Prior Credit Agreement was terminated concurrently with the effectiveness of, and as a condition of entering into, the~~borrowing capacity under our ABL Credit Facility. See Note 45 of the Notes to Condensed Consolidated Financial Statements. We were in compliance with the covenants of the ABL Credit Facility as of March 31, 2019.

We expect that our primary sources of liquidity and capital resources will be cash flows generated by operating activities and borrowings under our ABL Credit Facility. Depending upon market conditions and other factors, we may also have the ability to issue additional equity and debt if needed.

Our ability to satisfy our liquidity requirements, including cash distributions to the holders of CW Units to fund their share of taxes of the partnership and liabilities related to the TRA, depends on our future operating performance, which is affected by prevailing economic conditions, market conditions in the E&P industry, availability and cost of raw materials, and financial, business and other factors, many of which are beyond our control.

We currently estimate our net capital expenditures for the year ending December 31, ~~2018~~2019 will range from $60 million to $65 million, excluding acquisitions, mostly related to $70 million, excluding acquisitions. We accelerated and expanded our investments in frac equipment in response to increasing opportunities and client demands, expanded certain facilities, and we purchased a new branch facility in Hobbs, New Mexico.rental fleet investments. We continuously evaluate our capital expenditures, and the amount we ultimately spend will depend on a number of factors, including, among

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other things, demand for rental assets, ~~market opportunities,~~available capacity in existing locations, prevailing economic conditions, ~~the condition of our existing assets,~~ market conditions in the E&P industry, customers’ forecasts, demand and volatility ~~impact of tariff increases, available capacity~~ and company initiatives.

We believe that our existing cash on hand, cash generated from operations and available borrowings under our ABL Credit Facility will be sufficient to meet working capital requirements, anticipated capital expenditures, expected cash distributions to ~~the~~ holders of CW Units, expected TRA liability payments and anticipated tax ~~and TRA~~ liabilities for at least the next 12 months.

~~At September 30,~~Cash Flows

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018 ~~and December 31, 2017, we had $42.0~~

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


	Three Months Ended March 31,
	2019		2018
	(in thousands)
Net cash provided by operating activities	$	34,239	$	38,565
Net cash used in investing activities		(13,847)		(15,687)
Net cash used in financing activities		(3,555)		(22,640)

Net cash provided by operating activities was $34.2 million and ~~$7.6~~$38.6 million ~~respectively,~~for the three months ended March 31, 2019 and 2018, respectively. The primary reasons for the change were the $22.0 million increase in net income, offset by a $4.5 million decrease in non-cash items and a $21.8 million increase in net working capital use due to the increase in business activity during the first quarter 2019.

Net cash used in investing activities was $13.8 million and $15.7 million for the three months ended March 31, 2019 and 2018, respectively. The primary reasons for the decrease was slightly lower capital expenditures during the first quarter 2019 in addition to higher proceeds primarily from the sale of certain rental equipment and vehicles.

Net cash used in financing activities of $3.6 million for the three months ended March 31, 2019 consists of $1.5 million used to repurchase stock, $0.2 million in Cactus LLC member distributions and $1.8 million related to the principal payments on our finance leases. Net cash ~~equivalents. At September 30,~~used in financing activities of $22.6 million for the three months ended March 31, 2018 ~~we had $75.0~~was primarily related to the receipt of $469.6 million of ~~available borrowing capacity under~~net proceeds from our ~~ABL Credit Facility. As~~IPO, offset by (i) a $248.5 million repayment of ~~September 30, 2018, we had no~~the borrowings outstanding under ~~the ABL Credit Facility.~~

~~Prior~~our previous term loan and (ii) $216.4 million in redemptions of CW Units from certain direct and indirect owners of Cactus LLC in connection with our IPO. Additionally, we made a $26.0 million distribution to owners prior to our IPO on January 25, 2018, Cactus LLC paid a cash distribution of $26.0 million to its pre-IPO owners. This distribution was funded by borrowing under the revolving credit facility of the Prior Credit Agreement. The purpose of the distribution was to provide funds ~~to these owners~~ to pay their federal and state ~~tax~~ liabilities associated with taxable income recognized by them in the period prior to the completion of our IPO as a result of their ownership ~~interests~~ in Cactus LLC. ~~The borrowings under this revolving credit facility were repaid during~~

Tax Receivable Agreement

In connection with our IPO, we entered into the ~~first quarter~~TRA, which generally provides for the payment by Cactus Inc. to the TRA Holders of ~~2018. During~~85% of the ~~second~~net cash savings, if any, in U.S. federal, state and ~~third quarters~~local income tax or franchise tax that Cactus Inc. actually realizes or is deemed to realize in certain circumstances. Cactus Inc. will retain the benefit of ~~2018,~~the remaining 15% of these net cash savings. To the extent Cactus LLC ~~paid~~has available cash, we intend to cause Cactus LLC to make generally pro rata distributions ~~of $4.2 million and $1.6 million, respectively,~~ to its ~~members other than Cactus Inc.~~unitholders, including us, in an amount at least sufficient to allow us to pay our taxes and to make payments under the TRA.

Assuming no material changes in the relevant tax law, we expect that if the TRA were terminated as of March 31, 2019, the estimated termination payments, based on the assumptions discussed in Note 2 of the Notes to Condensed Consolidated Financial Statements, would be approximately $342 million, calculated using a discount rate equal to one-year LIBOR plus 150 basis points, applied against an undiscounted liability of $471 million. A 10% increase in the price of our Class A common stock at March 31, 2019 would have increased the discounted liability by $16 million to $358 million (an undiscounted increase of $25 million to $496 million), ~~which were funded by cash flow generated from operating activities.~~

and likewise, a 10% decrease in the price of our Class

2926

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~~Cash Flows~~

~~Nine Months Ended September 30, 2018 Compared~~A common stock at March 31, 2019 would have decreased the discounted liability by $17 million to ~~Nine Months Ended September 30, 2017~~

~~The following table summarizes our cash flows for the periods indicated:~~

Nine Months Ended September 30,

2018

2017

(in thousands)
Net cash provided by operating activities

$
122,350

$
19,510
Net cash used in investing activities

(54,407)

(21,427)
Net cash used in financing activities

(32,922)

(3,609)

~~Net cash provided by operating activities was $122.4~~$325 million ~~and $19.5~~(an undiscounted decrease of $25 million for the nine months ended September 30, 2018 and 2017, respectively. The primary reasons for the increase were a $67.9 million increase in net income and a $10.0 million period over period improvement in net working capital due to greater collections of receivables from the increase in business activity during the nine months ended September 30, 2018. We also had an increase of $25.0 million in non-cash items primarily related to $11.6 million in deferred income taxes, $4.9 million of additional depreciation, the $4.3 million loss on debt extinguishment recorded in conjunction with the repayment of our term loan and $3.4 million related to non-cash stock-based compensation expense.

Net cash used in investing activities was $54.4 million and $21.4 million for the nine months ended September 30, 2018 and 2017, respectively. The primary reasons for the increase was higher capital expenditures during 2018 related to investment in our rental fleet to meet the increased customer demand for our frac equipment as well as expansion of facilities.

Net cash used in financing activities was $32.9 million for the nine months ended September 30, 2018 compared to $3.6 million for the same period in 2017. The primary reason for the increase in use of cash related to the payment of $31.8 million in Cactus LLC member distributions to provide funds to pay their federal and state liabilities associated with taxable income recognized by them as a result of their ownership in Cactus LLC. Also during the nine months ended September 30, 2018, we received $828.2 million of net proceeds from our IPO, the Option and the Follow-on Offering offset by (i) a $248.5 million repayment of the borrowings outstanding under the term loan portion of our Prior Credit Agreement and (ii) $575.7 million in redemptions of CW Units from certain direct and indirect owners of Cactus LLC in connection with our IPO, the Option and the Follow-on Offering resulting in $4.0 million of net cash provided by these activities. $446 million).

Contractual Obligations

A summary of our contractual obligations as of ~~September 30, 2018~~March 31, 2019 is provided in the following table:

Payments Due by Period For the Year Ending December 31,


2018

2019

2020

2021

2022

Thereafter

Total

(in thousands)
Operating lease obligations(1)

$
1,671

$
5,538

$
4,485

$
3,461

$
2,176

$
5,002

$
22,333
Capital lease obligations(2)

2,018

8,167

6,205

1,874

—

—

18,264
Liability related to TRA(3)

—

12,170

8,215

8,405

8,601

124,406

161,797
Total

$
3,689

$
25,875

$
18,905

$
13,740

$
10,777

$
129,408

$
202,394



	Payments Due by Period For the Year Ending December 31,
	Remainder of 2019		2020		2021		2022		2023		Thereafter		Total
	(in thousands)
Operating lease liabilities (1)	$	5,090	$	6,010	$	3,783	$	2,803	$	1,947	$	5,893	$	25,526
Finance lease obligations (2)		5,679		6,055		2,373		74		—		—		14,181
Liability related to TRA (3)		9,574		14,019		11,776		12,036		12,280		164,857		224,542
Total	$	20,343	$	26,084	$	17,932	$	14,913	$	14,227	$	170,750	$	264,249

(1)

Operating lease obligations relate to real estate ~~vehicles~~ and equipment.

(2)

~~Capital~~Finance lease obligations relate to vehicles used in our business.

(3)

Represents obligations by Cactus to make payments under the TRA. The amount and timing of payments is subject to change.

~~Table of Contents~~

Off-Balance Sheet Arrangements

Currently, we do not have off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

For quantitative and qualitative disclosures about market risk, see Part II, Item 7A., “Quantitative and Qualitative Disclosures about Market Risk,” in our 2018 Annual ~~Report on Form 10-K for the year ended December 31, 2017 (our “2017 Annual Report”).~~Report. Our exposure to market risk has not changed materially since December 31, ~~2017.~~2018.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

In accordance with Exchange Act Rules 13a-15 and 15d-15, 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 period covered by this report. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act 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 and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of ~~September 30,~~March 31, 2019 due to a previously disclosed material weakness in internal control over financial reporting. This material weakness was identified and discussed in “Part II – Item 9A - Controls and Procedures” of our 2018 ~~at the reasonable assurance level.~~Annual Report.

Changes in Internal Control over Financial Reporting

There ~~were~~has been no ~~changes~~change in our internal control over financial reporting that occurred during the ~~third~~first quarter of ~~2018~~2019 that ~~have~~has materially affected, or is 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 party to lawsuits arising in the ordinary course of our business. We cannot predict the outcome of any such lawsuits with certainty, but management believes it is ~~remote~~unlikely that pending or threatened legal matters will have a material adverse impact on our financial condition.

Due to the nature of our business, we are, from time to time, involved in other routine litigation or subject to disputes or claims related to our business activities, including workers’ compensation claims and employment related disputes. In the opinion of our management, none of these other pending litigation, ~~matters,~~ disputes or claims against us, if decided adversely, will have a material adverse effect on our results of operations, financial condition or cash ~~flows or results of operations.~~flows.

Item 1A. Risk Factors.

In addition to the ~~other risk factors and~~ information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under the heading “Item 1A. Risk Factors” included in our ~~2017~~2018 Annual Report and the risk factors and other cautionary statements contained in our other filings with the Securities and Exchange Commission, which could materially affect our business, results of operations, financial condition or cash flows. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, results of operations, financial condition or cash flows. There have been no material changes in our risk factors from those described in our ~~2017~~2018 Annual Report or our other Securities and Exchange Commission ~~filings other than as set forth below:~~filings.

Colorado ballot Proposition 112, if approved by voters in November 2018, would likely have a material adverse impact on new oil and gas development in the state and could reduce the demand for our products and services in the state.

The Colorado Secretary of State has approved a citizen-initiated ballot measure, referred to as Proposition 112, for inclusion on the statewide voter ballot in November 2018. Proposition 112 seeks to amend the Colorado Revised Statutes to increase setback distances by requiring that all new oil and gas development on non-federal lands (i.e. state and private land) be located at least 2,500 feet away from certain occupied structures, including homes, schools and hospitals, as well as certain defined “vulnerable areas,” including playgrounds, permanent sports fields, amphitheaters, public parks and open spaces, public drinking water sources, reservoirs, lakes, rivers, perennial and intermittent streams and creeks, and any additional vulnerable areas designated by the state or a local government. In contrast, rules adopted and enforced by the Colorado Oil and Gas Conservation Commission (“COGCC”) currently require that wells and production facilities be located at least 500 feet away from occupied buildings such as homes, 1,000 feet away from certain defined high occupancy building units, including schools and hospitals, and 350 feet from outdoor venues and recreational areas such as playgrounds that are designated by the COGCC as designated outside activity areas, subject to certain exceptions. The term “oil and gas development” is broadly defined under Proposition 112 to include oil and gas exploration, drilling, hydraulic fracturing, flowlines, production and processing activities. Under Proposition 112, state and local governments would be allowed to designate vulnerable areas beyond those that are defined in the measure, but the proposal provides no additional guidance on procedures or any limitations with respect to such designations. Proposition 112 further provides that the state or a local government may increase the setback to a distance larger than 2,500 feet, also without any defined procedure, limitations, or governing standards. Proposition 112 is self-executing, and would take effect upon official certification of election results, and will apply to new oil and gas development permitted on or after the date of certification. The Proposition would also apply to the reentry of an oil or gas well previously plugged or abandoned, but is not expected to apply to other previously permitted wells.

The COGCC conducted a study in 2018 and determined that, if Proposition 112 were approved by state voters, an estimated 54% of Colorado’s total land surface would be unavailable for new oil and gas development, or 85% of all non-federal lands. Focusing on Weld County, located in the DJ Basin, the 2018 COGCC study determined that approval and adoption of Proposition 112 would preclude new oil and gas development on approximately 78% of the total land surface and 85% of the non-federal land surface in the county.

If Colorado voters approve Proposition 112 in November 2018, our customers operating in the state may experience material curtailment in the permitting of new oil and gas development, which would adversely affect drilling and

~~Table of Contents~~

completion activity in the state. This could have an adverse impact on the demand for the products and services we sell, rent and provide to our customers operating in the state, which would reduce our revenue and could have an adverse effect on our business, results of operations, financial condition and cash flows.

~~The outcome of final actions under Section 301 of the Trade Act of 1974 may adversely affect our business.~~

On March 22, 2018 the President of the United States announced his decisions on the actions that the U.S. government will take based on the findings of an investigation under Section 301. These actions include a proposed 25% tariff on approximately $50 billion worth of imports from China, pursuit of dispute settlement in the World Trade Organization and restrictions on investment in the United States directed or facilitated by China. On June 20, 2018 the U.S. Trade Representative (‘‘USTR’’) released the list of products imported from China to be subject to these additional tariffs. The initial U.S. tariffs were implemented on July 6, 2018 covering $34 billion worth of Chinese goods, with another $16 billion of goods facing tariffs beginning on August 23, 2018. In response to the initial U.S. action, the government of China specified that it would impose an additional 25% tariff on U.S. goods with a value of $50 billion. In response to China’s announcement, the President issued a statement directing the USTR to identify another $200 billion worth of Chinese goods for additional tariffs at a rate of 10%. The USTR issued a proposed list of products to be subject to an additional 10% tariff on July 17, 2018. On September 17, 2018, the President issued a statement directing the USTR to proceed with placing additional tariffs on approximately $200 billion worth of additional imports from China. These tariffs, which took effect on September 24, 2018, initially have been set at a level of 10% until the end of the year, at which point the tariffs will rise to 25%. Substantially all of the products that we import through our Chinese supply chain are subject to the tariffs that took effect on September 24, 2018. In the three months ended September 30, 2018, we estimate that 50% of our inventory received was sourced through our Chinese supply chain. We believe that we should be able to recover a significant portion of the increased costs from the 10% tariffs that took effect on September 24, 2018, and that they should not have a material adverse effect on our results of operations. We believe that a combination of factors should mitigate the impact of the anticipated increase in the tariff rate to 25%, effective at the end of 2018, on our results of operations, including, among other things, our negotiations with customers and suppliers, favorable currency exchange expectations and our expected future growth. Accordingly, we believe the anticipated increase in the tariff rate to 25% should not have a material adverse effect on our results of operations; however, there remains significant uncertainty as to the degree of any adverse impact. If we are unable to mitigate the impact of the increased costs resulting from the increase in the tariff rate to 25%, our business would be materially and adversely affected. To the extent these actions result in a decrease in demand for our products, our business may be adversely impacted. Given the uncertainty regarding the scope and duration of these trade actions by the U.S. or other countries, the impact of these trade actions on our operations or results remains uncertain.

~~We may be adversely affected by disputes regarding intellectual property rights, and the value of intellectual property rights is uncertain.~~

We may become involved in litigation from time to time to protect and enforce our intellectual property rights. In any such litigation, a defendant may assert that our intellectual property rights are invalid or unenforceable. Third parties from time to time may also initiate litigation against us by asserting that our businesses infringe, impair, misappropriate, dilute or otherwise violate another party’s intellectual property rights. We may not prevail in any such litigation, and our intellectual property rights may be found invalid or unenforceable or our products and services may be found to infringe, impair, misappropriate, dilute or otherwise violate the intellectual property rights of others. The results or costs of any such litigation may have an adverse effect on our business, operating results and financial condition. Any litigation concerning intellectual property could be protracted and costly, is inherently unpredictable and could have an adverse effect on our business, regardless of its outcome.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

~~None.~~ The following sets forth information with respect to our repurchase of Class A common stock during the three months ended March 31, 2019.


Period	Total number of shares purchased (1)		Average price paid per share (2)
January 1-31, 2019	-	$	-
February 1-28, 2019	44,906	$	32.79
March 1-31, 2019	-	$	-
Total	44,906	$	32.79

(1)

Consists of shares of Class A common stock repurchased from employees to satisfy tax withholding obligations related to restricted stock units that vested during the period.

(2)

Average price paid for Class A common stock purchased from employees to satisfy tax withholding obligations related to restricted stock units that vested during the period.

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Table of Contents

Item 6. Exhibits.

The following exhibits are required by Item 601 of Regulation S-K and are filed as part of this report.

~~EXHIBIT INDEX~~

~~The following exhibits are required by Item 601 of Regulation S-K and are filed as part of this report:~~


Exhibit No.		Description
3.1		Amended and Restated Certificate of Incorporation of Cactus, Inc., effective February 12, 2018 (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K ~~(File No. 001-38390)~~ filed with the Commission on February 12, 2018)

3.2		Amended and Restated Bylaws of Cactus, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 8-K filed with the Commission on February 12, 2018)

~~4.1~~10.1†		~~Form of Class A Common Stock Certificate~~First Amendment to the Amended and Restated Employment Agreement, dated February 21, 2019, by and between Scott Bender and Cactus Wellhead, LLC (incorporated by reference to Exhibit ~~4.1~~10.1 to the Registrant’s ~~Registration Statement on~~ Form ~~S-1~~8-K filed with the Commission on ~~January 12, 2018)~~February 22, 2019)

~~4.2~~10.2†		~~Registration Rights~~First Amendment to the Amended and Restated Employment Agreement, dated February 21, 2019, by and between Joel Bender and Cactus Wellhead, LLC (incorporated by reference to Exhibit ~~4.1~~10.2 to the Registrant’s Form 8-K ~~(File No. 001-38390)~~ filed with the Commission on February ~~12, 2018)~~

~~4.3~~		Stockholders’ Agreement, effective as of February 12, 2018., by and among Cactus, Inc., Cadent Energy Partners II, L.P. and Cactus WH Enterprises, LLC (incorporated by reference to Exhibit 4.2 to the Registrant’s Form 8-K (File No. 001-38390) filed with the Commission on February 12, 2018)

~~10.1~~		Credit Agreement, dated as of August 21, 2018, among Cactus Wellhead, LLC, as borrower, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, an issuing bank and swingline lender (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K (File No. 000-38390) filed with the Commission on August 24, 2018)22, 2019)

31.1*		CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**		CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**		CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101101.INS		~~Interactive Data Files~~XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Calculation Linkbase Document

101.LAB*		XBRL Taxonomy Label Linkbase Document

101.PRE*		XBRL Taxonomy Presentation Linkbase Document

101.DEF*		XBRL Taxonomy Definition Document

* Filed herewith.

** Furnished herewith.

† Management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Cactus, Inc.


Date: ~~November 2, 2018~~May 8, 2019
	By:	/s/ Scott Bender
		Scott Bender
		President, Chief Executive Officer and Director (Principal Executive Officer)


	By:	/s/ ~~Brian Small~~Stephen Tadlock
		~~Brian Small~~Stephen Tadlock
		Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)

3530



Cautionary Note Regarding Forward-Looking Statements		i

PART I - FINANCIAL INFORMATION		1

Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3127
Item 4.	Controls and Procedures	3127

PART II - OTHER INFORMATION		3228

Item 11..	Legal Proceedings	3228
Item lA.	Risk Factors	3228
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3328
Item 6.	Exhibits	3429
	Signatures	3530


	Three Months Ended September 30,		Nine Months Ended September 30,
	2018		2018
Pre-IPO Domestic	$	—	$	13,370
Post-IPO Domestic		49,277		106,906
Pre-IPO Foreign		—		512
Post-IPO Foreign		2,586		5,374
Income before income taxes	$	51,863	$	126,162



	September 30, 2018		December 31, 2017
Investment in Cactus LLC	$	179,265	$	—
Foreign loss carryforwards		383		489
Deferred tax assets		179,648		489
Valuation allowance		(383)		(489)
Deferred tax asset, net	$	179,265	$	—

Foreign withholding taxes	$	1,094	$	416
Deferred tax liability, net	$	1,094	$	416


	Nine Months Ended
	September 30,
	2018		2017		$ Change		% Change
	(in thousands)
Revenues
Product revenue	$	211,595	$	131,963	$	79,632	60.3	%
Rental revenue		102,224		52,979		49,245	93.0
Field service and other revenue		90,492		51,465		39,027	75.8
Total revenues		404,311		236,407		167,904	71.0
Costs and expenses
Cost of product revenue		128,897		86,564		42,333	48.9
Cost of rental revenue		41,477		28,173		13,304	47.2
Cost of field service and other revenue		70,084		41,011		29,073	70.9
Selling, general and administrative expenses		30,016		20,533		9,483	46.2
Total costs and expenses		270,474		176,281		94,193	53.4
Income from operations		133,837		60,126		73,711	122.6

Interest expense, net		(3,370)		(15,451)		(12,081)	(78.2)
Other income (expense), net		(4,305)		—		4,305	100.0
Income before income taxes		126,162		44,675		81,487	182.4
Income tax expense		14,564		942		13,622	1,446.1
Net income	$	111,598	$	43,733	$	67,865	155.2	%