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Item 1A. Risk Factors

2021-03-01 compared with 2020-02-28 · 115 added, 180 removed, 210 unchanged (58% of the section changed)

Investing in our Class A common stock involves risks.

You should carefully consider the information in this Annual Report, including the matters addressed under “Cautionary Statement Regarding Forward‑Looking Statements,”

and the following risks before making an investment decision.

You should carefully consider the information in this Annual Report, including the matters addressed under “Cautionary Statement Regarding Forward‑Looking Statements,” and the following risks before making an investment decision.

Our business, results of operations and financial condition could be materially and adversely affected by any of these risks.

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Risks Related to the Oilfield Services Industry and Our Business

The global outbreak of COVID-19 and associated responses has had, and is expected to continue to have, an adverse impact on our business and operations.

The COVID-19 pandemic has negatively affected, and is expected to continue to negatively affect, our business and operations and has had and continues to have a negative impact on the oil and gas industry as well as the global economy.

In an attempt to slow the spread of the COVID-19 virus, governments worldwide have implemented measures such as travel restrictions, school and business closures and stay-at-home or shelter-in-place orders.

These actions have severely reduced the demand for fossil fuels which, in turn, has adversely affected demand for our products and services.

We have experienced, and may experience in the future, slowdowns or temporary idling of certain of our manufacturing and production facilities due to a number of factors, including implementing additional safety measures, testing of our team members, team member absenteeism and governmental orders.

In January 2020, our production facility in Suzhou, China closed for 10 days as a result of a government mandated closure.

We cannot be sure the Suzhou facility will not face additional closures in the future.

A prolonged closure could have a material adverse impact on our ability to operate our business and on our results of operations.

We have also experienced, and expect to continue to experience, disruption and volatility in our supply chain, which has resulted, and may continue to result, in increased costs for certain raw materials.

The spread of COVID-19 has also disrupted and may continue to disrupt logistics necessary to import, export and deliver products to us and our customers.

Ports and other channels of entry have been closed or were operating at only a portion of capacity, as workers have been prohibited or otherwise unable to report to work, and means of transporting products within regions or countries may be limited for the same reason.

As the United States and other countries have attempted to lessen travel restrictions and reopen their businesses and schools, even at reduced occupancy, there has been a resurgence in COVID-19 cases.

Governmental authorities at the federal, state and local levels may increase or impose new or stricter social distancing directives, stay-at-home restrictions, travel bans, quarantines, workforce and workplace restrictions or other measures related to the resurgence of the virus.

These actions and the broader economic impact of the COVID-19 pandemic have had, and are expected to continue to have, an adverse effect on our business, results of operations and financial condition.

The duration of the pandemic and its continued adverse impact on commodity prices and the oil and gas industry are unknown and impossible to predict with certainty.

Additionally, there remains uncertainty with regard to whether new work from home policies will remain in place once our communities achieve herd immunity and can return to the office safely.

Despite vaccines being distributed worldwide, the extent of future impacts of the coronavirus and any new variants that cause COVID-19 on general economic conditions and on our business, operations and results of operations remains uncertain.

Demand for our products and services depends on oil and gas industry activity and customer expenditure levels, which are directly affected by trends in the demand for and price of crude oil and natural gas and availability of capital.

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• demand for hydrocarbons, which is affected by worldwide population growth, economic growth rates and general economic and business conditions;

available excess production capacity within the Organization of Petroleum Exporting Countries (“OPEC”) and the level of oil and gas production by non‑OPEC countries;

• available excess production capacity within OPEC and the level of oil and gas production by non‑OPEC countries;

• the continued development of shale plays which may influence worldwide supply;

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• political and economic uncertainty and sociopolitical unrest;

oil refining capacity and shifts in end‑customer preferences toward fuel efficiency and the use of natural gas;

• oil refining activity and shifts in end‑customer preferences toward fuel efficiency and increased transition to electric vehicles;

• conservation measures and technological advances affecting energy consumption;

• potential acceleration of the commercial development of alternative energy sources (such as wind, solar, geothermal, tidal, fuel cells and biofuels);

access to capital and credit markets, which may affect our customers’

activity levels and spending for our products and services;

changes in laws and regulations related to hydraulic fracturing activities;

changes in environmental laws and regulations (including relating to the use of coal in power plants);

natural disasters.

• access to capital and credit markets, which may affect our customers’ activity levels and spending for our products and services;

• changes in laws and regulations related to hydraulic fracturing activities or oil and gas drilling, particularly on public properties;

• changes in environmental laws and regulations (including relating to the use of coal in power plants which can impact the demand for natural gas);

• adverse weather conditions and natural disasters;

• terrorist attacks and armed conflicts;

• global pandemics.

The oil and gas industry is cyclical and has historically experienced periodic downturns, which have been characterized by diminished demand for our products and services and downward pressure on the prices we charge.

These downturns cause many exploration and production (“E&P”) companies to reduce their capital budgets and drilling activity.

Any future downturn or expected downturn could result in a significant decline in demand for oilfield services and adversely affect our results of operations, financial condition and cash flows.

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In addition, our ability to expand our operations depends in part on our ability to increase the size of our skilled labor force.

The demand for skilled workers is high, the supply is limited, and the cost to attract and retain qualified personnel has increased.

The demand for skilled workers is high while supply is limited, and the cost to attract and retain qualified personnel has increased.

During industry downturns, skilled workers may leave the industry, reducing the availability of qualified workers when conditions improve.

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In addition to our facilities in the United States, we operate one production facility in China and have facilities in Australia that sell and rent equipment as well as provide parts, repair services and field services associated with installation.

Instability and unforeseen changes in any of the markets in which we conduct business could have an adverse effect on the

demand for, or supply of, our products and services, our results of operations and our financial condition.

Instability and unforeseen changes in any of the markets in which we conduct business could have an adverse effect on the demand for, or supply of, our products and services, our results of operations and our financial condition.

These factors include, but are not limited to, the following:

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• supply disruptions in key oil producing countries;

tariffs, trade restrictions, trade protection measures, including those associated with Section 232 and Section 301, or price controls;

• tariffs, trade restrictions, trade protection measures or price controls;

• foreign ownership restrictions;

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• fluctuations in the interest rate component of forward foreign currency rates.

Our operations and results may be negatively impacted by the coronavirus outbreak.

During January 2020, a novel strain of coronavirus surfaced in the Hubei province in China.

We operate one facility in China in Suzhou, located in the Jiangsu province.

While the Jiangsu province does not share any borders with the Hubei province, it is approximately 500 miles from Hubei.

On January 27, 2020, in an effort to halt the outbreak, China’s State Council announced an extension of the Lunar New Year celebration and thus extended the mandatory closure of all non-essential enterprises until February 10, 2020 in the Jiangsu province.

As a result of these measures, we temporarily closed our facility in Suzhou for 10 days.

Although the Suzhou facility reopened on February 10, 2020, it is currently operating at a reduced capacity due to, among other reasons, employee shortages resulting in part from government-imposed travel restrictions and local statutory quarantines.

We cannot be sure the Suzhou facility will not face additional closures or assess how long it will continue operating at a reduced capacity.

Additionally, even once our operations at the Suzhou facility are fully restored, continued government-imposed transportation restrictions or subsequent bottlenecks in the shipment of our products may result in additional negative effects to our supply chain or our ability to transport our products to our customers.

There are still too many variables and uncertainties regarding the coronavirus outbreak to fully assess the potential impact on our business, including the ultimate geographic spread of the virus, the duration and severity of the outbreak and the extent of travel restrictions and business closures imposed in China or other affected countries.

We believe that our

existing inventory levels and other operations will be able to meet customer commitments and demand for the near future, and we do not believe that the coronavirus is likely to have a material adverse impact on our results of operations for the first quarter of 2020.

However, a prolonged shutdown or reduction in capacity of our Chinese operations or other facilities in China that are engaged in our supply chain will likely have a negative effect on our results of operations, which could be material.

Broader global effects of potentially reduced consumer confidence, reduced demand for oil and gas and other macro issues could also have a negative effect on our overall business.

We are dependent on a relatively small number of customers in a single industry.

The loss of an important customer could adversely affect our results of operations and financial condition.

Our customers are engaged in the oil and natural gas E&P business primarily in the United States and Australia.

Our customers are engaged in the oil and natural gas E&P business primarily in the United States and also Australia.

Historically, we have been dependent on a relatively small number of customers for our revenues.

For the years ended December 31, 2019 and 2018, Pioneer Natural Resources represented 10% and 11%, respectively, of our total revenue and no other customer represented more than 10% of our total revenue.

Our business, results of operations and financial condition could be materially adversely affected if an important customer ceases to engage us for our services on favorable terms or at all or fails to pay or delays in paying us significant amounts of our outstanding receivables.

Our business, results of operations and financial condition could be materially adversely affected if an important customer ceases to engage us for our services on favorable terms, or at all, or fails to pay or delays paying us significant amounts of our outstanding receivables.

Additionally, the E&P industry is characterized by frequent consolidation activity.

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In Texas, rural water districts have begun to impose restrictions on water use and may require permits for water used in drilling and completion activities.

Permitting, authorization or renewal delays, the inability to obtain new permits or the revocation of current permits could cause a loss of revenue and potentially have a materially adverse effect on our business, results of operations and financial condition.

In addition, in January 2021, President Biden indefinitely suspended new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices.

This review could result in additional restrictions or limitations on the issuance of federal leases and permits for drilling on public lands.

Permitting, authorization or renewal delays, the inability to obtain new permits or the revocation of current permits could impact our customers’ operations and cause a loss of revenue and potentially have a materially adverse effect on our business, results of operations and financial condition.

Competition within the oilfield services industry may adversely affect our ability to market our services.

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In addition, adverse market conditions lower demand for well servicing equipment, which results in excess equipment and lower utilization rates.

If market conditions in our oil‑oriented operating areas were to deteriorate or if adverse market conditions in our natural gas‑oriented operating areas persist, the prices we are able to charge and utilization rates may decline.

The competitive environment intensified in late 2014 and again in late 2019 as a result of the industry downturn and oversupply of oilfield equipment and services.

If market conditions in our operating areas deteriorate from current levels or if adverse market conditions persist, the prices we are able to charge and utilization rates may decline.

Any significant future increase in overall market capacity for the products, rental equipment or services that we offer could adversely affect our business and results of operations.

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Increased costs, or lack of availability, of raw materials and other components may result in increased operating expenses and adversely affect our results of operations and cash flows.

Our ability to source low cost raw materials and components, such as steel castings and forgings, is critical to our ability to manufacture and sell our products and provide our services competitively.

Our results of operations may be adversely affected by our inability to manage the rising costs and availability of raw materials and components used in our wide variety of products and systems.

We cannot assure that we will be able to continue to purchase these raw materials on a timely basis or at commercially viable prices, nor can we be certain of the impact of changes to Section 232 or Section 301 and future legislation that may impact trade with China.

Our ability to source low cost raw materials and components, such as steel castings, bar stock and forgings, is critical to our ability to manufacture and sell our products and provide our services competitively.

Our results of operations may be adversely affected by our inability to manage rising costs and availability of raw materials and components, in particular steel, used in our wide variety of products and systems.

Additionally, freight costs, specifically ocean freight costs, may rise due to a number of factors including, but not limited to a shortage of shipping containers, congested seaports, capacity constraints on vessels or lockdown in certain markets.

We cannot assure that we will be able to continue to purchase and move these materials on a timely basis or at commercially viable prices, nor can we be certain of the impact of changes to tariffs and future legislation that may impact trade with China or other countries.

Further, unexpected changes in the size of regional and/or product markets, particularly for short lead‑time products, could affect our results of operations and cash flows.

Should our current suppliers be unable to provide the necessary raw materials or components or otherwise fail to deliver such materials and components timely and in the quantities required, resulting delays in the provision of products or services to our customers could have a material adverse effect on our business.

In accordance with Section 1502 of the Dodd‑Frank Act, the SEC’s rules regarding mandatory disclosure and reporting requirements by public companies of their use of “conflict minerals”

(tantalum, tin, tungsten and gold) originating in the Democratic Republic of Congo and adjoining countries became effective in 2014.

Should our current suppliers be unable to provide the necessary raw materials or components or otherwise fail to deliver such materials and

components timely and in the quantities required, resulting delays in the provision of products or services to our customers could have a material adverse effect on our business.

In accordance with Section 1502 of the Dodd‑Frank Act, the SEC’s rules regarding mandatory disclosure and reporting requirements by public companies of their use of “conflict minerals” (tantalum, tin, tungsten and gold) originating in the Democratic Republic of Congo and adjoining countries became effective in 2014.

While the conflict minerals rule continues in effect as adopted, there remains uncertainty regarding how the conflict minerals rule, and our compliance obligations, will be affected in the future.

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The costs of compliance, including those related to supply chain research, the limited number of suppliers and possible changes in the sourcing of these minerals, could have a material adverse effect on our results of operations and cash flows.

Our relationship with one of our vendors is important to us.

We obtain certain important materials and machining services from one of our vendors located in China.

For the years ended December 31, 2019, 2018 and 2017, approximately $36.5 million, $46.7 million and $33.4 million, respectively, of purchases of machined components were made from this vendor, representing approximately 16%, 21% and 22%, respectively, of our total third party vendor purchases of raw materials, finished products, equipment, machining and other services.

If we are not able to maintain our relationship or we experience supply-related issues with such vendor, our results of operations could be adversely impacted until we are able to find an alternative vendor.

We design, manufacture, sell, rent and install equipment that is used in oil and gas E&P activities, which may subject us to liability, including claims for personal injury, property damage and environmental contamination should such equipment fail to perform to specifications.

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We also provide parts, repair services and field services associated with installation at all of our facilities and service centers in the United States and Australia, as well as at customer sites.

Because of applications to which our products and services are exposed, particularly those involving high pressure environments, a

failure of such equipment, or a failure of our customers to maintain or operate the equipment properly, could cause damage to the equipment, damage to the property of customers and others, personal injury and environmental contamination and could lead to a variety of claims against us that could have an adverse effect on our business and results of operations.

Because of applications to which our products and services are exposed, particularly those involving high pressure environments, a failure of such equipment, or a failure of our customers to maintain or operate the equipment properly, could cause damage to the equipment, damage to the property of customers and others, personal injury and environmental contamination and could lead to a variety of claims against us that could have an adverse effect on our business and results of operations.

We indemnify our customers against certain claims and liabilities resulting or arising from our provision of goods or services to them.

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This may cause us to restrict our operations, which might severely impact our financial condition.

Oilfield anti-indemnity provisions enacted by many states may restrict or prohibit a party’s indemnification of us.

We typically enter into agreements with our customers governing the provision of our services, which usually include certain indemnification provisions for losses resulting from operations.

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however, many states place limitations on contractual indemnity agreements, particularly agreements that indemnify a party against the consequences of its own negligence.

Furthermore, certain states, including Louisiana, New Mexico, Texas, and Wyoming, have enacted statutes generally referred to as “oilfield anti-indemnity acts”

expressly prohibiting certain indemnity agreements contained in or related to oilfield services agreements.

Such oilfield anti-indemnity acts may restrict or void a party’s indemnification of us, which could have a material adverse effect on our business, financial condition, prospects, and results of operations.

Furthermore, certain states, including Louisiana, New Mexico, Texas, and Wyoming, have enacted statutes generally referred to as “oilfield anti-indemnity acts” expressly prohibiting certain indemnity agreements contained in or related to oilfield services agreements.

Our operations require us to comply with various domestic and international regulations, violations of which could have a material adverse effect on our results of operations, financial condition and cash flows.

We are exposed to a variety of federal, state, local and international laws and regulations relating to matters such as environmental, workplace, health and safety, labor and employment, customs and tariffs, export and re-export controls, economic sanctions, currency exchange, bribery and corruption and taxation.

These laws and regulations are complex,

frequently change and have tended to become more stringent over time.

These laws and regulations are complex, frequently change and have tended to become more stringent over time.

They may be adopted, enacted, amended, enforced or interpreted in such a manner that the incremental cost of compliance could adversely impact our results of operations, financial condition and cash flows.

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For example, we may be affected by such laws as the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation, and Liability Act, the Clean Water Act, the Clean Air Act and the Occupational Safety and Health Act of 1970.

Further, our customers may be subject to a range of laws and regulations governing hydraulic fracturing, offshore drilling, and greenhouse gas emissions.

Further, our customers may be subject to a range of laws and regulations governing hydraulic fracturing, drilling and greenhouse gas emissions.

We are required to invest financial and managerial resources to comply with environmental laws and regulations and believe that we will continue to be required to do so in the future.

Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations, or the issuance of orders enjoining operations.

These laws and regulations, as well as the adoption of other new laws and regulations affecting exploration and production of crude oil and natural gas by our customers, could adversely affect our business and operating results by increasing our costs, limiting the demand for our products and services or restricting our operations.

These laws and regulations, as well as the adoption of other new laws and regulations affecting our operations or the exploration and production and transportation of crude oil and natural gas by our customers, could adversely affect our business and operating results by increasing our costs of compliance, increasing the costs of compliance and costs of doing business for our customers, limiting the demand for our products and services or restricting our operations.

Increased regulation or a move away from the use of fossil fuels caused by additional regulation could also reduce demand for our products and services.

Existing or future laws and regulations related to greenhouse gases and climate change could have a negative impact on our business and may result in additional compliance obligations with respect to the release, capture, and use of greenhouse gases that could have a material adverse effect on our business, results of operations, prospects, and financial condition.

Changes in environmental requirements related to greenhouse gas emissions and climate change may negatively impact demand for our products and services.

For example, oil and natural gas E&P may decline as a result of environmental requirements, including land use policies responsive to environmental concerns.

Existing or future laws and regulations related to greenhouse gases and public sentiment associated with climate change could have a negative impact on our business and may result in additional compliance obligations with respect

to the release, capture, and use of greenhouse gases that could have a material adverse effect on our business, results of operations, prospects, and financial condition.

Changes in environmental requirements related to greenhouse gas emissions and public sentiment associated with climate change may negatively impact demand for our products and services.

For example, oil and natural gas E&P may decline as a result of environmental requirements, including land use policies and other actions to restrict oil and gas leasing and permitting in response to environmental and climate change concerns.

In January 2021, the Acting Secretary of the Department of the Interior issued an order suspending new leasing and drilling permits for fossil fuel production on federal lands and waters for 60 days.

Then on January 27, 2021, President Biden issued an executive order indefinitely suspending new oil and natural gas leases on public lands or in offshore waters pending completion of a comprehensive review and reconsideration of federal oil and gas permitting and leasing practices.

To the extent that the review results in the development of additional restrictions on drilling, limitations on the availability of leases, or restrictions on the ability to obtain required permits, it could impact our customers’ opportunities and reduce demand for our products and services in the aforementioned areas.

Federal, state, and local agencies have been evaluating climate-related legislation and other regulatory initiatives that would restrict emissions of greenhouse gases in areas in which we conduct business.

Because our business depends on the level of activity in the oil and natural gas industry, existing or future laws and regulations related to greenhouse gases and climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if such laws or regulations reduce demand for oil and natural gas.

Likewise, such restrictions may result in additional compliance obligations with respect to the release, capture, sequestration, and use of greenhouse gases that could have a material adverse effect on our business, results of operations, prospects, and financial condition.

Finally, increasing concentrations of greenhouse gases in the Earth’s atmosphere may produce climate changes that could have significant physical effects, such as increased frequency and severity of storms, droughts, floods and other climatic events;

Because our business depends on the level of activity in the oil and natural gas industry, existing or future laws and regulations related to greenhouse gases and sentiment to climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if such laws or regulations reduce demand for oil and natural gas.

Likewise, such restrictions may result in additional compliance obligations with respect to the release, capture, sequestration, and use of greenhouse gases.

These additional obligations could increase our costs and have a material adverse effect on our business, results of operations, prospects, and financial condition.

Additional compliance obligations could also increase costs of compliance and costs of doing business for our customers, thereby reducing demand for our products and services.

if such effects were to occur, they could have an adverse impact on our operations.

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, which included a proposed 25% tariff on approximately $50 billion worth of imports from China.

The United States has since taken subsequent actions to impose additional tariffs on imports from China, which currently include a 25% tariff on approximately $250 billion worth of Chinese imports and a 15% tariff on approximately $120 billion worth of Chinese imports.

In December 2019, the Office of the United States Trade Representative announced that the United States has reached a Phase One trade deal with China, under which the U.S.

suspended indefinitely the imposition of an additional 15% tariff on certain Chinese products not covered in an earlier Section 301 action, and cut the 15% tariff on $120 billion worth of Chinese goods to 7.5%.

The United States will be maintaining the 25% tariff on approximately $250 billion of Chinese imports.

Substantially all of the products that we import through our Chinese supply chain are subject to the 25% tariff.

In the three months ended December 31, 2019, we estimate that approximately 50% of our inventory value received was sourced through our Chinese supply chain.

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.

If we are unable to fully protect our intellectual property rights or trade secrets, we may suffer a loss in revenue or any competitive advantage or market share we hold, or we may incur costs in litigation defending intellectual property rights.

While we have some patents and others pending, we do not have patents relating to many of our key processes and technology.

If we are not able to maintain the confidentiality of our trade secrets, or if our competitors are able to replicate our technology or services, our competitive advantage would be diminished.

We also cannot provide any assurance that any patents we may obtain in the future would provide us with any significant commercial benefit or would allow us to prevent our competitors from employing comparable technologies or processes.

We may initiate 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, results of operations 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.

A failure of our information technology infrastructure and cyberattacks could adversely impact us.

We depend on our information technology (“IT”) systems for the efficient operation of our business.

Accordingly, we rely upon the capacity, reliability and security of our IT hardware and software infrastructure and our ability to expand and update this infrastructure in response to our changing needs.

Despite our implementation of security measures, our systems are vulnerable to damage from computer viruses, natural disasters, incursions by intruders or hackers, failures in hardware or software, power fluctuations, cyber terrorists and other similar disruptions.

Additionally, we rely on third parties to support the operation of our IT hardware and software infrastructure, and in certain instances, utilize web‑based applications.

The failure of our IT systems or those of our vendors to perform as anticipated for any reason or any significant breach of security could disrupt our business and result in numerous adverse consequences, including reduced effectiveness and efficiency of operations, inappropriate disclosure of confidential and proprietary information, reputational harm, increased overhead costs and loss of important information, which could have a material adverse effect on our business and results of operations.

In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

Adverse weather conditions could impact demand for our services or materially impact our costs.

Our business could be harmed by adverse weather conditions.

For example, unusually warm winters could negatively affect the demand for our products and services by decreasing the demand for natural gas or unusually cold winters could adversely affect our ability to perform our services due to delays in the delivery of products that we need to provide our services.

Our operations in arid regions can be affected by droughts and limited access to water used in hydraulic fracturing operations.

Severe weather can also directly impede our own operations.

Repercussions of adverse weather conditions may include:

curtailment of services;

weather‑related damage to infrastructure, transportation, facilities and equipment, resulting in delays in operations;

inability to deliver equipment, personnel and products to job sites in accordance with contract schedules;

loss of productivity.

A terrorist attack or armed conflict could harm our business.

The occurrence or threat of terrorist attacks in the United States or other countries, anti‑terrorist efforts, domestic unrest or civil disturbance and other armed conflicts involving the United States or other countries, including continued hostilities in the Middle East, may adversely affect the United States and global economies and could prevent us from meeting our financial and other obligations.

If any of these events occur, the resulting political instability and societal disruption could reduce overall demand for oil and natural gas, potentially putting downward pressure on demand for our services and causing a reduction in our revenues.

Oil and natural gas related facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if infrastructure integral to our customers’

operations is destroyed or damaged.

Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all.

Risks Related to Our Class A Common Stock

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Moreover, because we have no independent means of generating revenue, 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 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, (i) the applicable provisions of Delaware law (or other applicable U.S.

and foreign jurisdictions) that may limit the amount of funds available for distribution and (ii) 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.

This ability, in turn, may depend on the ability of Cactus LLC’s subsidiaries to make distributions to it.

The ability of Cactus LLC and its subsidiaries to make such distributions will be subject to, among other things, (i) the applicable provisions of Delaware law (or other applicable U.S.

and foreign jurisdictions) that may limit the amount of funds available for distribution and (ii) restrictions in relevant debt instruments issued by Cactus LLC or its subsidiaries.

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.

We are subject to the requirements of Section 404 of the Sarbanes-Oxley Act.

If we fail to comply with the requirements of Section 404 or if we or our auditors identify and report material weaknesses in internal control over financial reporting, our investors may lose confidence in our reported information and our stock price may be negatively affected.

Section 404 requires that we document and test our internal control over financial reporting and issue our management’s assessment of our internal control over financial reporting.

This section also requires that our independent registered public accounting firm issue an attestation report on such internal control.

If we fail to comply with the requirements of Section 404 of the Sarbanes-Oxley Act or if we or our auditors identify and report material weaknesses in our internal control over financial reporting, the accuracy and timeliness of the filing of our annual and quarterly reports may be materially adversely affected and could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our Class A common stock.

In addition, a material weakness in the effectiveness of our internal control over financial reporting could result in an increased chance of fraud and the loss of customers, reduce our ability to obtain financing and require additional expenditures to comply with these requirements, each of which could have a material adverse effect on our business, results of operations and financial condition.

Cadent and Cactus WH Enterprises LLC have the ability to direct the voting of a significant percentage of the voting power of our common stock, and their interests may conflict with those of our other shareholders.

Holders of Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law or our amended and restated certificate of incorporation.

Cadent and Cactus WH Enterprises LLC (“Cactus WH Enterprises”), a Delaware limited liability company owned by Scott Bender, Joel Bender, Steven Bender and certain of our other officers and employees, own approximately 11% and 24% of our voting power, respectively, as of December 31, 2019.

As a result, Cadent and Cactus WH Enterprises effectively control matters requiring stockholder approval, including the election of directors, changes to our organizational documents and significant corporate transactions.

Cadent and Cactus WH Enterprises owned approximately 11% and 23% of our voting power, respectively, as of December 31, 2020.

transactions.

This concentration of ownership will limit your ability to affect the way we are managed or the direction of our business.

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In addition, the Chairman of our board of directors is currently a member of Cadent Energy Partners LLC.

This director’s duties as a partner of Cadent Energy Partners LLC may conflict with his duties as our director, and the resolution of these conflicts may not always be in our or your best interest.

Furthermore, in connection with our IPO, we entered into a stockholders’

agreement with Cadent and Cactus WH Enterprises.

Among other things, the stockholders’

agreement provides each of Cadent and Cactus WH Enterprises with the right to designate a certain number of nominees to our board of directors so long as they and their respective affiliates collectively beneficially own at least 5% of the outstanding shares of our common stock.

The existence of significant stockholders and the stockholders’

agreement may have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management or limiting the ability of our other stockholders to approve transactions that they may deem to be in our best interests.

Cadent and Cactus WH Enterprises’

concentration of stock ownership may also adversely affect the trading price of our Class A common stock to the extent investors perceive a disadvantage in owning stock of a company with significant stockholders.

See “Item 13.

Certain Relationships and Related Party Transactions, and Director Independence—Stockholders’

Agreement.”

This director’s duties as a partner of Cadent Energy Partners LLC may conflict with his duties as our director, and the resolution of these conflicts may not always be in our or your best interest.

Furthermore, in connection with our IPO, we entered into a stockholders’ agreement with Cadent and Cactus WH Enterprises.

Among other things, the stockholders’ agreement provides each of Cadent and Cactus WH Enterprises with the right to designate a certain number of nominees to our board of directors so long as they and their respective affiliates collectively beneficially own at least 5% of the outstanding shares of our common stock.

The existence of significant stockholders and the stockholders’ agreement may have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management or limiting the ability of our other stockholders to approve transactions that they may deem to be in our best interests.

Cadent and Cactus WH Enterprises’ concentration of stock ownership may also adversely affect the trading price of our Class A common stock to the extent investors perceive a disadvantage in owning stock of a company with significant stockholders.

See “Item 13.

Certain Relationships and Related Party Transactions, and Director Independence—Stockholders’ Agreement.”

Certain of our directors have significant duties with, and spend significant time serving, entities that may compete with us in seeking acquisitions and business opportunities and, accordingly, may have conflicts of interest in allocating time or pursuing business opportunities.

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Due to these existing and potential future affiliations, they may present potential business opportunities to other entities prior to presenting them to us, which could cause additional conflicts of interest.

They may also decide that certain opportunities are more appropriate for

other entities with which they are affiliated, and as a result, they may elect not to present those opportunities to us.

They may also decide that certain opportunities are more appropriate for other entities with which they are affiliated, and as a result, they may elect not to present those opportunities to us.

These conflicts may not be resolved in our favor.

Cadent Energy Partners and its affiliates are not limited in their ability to compete with us, and the corporate opportunity provisions in our amended and restated certificate of incorporation could enable Cadent Energy Partners to benefit from corporate opportunities that might otherwise be available to us.

Our governing documents provide that Cadent Energy Partners and its affiliates (including portfolio investments of Cadent Energy Partners and its affiliates) are not restricted from owning assets or engaging in businesses that compete directly or indirectly with us.

In particular, subject to the limitations of applicable law, our amended and restated certificate of incorporation, among other things:

permits Cadent Energy Partners and its affiliates, including any of our directors affiliated with Cadent Energy Partners, to conduct business that competes with us and to make investments in any kind of business, asset or property in which we may make investments;

provides that if Cadent Energy Partners or its affiliates, including any of our directors affiliated with Cadent Energy Partners, becomes aware of a potential business opportunity, transaction or other matter, they will have no duty to communicate or offer that opportunity to us (unless such opportunity is expressly offered to such director in his capacity as one of our directors).

Cadent Energy Partners and its affiliates, or our non‑employee directors, may become aware, from time to time, of certain business opportunities (such as, among other things, acquisition opportunities) and may direct such opportunities to other businesses in which they have invested, in which case we may not become aware of or otherwise have the ability to pursue such opportunity.

Further, such businesses may choose to compete with us for these opportunities, possibly causing these opportunities to not be available to us or causing them to be more expensive for us to pursue.

In addition, Cadent Energy Partners and its affiliates, or our non‑employee directors, may dispose of assets owned by them in the future, without any obligation to offer us the opportunity to purchase any of those assets.

As a result, our renouncing our interest and expectancy in any business opportunity that may be from time to time presented to Cadent Energy Partners and its affiliates, or our non‑employee directors, could adversely impact our business or prospects if attractive business opportunities are procured by such parties for their own benefit rather than for ours.

Our amended and restated certificate of incorporation and amended and restated bylaws, as well as Delaware law, contain provisions that could discourage acquisition bids or merger proposals, which may adversely affect the market price of our Class A common stock.

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In addition, certain change of control events have the effect of accelerating the payment due under the TRA, which could be substantial and accordingly serve as a disincentive to a potential acquirer of our company.

We may issue preferred stock whose terms could adversely affect the voting power or value of our Class A common stock.

Our amended and restated certificate of incorporation authorizes us to issue, without the approval of our shareholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our Class A common stock respecting dividends and distributions, as our board of directors may determine.

The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our Class A common stock.

For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions.

Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of the Class A common stock.

Future sales of our Class A common stock in the public market, or the perception that such sales may occur, could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us.

Subject to certain limitations and exceptions, the CW Unit Holders may cause Cactus LLC to redeem their CW Units for shares of Class A common stock (on a one‑for‑one basis, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions) and then sell those shares of Class A common stock.

Additionally, we may issue additional shares of Class A common stock or convertible securities in subsequent public offerings.

Additionally,

we may issue additional shares of Class A common stock or convertible securities in subsequent public offerings.

We have 47,712,577 outstanding shares of Class A common stock and 27,655,077 outstanding shares of Class B common stock as of December 31, 2020.

The CW Unit Holders own all 27,655,077 shares of Class B common stock, representing approximately 36.7% of our total outstanding common stock.

As required pursuant to the terms of the registration rights agreement that we entered into at the time of our IPO, we have filed a registration statement on Form S-3 under the Securities Act of 1933, as amended, to permit the public resale of shares of Class A common stock owned by Cadent, Cactus WH Enterprises and Lee Boquet.

See “Item 13.

Certain Relationships and Related Party Transactions, and Director Independence—Stockholders’

Agreement”

for more information.

See “Item 13.

Certain Relationships and Related Party Transactions, and Director Independence—Stockholders’ Agreement” for more information.

We cannot predict the size of future issuances of our Class A common stock or securities convertible into Class A common stock or the effect, if any, that future issuances and sales of shares of our Class A common stock will have on the market price of our Class A common stock.

Sales of substantial amounts of our Class A common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of our Class A common stock.

Holders of our Class A common stock may not receive dividends on their Class A common stock.

We declared our first dividend to Class A stockholders in the fourth quarter of 2019.

Holders of our Class A common stock are entitled to receive only such dividends as our board of directors may declare out of funds legally available for such payments.

We are incorporated in Delaware and are governed by the Delaware General Corporation Law (“DGCL”).

The DGCL allows a corporation to pay dividends only out of a surplus, as determined under Delaware law or, if there is no surplus, out of net profits for the fiscal year in which the dividend was declared and for the preceding fiscal year.

Under the DGCL, however, we cannot pay dividends out of net profits if, after we pay the dividend, our capital would be less than the capital represented by the outstanding stock of all classes having a preference upon the distribution of assets.

We are not required to pay a dividend, and any determination to pay dividends and other distributions in cash, stock or property by us in the future (including determinations as to the amount of any such dividend or distribution) will be at the discretion of our board of directors and will be dependent on then-existing conditions, including business conditions, our financial condition, results of operations, liquidity, capital requirements, contractual restrictions, including restrictive covenants contained in debt agreements, and other factors.

Under certain circumstances, redemptions of CW Units by CW Unit Holders will result in dilution to the holders of our Class A common stock.

Redemptions of CW Units by CW Unit Holders in accordance with the terms of the Cactus Wellhead LLC Agreement will result in a corresponding increase in our membership interest in Cactus LLC, increase in the number of shares of Class A common stock outstanding and decrease in the number of shares of Class B common stock outstanding.

In the event that CW Units are exchanged at a time when Cactus LLC has made cash distributions to CW Unit Holders, including Cactus Inc., and Cactus Inc.

has accumulated such distributions and neither reinvests them in Cactus LLC in exchange for additional CW Units nor distributes them as dividends to the holders of Cactus Inc.’s Class A common stock, the holders of our Class A common stock would experience dilution with respect to such accumulated distributions.

will be required to make payments under the TRA for certain tax benefits that we may claim, and the amounts of such payments could be significant.

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federal income tax rate and an assumed combined state and local income tax rate) to the amount we would have been required to pay had we 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 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 income tax rates then applicable, and the portion of our payments under the TRA that constitute imputed interest or give rise to depreciable or amortizable tax basis.

The payments under the TRA are not conditioned upon a holder of rights under the TRA having a continued ownership interest in us.

For additional information regarding the TRA, see “Item 13.

Certain Relationships and Related Party Transactions, and Director Independence—Tax Receivable Agreement.”

For additional information regarding the TRA, see “Item 13.

Certain Relationships and Related Party Transactions, and Director Independence—Tax Receivable Agreement.”

In certain cases, payments under the TRA may be accelerated and/or significantly exceed the actual benefits, if any, we realize in respect of the tax attributes subject to the TRA.

If we elect to terminate the TRA early or it is terminated early due to Cactus Inc.’s failure to honor a material obligation thereunder or due to certain mergers 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 (i) the assumption that we have sufficient taxable income to fully utilize the tax benefits covered by the TRA and (ii) the assumption that 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 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.

termination date are deemed to be redeemed on the termination date.

Any early 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.

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 actual cash tax savings under the TRA.

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federal income tax purposes.

A “publicly traded partnership”

is a partnership the interests of which are traded on an established securities market or are readily tradable on a secondary market or the substantial equivalent thereof.

A “publicly traded partnership” is a partnership the interests of which are traded on an established securities market or are readily tradable on a secondary market or the substantial equivalent thereof.

Under certain circumstances, redemptions of CW Units pursuant to the Redemption Right (or our Call Right) or other transfers of CW Units could cause Cactus LLC to be treated as a publicly traded partnership.

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federal income tax return with Cactus LLC.

In addition, we would no longer have the benefit of certain increases in tax basis covered under the TRA, and we would not be able to recover any payments previously made by us under the TRA, even if the corresponding tax benefits (including any claimed increase in the tax basis of Cactus LLC’s assets) were subsequently determined to have been unavailable.

Discontinuation, reform or replacement of LIBOR and other benchmark rates, or uncertainty related to the potential for any of the foregoing, may adversely affect our business.

Financial Conduct Authority announced in 2017 that it intends to phase out LIBOR by the end of 2021.

In addition, other regulators have suggested reforming or replacing other benchmark rates.

The discontinuation, reform or replacement of LIBOR or any other benchmark rates may have an unpredictable impact on contractual mechanics in the credit markets or cause disruption to the broader financial markets.

Uncertainty as to the nature of such potential discontinuation, reform or replacement may negatively impact interest expense related to borrowings under our credit facility and interest on deferred payments due under the TRA.

We may in the future pursue amendments to our credit facility and the TRA to provide for a transition mechanism or other reference rate in anticipation of LIBOR’s discontinuation, but we may not be able to reach agreement on any such amendments.

Further, our credit facility limits the amount of indebtedness we and

our subsidiaries may incur.

As a result, additional financing to replace our LIBOR-based debt may be unavailable, more expensive or restricted by the terms of our outstanding indebtedness.

General Risks