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 U.S. service centers located in Texas, Pennsylvania, Oklahoma, North Dakota, New Mexico, Louisiana, Colorado and Wyoming, and 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, 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 IPO and Cactus LLC and its consolidated subsidiaries prior to the completion of our IPO.

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 common stock, par value $0.01 per share (“Class A common stock”).

Redemptions of CW Units

Pursuant to the First Amended and Restated Limited Liability Company Operating Agreement of Cactus LLC (the “Cactus LLC Agreement”), each holder of CW Units (“CW Unit Holder”) has, subject to certain limitations, 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

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.