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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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, 2022

OR

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

For the transition period from to

Commission File Number: 001-40542

 

Mister Car Wash, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

47-1393909

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

222 E. 5th Street

Tucson, Arizona

85705

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (520) 615-4000

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $0.01 per share

 

MCW

 

New York Stock Exchange

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, 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

As of November 1, 2022, the registrant had 304,992,610 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page

 

FORWARD-LOOKING STATEMENTS

2

 

 

 

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

 

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Condensed Consolidated Statements of Stockholders' Equity

6

 

Notes to Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

Item 4.

Controls and Procedures

36

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

37

Item 1A.

Risk Factors

37

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

Item 3.

Defaults Upon Senior Securities

37

Item 4.

Mine Safety Disclosures

37

Item 5.

Other Information

37

Item 6.

Exhibits

38

 

 

Signatures

39

 

i


 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of present and historical facts contained in this Quarterly Report on Form 10-Q, including without limitation, statements regarding our future results of operations and financial position, business strategy and approach may be forward-looking. You can generally identify forward-looking statements by our use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “seek,” “vision,” or “should,” or the negative thereof or other variations thereon or comparable terminology.

Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to us. Such beliefs and assumptions may or may not prove to be correct. Additionally, such forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, and actual results may differ materially from those expressed or implied in the forward-looking statements due to various factors, including, but not limited to, those identified in Part I. Item 1A. “Risk Factors” and in Part II. Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 10-K”) and in Part I. Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q. These risks and uncertainties include, but are not limited to:

We may be unable to attract new customers, retain existing customers and maintain or grow the number of Unlimited Wash Club (“UWC”) Members, which could adversely affect our business, financial condition and results of operations and rate of growth.
If we fail to acquire or operate new locations in a timely and cost-effective manner, enter into new markets or leverage new technologies, our competitive advantage or financial performance could be materially and adversely affected.
We may not be able to successfully implement our growth strategies on a timely basis or at all.
We are subject to a number of risks and regulations related to credit card and debit card payments we accept.
An overall decline in the health of the economy and other factors impacting consumer spending, such as natural disasters and fluctuations in inflation, may affect consumer purchases, reduce demand for our services and materially and adversely affect our business, results of operations and financial condition.
Growing inflation, supply chain disruption and other increased operating costs could materially and adversely affect our results of operations.
Our locations may experience difficulty hiring and retaining qualified personnel, resulting in higher labor costs.
We lease or sublease the land and buildings where a number of our locations are situated, which could expose us to possible liabilities and losses.
Our indebtedness could adversely affect our financial health and competitive position.
Our business is subject to various laws and regulations and changes in such laws and regulations, or failure to comply with existing or future laws and regulations, may result in litigation, investigation or claims by third parties or employees that could adversely affect our business.
Our locations are subject to certain environmental laws and regulations.
We are subject to data security and privacy risks that could negatively impact our results of operations or reputation.
We may be unable to adequately protect, and we may incur significant costs in enforcing or defending, our intellectual property and other proprietary rights.
Stockholders’ ability to influence corporate matters may be limited because a small number of stockholders beneficially own a substantial amount of our common stock and continue to have substantial control over us.
Our stock price may be volatile or may decline regardless of our operating performance, resulting in substantial losses for investors purchasing shares of our common stock.

Given these and other risks and uncertainties applicable to us, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included elsewhere in this Quarterly Report on Form 10-Q are not guarantees of future performance and our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from the forward-looking statements included elsewhere in this Quarterly Report on Form 10-Q. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate, are consistent with the forward-looking statements included elsewhere in this Quarterly Report on Form 10-Q, they may not be predictive of results or developments in future periods.

Any forward-looking statement that we make in this Quarterly Report on Form 10-Q speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q.

As used in this Quarterly Report on Form 10-Q, unless otherwise stated or the context requires otherwise, references to “Mister Car Wash,” “Mister,” the “Company,” “we,” “us,” and “our,” refer to Mister Car Wash, Inc. and its subsidiaries on a consolidated basis.

2


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

 

Mister Car Wash, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share and per share data)

(Unaudited)

 

 

As of

 

 

September 30, 2022

 

 

December 31, 2021

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

74,885

 

 

$

19,738

 

Restricted cash

 

62

 

 

 

120

 

Accounts receivable, net

 

2,937

 

 

 

1,090

 

Other receivables

 

14,441

 

 

 

22,796

 

Inventory, net

 

8,888

 

 

 

6,334

 

Prepaid expenses and other current assets

 

11,247

 

 

 

8,766

 

Total current assets

 

112,460

 

 

 

58,844

 

 

 

 

 

 

 

Property and equipment, net

 

514,357

 

 

 

472,448

 

Operating lease right of use assets, net

 

763,427

 

 

 

718,533

 

Other intangible assets, net

 

125,781

 

 

 

129,820

 

Goodwill

 

1,107,072

 

 

 

1,060,221

 

Other assets

 

8,394

 

 

 

8,236

 

Total assets

$

2,631,491

 

 

$

2,448,102

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

27,589

 

 

$

27,346

 

Accrued payroll and related expenses

 

19,976

 

 

 

16,963

 

Other accrued expenses

 

25,460

 

 

 

20,201

 

Current maturities of operating lease liability

 

39,336

 

 

 

37,345

 

Current maturities of finance lease liability

 

648

 

 

 

559

 

Deferred revenue

 

28,814

 

 

 

27,815

 

Total current liabilities

 

141,823

 

 

 

130,229

 

 

 

 

 

 

 

Long-term portion of debt, net

 

895,428

 

 

 

896,336

 

Operating lease liability

 

750,929

 

 

 

717,552

 

Financing lease liability

 

14,955

 

 

 

15,359

 

Long-term deferred tax liability

 

45,741

 

 

 

22,603

 

Other long-term liabilities

 

7,043

 

 

 

8,871

 

Total liabilities

 

1,855,919

 

 

 

1,790,950

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.01 par value, 1,000,000,000 shares authorized, 304,624,334 and 300,120,451 shares outstanding as of September 30, 2022 and December 31, 2021, respectively

 

3,052

 

 

 

3,007

 

Additional paid-in capital

 

775,199

 

 

 

752,343

 

Accumulated other comprehensive income

 

600

 

 

 

225

 

Accumulated deficit

 

(3,279

)

 

 

(98,423

)

Total stockholders’ equity

 

775,572

 

 

 

657,152

 

Total liabilities and stockholders’ equity

$

2,631,491

 

 

$

2,448,102

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 

Mister Car Wash, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(Amounts in thousands, except share and per share data)

(Unaudited)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net revenues

$

217,576

 

 

$

194,310

 

 

$

662,154

 

 

$

566,898

 

Cost of labor and chemicals

 

68,228

 

 

 

63,438

 

 

 

203,117

 

 

 

203,051

 

Other store operating expenses

 

82,343

 

 

 

68,435

 

 

 

239,173

 

 

 

194,889

 

General and administrative

 

24,743

 

 

 

22,166

 

 

 

74,040

 

 

 

226,015

 

(Gain) loss on sale of assets

 

(649

)

 

 

748

 

 

 

(3,336

)

 

 

(5,559

)

Total costs and expenses

 

174,665

 

 

 

154,787

 

 

 

512,994

 

 

 

618,396

 

Operating income (loss)

 

42,911

 

 

 

39,523

 

 

 

149,160

 

 

 

(51,498

)

 

 

 

 

 

 

 

 

 

 

 

 

Other expense:

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

10,100

 

 

 

5,717

 

 

 

27,028

 

 

 

33,416

 

Loss on extinguishment of debt

 

-

 

 

 

-

 

 

 

-

 

 

 

3,183

 

Total other expense

 

10,100

 

 

 

5,717

 

 

 

27,028

 

 

 

36,599

 

Income (loss) before taxes

 

32,811

 

 

 

33,806

 

 

 

122,132

 

 

 

(88,097

)

Income tax provision (benefit)

 

8,814

 

 

 

6,440

 

 

 

26,988

 

 

 

(29,747

)

Net income (loss)

$

23,997

 

 

$

27,366

 

 

$

95,144

 

 

$

(58,350

)

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

(Loss) gain on interest rate swap

 

(1,795

)

 

 

54

 

 

 

375

 

 

 

401

 

Total comprehensive income (loss)

$

22,202

 

 

$

27,420

 

 

$

95,519

 

 

$

(57,949

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.08

 

 

$

0.09

 

 

$

0.31

 

 

$

(0.21

)

Diluted

$

0.07

 

 

$

0.08

 

 

$

0.29

 

 

$

(0.21

)

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

304,290,590

 

 

 

296,360,660

 

 

 

302,641,749

 

 

 

274,387,532

 

Diluted

 

326,881,152

 

 

 

327,320,169

 

 

 

327,773,344

 

 

 

274,387,532

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4


 

Mister Car Wash, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

 

 

Nine Months Ended September 30,

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

$

95,144

 

 

$

(58,350

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization expense

 

45,274

 

 

 

36,530

 

Stock-based compensation expense

 

16,959

 

 

 

210,292

 

(Gain) loss on sale of assets

 

(3,336

)

 

 

(5,559

)

Loss on extinguishment of debt

 

-

 

 

 

3,183

 

Amortization of deferred debt issuance costs

 

1,270

 

 

 

898

 

Non-cash lease expense

 

29,602

 

 

 

26,535

 

Deferred income tax

 

21,526

 

 

 

(33,247

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable, net

 

(1,663

)

 

 

(549

)

Other receivables

 

8,355

 

 

 

(5,595

)

Inventory, net

 

(2,431

)

 

 

850

 

Prepaid expenses and other current assets

 

(2,458

)

 

 

(5,042

)

Accounts payable

 

6,424

 

 

 

4,025

 

Accrued expenses

 

4,295

 

 

 

6,874

 

Deferred revenue

 

660

 

 

 

1,531

 

Operating lease liability

 

(32,103

)

 

 

(26,468

)

Other noncurrent assets and liabilities

 

(2,065

)

 

 

(2,599

)

Net cash provided by operating activities

$

185,453

 

 

$

153,309

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(132,014

)

 

 

(86,330

)

Acquisition of car wash operations, net of cash

 

(65,533

)

 

 

(55,072

)

Proceeds from sale of property and equipment

 

63,763

 

 

 

50,944

 

Net cash used in investing activities

$

(133,784

)

 

$

(90,458

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock pursuant to initial public offering

 

-

 

 

 

468,750

 

Proceeds from issuance of common stock under employee plans

 

5,941

 

 

 

121

 

Payments for repurchases of common stock

 

-

 

 

 

(308

)

Proceeds from secondary public offering for employee tax withholdings

 

-

 

 

 

20,859

 

Tax withholdings paid on behalf of employees for secondary public offering

 

-

 

 

 

(20,859

)

Payments on debt borrowings

 

(2,100

)

 

 

(456,972

)

Payments of debt extinguishment costs

 

-

 

 

 

(28

)

Payments of deferred debt issuance costs

 

-

 

 

 

(226

)

Principal payments on finance lease obligations

 

(421

)

 

 

(364

)

Payments of issuance costs pursuant to initial public offering

 

-

 

 

 

(29,194

)

Net cash provided by (used in) financing activities

$

3,420

 

 

$

(18,221

)

 

 

 

 

 

 

Net change in cash and cash equivalents and restricted cash during period

 

55,089

 

 

 

44,630

 

Cash and cash equivalents and restricted cash at beginning of period

 

19,858

 

 

 

117,874

 

Cash and cash equivalents and restricted cash at end of period

$

74,947

 

 

$

162,504

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest

$

25,900

 

 

$

33,134

 

Cash paid for income taxes

$

2,416

 

 

$

8,029

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

Property and equipment in accounts payable

$

10,965

 

 

$

14,817

 

Property and equipment accrued in other accrued expenses

$

3,886

 

 

$

-

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

Mister Car Wash, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Amounts in thousands, except share and per share data)

(Unaudited)

 

Nine Months Ended September 30, 2022

 

Common Stock

 

 

Additional Paid-in Capital

 

 

Accumulated Other Comprehensive Income

 

 

Accumulated Deficit

 

 

Stockholders’ Equity

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2021

 

300,120,451

 

 

$

3,007

 

 

$

752,343

 

 

$

225

 

 

$

(98,423

)

 

$

657,152

 

Stock-based compensation expense

 

-

 

 

 

-

 

 

 

5,519

 

 

 

-

 

 

 

-

 

 

 

5,519

 

Exercise of stock options

 

1,486,727

 

 

 

15

 

 

 

1,311

 

 

 

-

 

 

 

-

 

 

 

1,326

 

Gain on interest rate swap

 

-

 

 

 

-

 

 

 

-

 

 

 

1,869

 

 

 

-

 

 

 

1,869

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

35,488

 

 

 

35,488

 

Balance as of March 31, 2022

 

301,607,178

 

 

$

3,022

 

 

$

759,173

 

 

$

2,094

 

 

$

(62,935

)

 

$

701,354

 

Stock-based compensation expense

 

-

 

 

 

-

 

 

 

5,979

 

 

 

-

 

 

 

-

 

 

 

5,979

 

Issuance of common stock under employee plans

 

251,003

 

 

 

2

 

 

 

2,415

 

 

 

-

 

 

 

-

 

 

 

2,417

 

Vesting of restricted stock units

 

457,372

 

 

 

5

 

 

 

(5

)

 

 

-

 

 

 

-

 

 

 

 

Exercise of stock options

 

1,601,615

 

 

 

16

 

 

 

1,680

 

 

 

-

 

 

 

-

 

 

 

1,696

 

Gain on interest rate swap

 

-

 

 

 

-

 

 

 

-

 

 

 

301

 

 

 

-

 

 

 

301

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

35,659

 

 

 

35,659

 

Balance as of June 30, 2022

 

303,917,168

 

 

$

3,045

 

 

$

769,242

 

 

$

2,395

 

 

$

(27,276

)

 

$

747,406

 

Stock-based compensation expense

 

-

 

 

 

-

 

 

 

5,461

 

 

 

-

 

 

 

-

 

 

 

5,461

 

Exercise of stock options

 

707,166

 

 

 

7

 

 

 

496

 

 

 

-

 

 

 

-

 

 

 

503

 

Loss on interest rate swap

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,795

)

 

 

-

 

 

 

(1,795

)

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

23,997

 

 

 

23,997

 

Balance as of September 30, 2022

 

304,624,334

 

 

$

3,052

 

 

$

775,199

 

 

$

600

 

 

$

(3,279

)

 

$

775,572

 

 

 

 

 

6


 

Nine Months Ended September 30, 2021

 

Common Stock

 

 

Additional Paid-in Capital

 

 

Accumulated Other Comprehensive Loss

 

 

Accumulated Deficit

 

 

Stockholders’ Equity

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2020

 

261,907,622

 

 

$

2,622

 

 

$

91,523

 

 

$

(1,117

)

 

$

(76,378

)

 

$

16,650

 

Stock-based compensation expense

 

-

 

 

 

-

 

 

 

310

 

 

 

-

 

 

 

-

 

 

 

310

 

Exercise of stock options

 

688,430

 

 

 

7

 

 

 

260

 

 

 

-

 

 

 

-

 

 

 

267

 

Shares repurchased

 

(180,681

)

 

 

-

 

 

 

(534

)

 

 

-

 

 

 

-

 

 

 

(534

)

Gain on interest rate swap

 

-

 

 

 

-

 

 

 

-

 

 

 

319

 

 

 

-

 

 

 

319

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

24,584

 

 

 

24,584

 

Balance as of March 31, 2021

 

262,415,371

 

 

$

2,629

 

 

$

91,559

 

 

$

(798

)

 

$

(51,794

)

 

$

41,596

 

Issuance of common stock pursuant to initial public offering, net of issuance of $29,194

 

31,250,000

 

 

 

313

 

 

 

439,243

 

 

 

-

 

 

 

-

 

 

 

439,556

 

Stock-based compensation expense

 

-

 

 

 

-

 

 

 

203,231

 

 

 

-

 

 

 

-

 

 

 

203,231

 

Vesting of restricted stock units

 

7,680

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercise of stock options

 

2,516,784

 

 

 

25

 

 

 

1,597

 

 

 

-

 

 

 

-

 

 

 

1,622

 

Shares repurchased

 

(127,357

)

 

 

-

 

 

 

(1,716

)

 

 

-

 

 

 

-

 

 

 

(1,716

)

Gain on interest rate swap

 

-

 

 

 

-

 

 

 

-

 

 

 

28

 

 

 

-

 

 

 

28

 

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(110,300

)

 

 

(110,300

)

Balance as of June 30, 2021

 

296,062,478

 

 

$

2,967

 

 

$

733,914

 

 

$

(770

)

 

$

(162,094

)

 

$

574,017

 

Stock-based compensation expense

 

-

 

 

 

-

 

 

 

6,751

 

 

 

-

 

 

 

-

 

 

 

6,751

 

Exercise of stock options

 

757,887

 

 

 

8

 

 

 

502

 

 

 

-

 

 

 

-

 

 

 

510

 

Shares repurchased

 

(26,166

)

 

 

-

 

 

 

(510

)

 

 

-

 

 

 

-

 

 

 

(510

)

Gain on interest rate swap

 

-

 

 

 

-

 

 

 

-

 

 

 

54

 

 

 

-

 

 

 

54

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

27,366

 

 

 

27,366

 

Balance as of September 30, 2021

 

296,794,199

 

 

$

2,975

 

 

$

740,657

 

 

$

(716

)

 

$

(134,728

)

 

$

608,188

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

7


 

Mister Car Wash, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

 

1. Nature of Business

Mister Car Wash, Inc., together with its subsidiaries (collectively, the Company), is a Delaware corporation based in Tucson, Arizona and provider of conveyorized car wash services. The Company primarily operates Express Exterior Locations, which offers express exterior cleaning services along with free vacuum services, and interior cleaning services at select locations. As of September 30, 2022, the Company operated 420 car washes in 21 states.

Forward Stock Split

In June 2021, the Company's board of directors (the “Board”) and the stockholders of the Company approved a 96-for-1 forward stock split of the Company’s outstanding common stock, which was effective on June 16, 2021. All common stock and per share information has been retroactively adjusted to give effect to this forward stock split for all periods presented. Shares of common stock underlying outstanding stock options and other equity instruments were proportionately increased and the respective per share value and exercise prices, if applicable, were proportionately decreased in accordance with the terms of the agreements governing such securities. There were no changes to the par value per share of the Company’s common stock as a result of the forward stock split. Additionally, the Board and the stockholders of the Company approved an increase in the authorized shares of common stock to 1,000,000,000 shares.

Initial Public Offering

In June 2021, the Company completed its initial public offering (“IPO”) of 43,125,000 shares of common stock at a public offering price of $15.00 per share. The Company sold 31,250,000 shares of common stock and the selling stockholders identified in the Company’s final prospectus that forms a part of the Company’s Registration Statement on Form S-1 (File No. 333-256697), filed with the SEC pursuant to Rule 424(b)(4) on June 28, 2021 (the “Prospectus”), sold an aggregate amount of 11,875,000 shares of common stock, which selling stockholder amount included the underwriters' option to purchase up to an additional 5,625,000 shares of common stock. The Company received gross proceeds of approximately $468,750 before deducting underwriting discounts, commissions and offering related issuance costs; the Company did not receive any proceeds from the sale of shares by the selling stockholders. The unaudited condensed consolidated financial statements as of September 30, 2022, including share and per share amounts, include the effects of the IPO.

Secondary Public Offering

In August 2021, the Company completed a secondary public offering of 12,000,000 shares of common stock sold by the selling stockholders identified in the Company’s final prospectus that forms a part of the Company’s Registration Statement on Form S-1 (File No. 333-258186), filed with the SEC pursuant to Rule 424(b)(5) on August 24, 2021. The Company did not receive any proceeds from the sale of shares by the selling stockholders, and the Company incurred $498 of expenses in connection with the secondary public offering, which were recorded in general and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

2. Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements as of September 30, 2022 and for the three and nine months ended September 30, 2022 and 2021 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2021 included in the 2021 10-K.

The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, the included disclosures are adequate, and the accompanying unaudited condensed consolidated financial statements contain all adjustments which are necessary for a fair presentation of the Company’s consolidated financial position as of September 30, 2022, consolidated results of operations and comprehensive income (loss) for the three and nine months ended September 30, 2022 and 2021, and consolidated cash flows for the nine months ended September 30, 2022 and 2021. Such adjustments are of a normal and recurring nature. The consolidated results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the consolidated results of operations that may be expected for the year ending December 31, 2022.

Principles of Consolidation

8


 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company. All material intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the periods reported. Some of the significant estimates that the Company has made pertain to the determination of deferred tax assets and liabilities; estimates utilized to determine the fair value of assets acquired and liabilities assumed in business combinations and the related goodwill and intangibles; and certain assumptions used related to the evaluation of goodwill, intangibles, and property and equipment asset impairment. Actual results could differ from those estimates.

Accounts Receivable, Net

Accounts receivable are presented net of an allowance for doubtful accounts of $119 and $70 as of September 30, 2022 and December 31, 2021, respectively. The activity in the allowance for doubtful accounts was immaterial for the three and nine months ended September 30, 2022 and 2021.

Other Receivables

Other receivables consisted of the following for the periods presented:

 

As of

 

 

September 30, 2022

 

 

December 31, 2021

 

Payroll tax withholding and exercise proceeds receivable

$

9

 

 

$

8,477

 

Construction receivable

 

8,034

 

 

 

5,574

 

Income tax receivable

 

1,891

 

 

 

4,935

 

Insurance receivable

 

2,977

 

 

 

2,594

 

Other

 

1,530

 

 

 

1,216

 

Total other receivables

$

14,441

 

 

$

22,796

 

Inventory, Net

Inventory consisted of the following for the periods presented:

 

As of

 

 

September 30, 2022

 

 

December 31, 2021

 

Chemical washing solutions

$

9,063

 

 

$

6,406

 

Other

 

-

 

 

 

52

 

Total inventory, gross

 

9,063

 

 

 

6,458

 

Reserve for obsolescence

 

(175

)

 

 

(124

)

Total inventory, net

$

8,888

 

 

$

6,334

 

The activity in the reserve for obsolescence was immaterial for the three and nine months ended September 30, 2022 and 2021.

Revenue Recognition

The following table summarizes the composition of the Company’s net revenues for the periods presented:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Recognized over time

$

150,873

 

 

$

127,825

 

 

$

440,809

 

 

$

358,456

 

Recognized at a point in time

 

66,590

 

 

 

66,026

 

 

 

220,420

 

 

 

206,087

 

Other revenue

 

113

 

 

 

459

 

 

 

925

 

 

 

2,355

 

Net revenues

$

217,576

 

 

$

194,310

 

 

$

662,154

 

 

$

566,898

 

 

9


 

 

Net Income (loss) Per Share

Basic net income (loss) per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing net income by the weighted-average shares outstanding for the period and includes the dilutive impact of potential new shares issuable upon vesting and exercise of stock options, vesting of restricted stock units, and stock purchase rights granted under an employee stock purchase plan. Potentially dilutive securities are excluded from the computation of diluted net income per share if their effect is antidilutive. Reconciliations of the numerators and denominators of the basic and diluted net income per share calculations for the periods presented are as follows:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

23,997

 

 

$

27,366

 

 

$

95,144

 

 

$

(58,350

)

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding - basic

 

304,290,590

 

 

 

296,360,660

 

 

 

302,641,749

 

 

 

274,387,532

 

Effect of potentially dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

22,377,790

 

 

 

30,251,223

 

 

 

24,433,580

 

 

 

-

 

Restricted stock units

 

154,987

 

 

 

652,019

 

 

 

678,005

 

 

 

-

 

Employee stock purchase plan

 

57,785

 

 

 

56,267

 

 

 

20,010

 

 

 

-

 

Weighted-average common shares outstanding - diluted

 

326,881,152

 

 

 

327,320,169

 

 

 

327,773,344

 

 

 

274,387,532

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share - basic

$

0.08

 

 

$

0.09

 

 

$

0.31

 

 

$

(0.21

)

Net income (loss) per share - diluted

$

0.07

 

 

$

0.08

 

 

$

0.29

 

 

$

(0.21

)

 

The following potentially dilutive shares were excluded from the computation of diluted net income per share for the periods presented because including them would have been antidilutive:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Stock options

 

2,384,530

 

 

 

2,086,437

 

 

 

2,188,289

 

 

 

33,773,922

 

Restricted stock units

 

15,165

 

 

 

-

 

 

 

60,612

 

 

 

1,592,524

 

Employee stock purchase plan

 

7,186

 

 

 

-

 

 

 

34,466

 

 

 

244,751

 

 

Deferred Offering Costs

The Company capitalizes certain legal, accounting, and other third-party fees that are directly related to the Company’s equity financings, including the IPO, until such financings are consummated. After consummation of an equity financing, these costs are then recorded as a reduction of the proceeds received as a result of the financing. Should a planned equity financing be abandoned, terminated, or significantly delayed, the deferred offering costs would be immediately written off to operating expenses. Upon the closing of the IPO in June 2021, all deferred offering costs in the accompanying unaudited condensed consolidated balance sheets were reclassified from prepaid expenses and other current assets and recorded against the IPO proceeds as a reduction to additional paid-in capital. As of September 30, 2022 and December 31, 2021, there were no deferred offering costs capitalized.

Prior Period Reclassification

Certain prior period amounts related to other receivables within accounts receivable, net and prepaid expenses and other current assets in the accompanying unaudited condensed consolidated financial statements have been reclassified to conform to the current period presentation. There was no change to prior period current or total assets.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”), which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The guidance will be effective for the Company beginning January 1, 2023, and interim periods therein. Early adoption is permitted. The Company is currently evaluating the effect that ASU No. 2016-13 will have on its consolidated financial statements and related disclosures.

10


 

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805) – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU No. 2021-08”). The guidance improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and certain inconsistencies in application. Under current U.S. GAAP, an acquirer generally recognizes contract assets acquired and liabilities assumed in a business combination at fair value on the acquisition date. The amendments in this update require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606 as if it had originated the contracts. The amendments in this update will be effective for the Company beginning January 1, 2023, and interim periods thereafter. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the effect that ASU No. 2021-08 will have on its consolidated financial statements and related disclosures.

3. Property and Equipment, Net

Property and equipment, net consisted of the following for the periods presented:

 

 

As of

 

 

September 30, 2022

 

 

December 31, 2021

 

Land

$

88,409

 

 

$

81,911

 

Buildings and improvements

 

172,978

 

 

 

171,540

 

Finance leases

 

16,604

 

 

 

16,497

 

Leasehold improvements

 

103,124

 

 

 

92,821

 

Vehicles and equipment

 

212,296

 

 

 

188,053

 

Furniture, fixtures and equipment

 

82,882

 

 

 

73,213

 

Construction in progress

 

53,057

 

 

 

24,724

 

Property and equipment, gross

 

729,350

 

 

 

648,759

 

Less: accumulated depreciation

 

(212,960

)

 

 

(175,017

)

Less: accumulated depreciation - finance leases

 

(2,033

)

 

 

(1,294

)

Property and equipment, net

$

514,357

 

 

$

472,448

 

For the three months ended September 30, 2022 and 2021, depreciation expense was $13,314 and $11,388, respectively. For the nine months ended September 30, 2022 and 2021, depreciation expense was $39,446 and $31,596, respectively.

For the three months ended September 30, 2022 and 2021, amortization expense on finance leases was $250 and $242, respectively. For the nine months ended September 30, 2022 and 2021, amortization expense on finance leases was $739 and $727, respectively.

4. Other Intangible Assets, Net

Other intangibles assets, net consisted of the following as of the periods presented:

 

 

September 30, 2022

 

 

December 31, 2021

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

Trade names and trademarks

$

107,200

 

 

$

200

 

 

$

107,200

 

 

$

-

 

CPC Unity System

 

42,900

 

 

 

34,809

 

 

 

42,900

 

 

 

31,591

 

Customer relationships

 

11,800

 

 

 

7,958

 

 

 

11,800

 

 

 

7,584

 

Covenants not to compete

 

12,125

 

 

 

5,277

 

 

 

11,075

 

 

 

3,980

 

 

$

174,025

 

 

$

48,244

 

 

$

172,975

 

 

$

43,155

 

For the three months ended September 30, 2022 and 2021, amortization expense associated with the Company’s finite-lived intangible assets was $1,629 and $1,350, respectively.

For the nine months ended September 30, 2022 and 2021, amortization expense associated with the Company’s finite-lived intangible assets was $5,089 and $4,207, respectively.

As of September 30, 2022, estimated future amortization expense was as follows:

 

Fiscal Year Ending:

 

 

 

 

2022 (remaining three months)

 

 

$

2,343

 

2023

 

 

 

7,009

 

2024

 

 

 

5,053

 

2025

 

 

 

1,568

 

2026

 

 

 

1,501

 

Thereafter

 

 

 

1,307

 

Total estimated future amortization expense

 

 

$

18,781

 

 

11


 

 

5. Goodwill

Goodwill consisted of the following for the periods presented:

 

 

As of

 

 

September 30, 2022

 

 

December 31, 2021

 

Balance at beginning of period

$

1,060,221

 

 

$

737,415

 

   Current period acquisitions

 

55,113

 

 

 

323,477

 

   Other provisional adjustments

 

(8,262

)

 

 

(671

)

Balance at end of period

$

1,107,072

 

 

$

1,060,221

 

 

Goodwill is generally deductible for tax purposes, except for the portion related to purchase accounting step-up goodwill.

6. Other Accrued Expenses

Other accrued expenses consisted of the following for the periods presented:

 

 

As of

 

 

 

September 30, 2022

 

 

December 31, 2021

 

Utilities

 

$

5,149

 

 

$

4,274

 

Accrued other tax expense

 

 

8,912

 

 

 

8,088

 

Insurance expense

 

 

3,753

 

 

 

3,200

 

Other

 

 

7,646

 

 

 

4,639

 

Total other accrued expenses

 

$

25,460

 

 

$

20,201

 

 

7. Income Taxes

The effective income tax rates on continuing operations for the nine months ended September 30, 2022 and 2021 were 22.10% and 33.7%, respectively. In general, the effective tax rates differed from the U.S. federal statutory income tax rate primarily due to state income taxes, non-deductible expenses such as those related to certain executive compensation, and other discrete tax benefits recorded during the period.

The year-to-date provision for income taxes for the nine months ended September 30, 2022 included taxes on earnings at an anticipated annual effective tax rate of 26.63% and a net, favorable tax impact of $5,543 related primarily to discrete tax benefits originating from stock options exercised during the nine months ended September 30, 2022.

The year-to-date provision for income taxes for the nine months ended September 30, 2021 included taxes on earnings at an anticipated annual effective tax rate of 25.19% and a favorable tax impact of $58,443 related primarily to discrete tax benefits originating from stock option exercises and certain non-deductible expenses related to executive compensation that were incurred during the nine months ended September 30, 2021.

On August 9, 2022, the Creating Helpful Incentives to Produce Semiconductors (“CHIPS”) Act of 2022 was signed into law. The

CHIPS Act is designed to boost domestic semiconductor manufacturing and encourage US research activities. Later that month,

on August 16, 2022, the Inflation Reduction Act (“IRA”) of 2022 was signed into law. The IRA creates a new book-minimum tax

on certain large corporations and an excise tax on stock buybacks while also providing incentives to address climate change

mitigation and clean energy, among other items. Most of these changes will become effective for the 2023 tax year and after initial evaluation, the Company does not currently expect these laws to have a material effect on the consolidated financial statements.

 

For the nine months ended September 30, 2022 and 2021, the Company did not record any unrecognized tax benefits or interest and penalties related to any uncertain tax positions.

 

12


 

 

8. Debt

The Company’s long-term debt consisted of the following as of the periods presented:

 

 

As of

 

 

September 30, 2022

 

 

December 31, 2021

 

Credit agreement

 

 

 

 

 

First lien term loan

$

901,201

 

 

$

903,301

 

Less: unamortized discount and debt issuance costs

 

(5,773

)

 

 

(6,965

)

First lien term loan, net

 

895,428

 

 

 

896,336

 

Total long-term portion of debt, net

$

895,428

 

 

$

896,336

 

 

As of September 30, 2022, annual maturities of debt were as follows:

 

Fiscal Year Ending:

 

 

 

 

2022 (remaining three months)

 

 

$

-

 

2023

 

 

 

-

 

2024

 

 

 

-

 

2025

 

 

 

-

 

2026

 

 

 

901,201

 

Thereafter

 

 

 

-

 

Total maturities of debt

 

 

$

901,201

 

 

As of September 30, 2022 and December 31, 2021, unamortized debt issuance costs, including those associated with the Company's Revolving Commitment (as defined below), were $6,157 and $7,427, respectively, and accumulated amortization of debt issuance costs was $4,018 and $2,748, respectively.

For the three months ended September 30, 2022 and 2021, the amortization of deferred debt issuance costs in interest expense, net in the unaudited condensed consolidated statements of operations and comprehensive income (loss) was approximately $428 and $200, respectively.

For the nine months ended September 30, 2022 and 2021, the amortization of deferred debt issuance costs in interest expense, net in the unaudited condensed consolidated statements of operations and comprehensive income (loss) was approximately $1,270 and $898.

Credit Agreement

On August 21, 2014, the Company entered into a Credit Agreement (“Credit Agreement”) which was originally comprised of a term loan (“First Lien Term Loan”) and a revolving commitment (“Revolving Commitment”). The Credit Agreement was collateralized by substantially all personal property (including cash, inventory, property and equipment, and intangible assets), real property, and equity interests owned by the Company.

Under the Credit Agreement and with respect to the First Lien Term Loan, the Company had the option of selecting either (i) a Base Rate interest rate plus fixed margin of 2.25% or (ii) a Eurodollar (LIBOR) interest rate for one, two, three or six months plus a fixed margin of 3.25%.

Under the Credit Agreement and with respect to the Revolving Commitment, the Company had the option of selecting either (i) a Base Rate interest rate plus a variable margin of 2.50% to 3.00%, based on the Company’s First Lien Net Debt Leverage Ratio, or (ii) a Eurodollar (LIBOR) interest rate for one, two, three or six months plus a variable margin of 3.50% to 4.00%, based on the Company’s First Lien Net Leverage Ratio.

First Lien Term Loan

In February 2020, the Company entered into Amendment No. 1 to Amended and Restated First Lien Credit Agreement (“Amendment No. 1”) which amended the Amended and Restated First Lien Credit Agreement entered into in May 2019 (the “A&R First Lien Credit Agreement”). Amendment No. 1 changed the interest rate spreads associated with the A&R First Lien Credit Agreement where (i) the variable margin associated with the Base Rate interest rate plus a variable margin based on the Company’s First Lien Net Leverage Ratio changed from 2.25% to 2.50% to 2.00% to 2.25% and (ii) the variable margin associated with the Eurodollar Rate interest rate for one, two, three or six months plus a variable margin based on the Company’s First Lien Net Leverage Ratio changed from 3.25% to 3.50% to 3.00% to 3.25%.

In June 2021, the Company made a voluntary prepayment of $190,400 of outstanding principal under the First Lien Term Loan funded by the net proceeds from the IPO. In connection with the voluntary prepayment, the Company expensed $1,037 of previously unamortized debt issuance costs as a loss on extinguishment of debt in the unaudited condensed consolidated statements of operations

13


 

and comprehensive income (loss). The early prepayment resulted in the elimination of required quarterly amortization principal payments through 2026.

In December 2021, in connection with the Clean Streak Ventures acquisition, the Company entered into Amendment No. 3 to Amended and Restated First Lien Credit Agreement (“Amendment No. 3”) which amended and restated the A&R First Lien Credit Agreement, as previously amended. Under the terms of Amendment No. 3, the previous First Lien Term Loan was increased by $290,000 to $903,301 with the balance due on May 14, 2026. The incremental increase in aggregate principal of $290,000 resulted in $285,962 of proceeds net of discount and deferred debt issuance costs.

As of September 30, 2022 and December 31, 2021, the amount outstanding under the First Lien Term Loan was $901,201 and $903,301, respectively. As of September 30, 2022 and December 31, 2021, the interest rate on the First Lien Term Loan was 6.12% and 3.10%, respectively.

The A&R First Lien Credit Agreement, as amended (the “Amended A&R First Lien Credit Agreement”), requires the Company to maintain compliance with a First Lien Net Leverage Ratio. As of September 30, 2022, the Company was in compliance with the First Lien Net Leverage Ratio financial covenant of the Amended A&R First Lien Credit Agreement.

Revolving Credit Agreement

In June 2021, the Company entered into Amendment No. 2 to the Amended and Restated First Lien Credit Agreement (Amendment No. 2”) that (i) increased the maximum available borrowing capacity under the Revolving Commitment from $75,000 to $150,000 and (ii) extended the maturity date of the Revolving Commitment to the earliest to occur of (a) June 4, 2026, (b) the date that is six months prior to the maturity date of the First Lien Term Loan (provided that clause (b) shall not apply if the maturity date for the First Lien Term Loan is extended to a date that is at least six months after June 4, 2026, the First Lien Term Loan is refinanced having a maturity date at least six months after June 4, 2026, or the First Lien Term Loan is paid in full), (c) the date that commitments under the Revolving Commitment are permanently reduced to zero, and (d) the date of the termination of the commitments under the Revolving Commitment. The increase to the maximum available borrowing capacity was effected on the close of the IPO in June 2021. In connection with Amendment No. 2, the Company expensed $87 of previously unamortized debt issuance costs as a loss on extinguishment of debt in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

As of September 30, 2022 and December 31, 2021, there were no amounts outstanding under the Revolving Commitment.

The maximum available borrowing capacity under the Revolving Commitment is reduced by outstanding letters of credit under the Revolving Commitment. As of September 30, 2022 and December 31, 2021, the available borrowing capacity under the Revolving Commitment was $148,991 and $149,503, respectively.

In addition, an unused commitment fee based on the Company’s First Lien Net Leverage Ratio is payable on the average of the unused borrowing capacity under the Revolving Commitment. As of September 30, 2022 and December 31, 2021, the unused commitment fee was 0.25%.

Standby Letters of Credit

As of September 30, 2022, the Company has a letter of credit sublimit of $10,000 under the Revolving Commitment, provided that the total utilization of revolving commitments under the Revolving Commitment does not exceed $150,000. Any letter of credit issued under the Credit Agreement has an expiration date which is the earlier of (i) no later than 12 months from the date of issuance or (ii) five business days prior to the maturity date of the Revolving Commitment, as amended under Amendment No. 2. Letters of credit under the Revolving Commitment reduce the maximum available borrowing capacity under the Revolving Commitment. As of September 30, 2022 and December 31, 2021, the amounts associated with outstanding letters of credit were $1,009 and $497, respectively, and unused letters of credit under the Revolving Commitment were $8,991 and $9,503, respectively.

Second Lien Credit Agreement

In June 2021, the Company made a voluntary prepayment of all outstanding borrowings under the second lien term loan (the “Second Lien Term Loan”) pursuant to the Second Lien Credit Agreement entered into May 2019, as amended by the First Amendment to Second Lien Credit Agreement in March 2020 (the “Amended Second Lien Credit Agreement”) funded by the net proceeds from the IPO, which included outstanding principal of $242,673 and accrued interest expense of $6,050. In connection with this voluntary prepayment, the Company expensed $2,059 of previously unamortized debt issuance costs as a loss on extinguishment of debt in the unaudited condensed consolidated statements of operations and comprehensive income (loss).

 

9. Fair Value Measurements

The following table presents financial liabilities which are measured at fair value on a recurring basis as of September 30, 2022:

 

14


 

 

Fair Value Measurements

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

$

1,206

 

 

$

-

 

 

$

1,206

 

 

$

-

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Contingent Consideration

$

5,750

 

 

$

-

 

 

$

-

 

 

$

5,750

 

The following table presents financial liabilities which are measured at fair value on a recurring basis as of December 31, 2021:

 

 

Fair Value Measurements

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

$

268

 

 

$

-

 

 

$

268

 

 

$

-

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Contingent Consideration

$

5,750

 

 

$

-

 

 

$

-

 

 

$

5,750

 

 

The Company measures the fair value of its financial assets and liabilities using the highest level of inputs that are available as of the measurement date. The carrying amounts of cash, accounts receivable, and accounts payable approximate their fair value due to the immediate or short-term maturity of these financial instruments. See Note 10 Interest Rate Swap for additional information on the interest rate swap.

As of September 30, 2022 and December 31, 2021, the fair value of the Company’s First Lien Term Loan approximated its carrying value due to the debt’s variable interest rate terms.

The Company recognized a Level 3 contingent consideration liability in connection with the Downtowner Car Wash acquisition in December 2021. The Company measured its contingent consideration liability using Level 3 unobservable inputs. The contingent consideration liability is associated with the achievement of certain targets and is estimated at each balance sheet date by considering among other factors, results of completed periods and the Company's most recent financial projection for future periods subject to earn-out payments. There are two components to the contingent consideration: a payment when the Company obtains the certificate of occupancy for the car wash and opens to the public in 2023 and an annual payment based on certain financial metrics of the business. A change in the forecasted revenue or projected opening dates could result in a significantly lower or higher fair value measurement. The Company determined that there were no significant changes to the unobservable inputs that would have resulted in a change in fair value of this contingent consideration liability at September 30, 2022.

During the three and nine months ended September 30, 2022 and 2021, there were no transfers between fair value measurement levels.

10. Interest Rate Swap

In May 2020, the Company entered into a pay-fixed, receive-floating interest rate swap (the “Swap”) to mitigate variability in forecasted interest payments on an amortizing notional of $550,000 of the Company’s variable-rate First Lien Term Loan. The Company designated the Swap as a cash flow hedge.

As of September 30, 2022, information pertaining to the Swap was as follows:

 

Notional Amount

 

 

Fair Value

 

 

Pay-Fixed

 

Receive-Floating

 

Maturity Date

$

540,228

 

 

$

1,206

 

 

0.308%

 

2.99%

 

October 20, 2022

 

As of September 30, 2022 and December 31, 2021, the fair value of the Swap was $1,206 and $268, respectively, and is reported as a debit balance as a result of floating interest rates above fixed interest rates, and is included in prepaid expenses and other current assets in the accompanying unaudited condensed consolidated balance sheets.

For the three months ended September 30, 2022 and 2021, amounts reported in other comprehensive income (loss) in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss) are net of tax of $(601) and $18, respectively.

For the nine months ended September 30, 2022 and 2021, amounts reported in other comprehensive income (loss) in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss) are net of tax of $125 and $133, respectively

In October 2022, the interest rate swap expired and was not replaced by a new interest rate swap.

15


 

11. Leases

Balance sheet information related to leases consisted of the following for the periods presented:

 

 

 

 

 

As of

 

 

 

Classification

 

September 30, 2022

 

 

December 31, 2021

 

Assets

 

 

 

 

 

 

 

 

Operating

 

Operating lease right of use assets, net

 

$

763,427

 

 

$

718,533

 

Finance

 

Property and equipment, net

 

 

14,571

 

 

 

15,204

 

Total lease assets

 

 

 

$

777,998

 

 

$

733,737

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

Operating

 

Current maturities of operating lease liability

 

$

39,336

 

 

$

37,345

 

Finance

 

Current maturities of finance lease liability

 

 

648

 

 

 

559

 

Long-term

 

 

 

 

 

 

 

 

Operating

 

Operating lease liability

 

 

750,929

 

 

 

717,552

 

Finance

 

Financing lease liability

 

 

14,955

 

 

 

15,359

 

Total lease liabilities

 

 

 

$

805,868

 

 

$

770,815

 

 

Components of total lease cost, net, consisted of the following for the periods presented:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease expense(1)

 

$

22,796

 

 

$

20,134

 

 

$

65,653

 

 

$

58,654

 

Finance lease expense

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of lease assets

 

 

250

 

 

 

242

 

 

$

739

 

 

 

727

 

Interest on lease liabilities

 

 

282

 

 

 

290

 

 

$

850

 

 

 

876

 

Short-term lease expense

 

 

7

 

 

 

23

 

 

$

23

 

 

 

42

 

Variable lease expense(2)

 

 

3,103

 

 

 

2,160

 

 

$

10,732

 

 

 

8,648

 

Total

 

$

26,438

 

 

$

22,849

 

 

$

77,997

 

 

$

68,947

 

(1)
Operating lease expense includes an immaterial amount of sublease income and is included in other store operating expenses and general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss).
(2)
Variable lease costs consist of property taxes, property insurance, and common area or other maintenance costs for the Company’s leases of land and buildings and is included in other store operating expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss).

The following includes supplemental information for the periods presented:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Operating cash flows from operating leases

 

$

22,820

 

 

$

20,490

 

 

$

66,162

 

 

$

59,831

 

Operating cash flows from finance leases

 

$

282

 

 

$

290

 

 

$

850

 

 

$

876

 

Financing cash flows from finance leases

 

$

147

 

 

$

124

 

 

$

421

 

 

$

364

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease liabilities arising from obtaining ROU assets

 

$

44,471

 

 

$

12,251

 

 

$

72,482

 

 

$

44,271

 

Finance lease liabilities arising from obtaining ROU assets

 

$

-

 

 

$

-

 

 

$

103

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average remaining operating lease term

 

 

14.22

 

 

 

14.55

 

 

 

14.22

 

 

 

14.55

 

Weighted-average remaining finance lease term

 

 

16.57

 

 

 

17.51

 

 

 

16.57

 

 

 

17.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average operating lease discount rate

 

 

7.18

%

 

 

6.45

%

 

 

7.18

%

 

 

6.45

%

Weighted-average finance lease discount rate

 

 

7.33

%

 

 

7.33

%

 

 

7.33

%

 

 

7.33

%

 

16


 

As of September 30, 2022, lease obligation maturities were as follows:

 

Fiscal Year Ending:

 

Operating Leases

 

 

Finance Leases

 

2022 (remaining three months)

 

$

23,101

 

 

$

435

 

2023

 

 

92,772

 

 

 

1,755

 

2024

 

 

92,427

 

 

 

1,780

 

2025

 

 

92,217

 

 

 

1,786

 

2026

 

 

91,180

 

 

 

1,792

 

Thereafter

 

 

895,891

 

 

 

22,090

 

Total future minimum obligations

 

$

1,287,588

 

 

$

29,638

 

Less: Present value discount

 

 

(497,323

)

 

 

(14,035

)

Present value of net future minimum lease obligations

 

$

790,265

 

 

$

15,603

 

Less: current portion

 

 

(39,336

)

 

 

(648

)

Long-term obligations

 

$

750,929

 

 

$

14,955

 

 

Forward-Starting Leases

As of September 30, 2022, the Company entered into six leases that had not yet commenced related to build-to-suit arrangements for car wash locations. These leases will commence in the remainder of 2022, or in 2023 or 2024 with initial lease terms of 15 to 20 years.

As of December 31, 2021, the Company entered into eight leases that had not yet commenced related to build-to-suit arrangements for car wash locations. These leases will commence in the remainder of 2022 or in 2023 with initial lease terms of five to 20 years.

Sale-Leaseback Transactions

During the three months ended September 30, 2022 and 2021, the Company completed two and one sale-leaseback transactions related to its car wash locations, with aggregate consideration of $60,894 and $5,000, respectively, resulting in a net gain of $860 and net loss of $6, respectively, which are included in (Gain) loss on sale of assets in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss). Contemporaneously with the closing of the sales, the Company entered into lease agreements for the properties for initial 15- to 20-year terms. For the sale-leaseback transactions consummated in the three months ended September 30, 2022, the cumulative initial annual rent for the properties was approximately $3,605, subject to annual escalations. These leases are accounted for as operating leases. For the sale-leaseback transactions consummated in the three months ended September 30, 2021, the cumulative initial annual rent for the properties was approximately $310, subject to annual escalations. These leases are accounted for as operating leases.

During the nine months ended September 30, 2022 and 2021, the Company completed three and five sale-leaseback transactions related to its car wash locations, respectively, with aggregate consideration of $64,694 and $51,267, resulting in a net gain of $4,063 and $6,840, respectively, which are included in (Gain) loss on sale of assets in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss). Contemporaneously with the closing of the sales, the Company entered into lease agreements for the properties for initial 15- to 20-year terms. For the sale-leaseback transactions consummated in the nine months ended September 30, 2022, the cumulative initial annual rent for the properties was approximately $3,787, subject to annual escalations. These leases are accounted for as operating leases. For the sale-leaseback transactions consummated in the nine months ended September 30, 2021, the cumulative initial annual rent for the properties was approximately $3,192, subject to annual escalations. These leases are accounted for as operating leases.

12. Stockholders’ Equity

As of September 30, 2022, there were 1,000,000,000 shares of common stock authorized, 307,798,561 shares of common stock issued, and 304,624,334 shares of common stock outstanding. As of September 30, 2022, there were 5,000,000 shares of preferred stock authorized and none were issued or outstanding.

As of December 31, 2021, there were 1,000,000,000 shares of common stock authorized, 303,294,678 shares of common stock issued, and 300,120,451 shares of common stock outstanding.

As of September 30, 2022, and December 31, 2021, the Company had 3,174,227 shares of treasury stock. As of September 30, 2022 and December 31, 2021, the cost of treasury stock included in additional paid-in capital in the accompanying unaudited condensed consolidated balance sheets was $6,091.

13. Stock-Based Compensation

The 2014 Plan

Under the 2014 Stock Option Plan of Hotshine Holdings, Inc. (the “2014 Plan”), the Company may grant incentive stock options or nonqualified stock options to purchase common shares of the Company to its employees, directors, officers, outside advisors and non-employee consultants.

17


 

All stock options granted under the 2014 Plan are equity-classified and have a contractual life of ten years. Under the 2014 Plan, 60% of the shares in a grant contain service-based vesting conditions and vest ratably over a five-year period and 40% of the shares in a grant contain performance-based vesting conditions (“Performance Vesting Options”). The condition for the Performance Vesting Options is a change in control or an initial public offering, where (i) 50% of the Performance Vesting Options vest and become exercisable if the Principal Stockholders receive the Target Proceeds at the Measurement Date and (ii) the remaining 50% of the Performance Vesting Options vest and become exercisable if the Principal Stockholders receive the Maximum Amount at the Measurement Date. Principal Stockholders is defined in the 2014 Plan as (a) Green Equity Investors VI, L.P., (b) Green Equity Investors Side VI, L.P., (c) LGP Associates VI-A, LLC, (d) LGP Associates VI-B LLC, and (e) the affiliates of the foregoing entities. Measurement Date is defined as the date of a change in control or an initial public offering, whichever comes first. The Target Proceeds and Maximum Amount are defined and measured by either multiples of invested capital or an annual compounded pre-tax internal rate of return on investment. In June 2021, the Company modified all outstanding shares of Performance Vesting Options to remove, subject to the successful completion of the IPO, the requirement that the Principal Stockholders receive the Target Proceeds and the Maximum Amount as conditions for the Performance Vesting Options to vest. The exercise prices for stock options granted under the 2014 Plan were not less than the fair market value of the common stock of the Company on the date of grant. For the avoidance of doubt, the IPO constituted a performance measurement date under the applicable option agreements for the Performance Vesting Options and the Performance Vesting Options vested in full in connection with the IPO.

The 2021 Plan

In June 2021, the Board adopted the 2021 Incentive Award Plan (the “2021 Plan”), which was subsequently approved by the Company's stockholders and became effective on June 25, 2021. Under the 2021 Plan, the Company may grant incentive stock options, nonqualified stock options, restricted stock units ("RSUs"), restricted stock, and other stock- or cash-based awards to its employees, directors, officers, and non-employee consultants. Initially, the maximum number of shares of the Company’s common stock that may be issued under the 2021 Plan is 29,800,000 new shares of common stock, which includes 256,431 shares of common stock that remained available for issuance under the 2014 Plan at June 25, 2021. In connection with the IPO, stock option and RSU awards were granted with respect to 3,726,305 shares. Any shares of common stock subject to outstanding stock awards granted under the 2014 Plan and, following June 25, 2021, terminate, expire or are otherwise forfeited, reacquired or withheld will become available for issuance under the 2021 Plan.

All stock options granted under the 2021 Plan are equity-classified and have a contractual life of ten years. Under the 2021 Plan, the stock options contain service-based vesting conditions and generally vest ratably over a three- or five-year period (collectively with stock options under the 2014 Plan, the “Time Vesting Options”). The exercise prices for stock options granted under the 2021 Plan were not less than the fair market value of the common stock of the Company on the date of grant.

RSUs granted under the 2021 Plan are equity-classified and contain service-based conditions and generally vest ratably over one- to five-year periods. Each RSU represents the right to receive one share of the Company’s common stock upon vesting. The fair value is calculated based upon the Company’s closing stock price on the date of grant, and the stock-based compensation expense is recognized over the requisite service period, which is generally the vesting period.

 

The 2014 Plan and 2021 Plan are administered by the Board or, at the discretion of the Board, by a committee thereof. The exercise prices for stock options, the vesting of awards, and other restrictions are determined at the discretion of the Board, or its committee if so delegated.

The 2021 ESPP

In June 2021, the Board adopted the 2021 Employee Stock Purchase Plan (“2021 ESPP”), which was subsequently approved by the Company’s stockholders and became effective in June 2021. The 2021 ESPP authorizes the initial issuance of up to 5,000,000 shares of the Company’s common stock to eligible employees of the Company or, as designated by the Board, employees of a related company. The 2021 ESPP provides for offering periods not to exceed 27 months, and each offering period will include purchase periods. The Company determined that offering periods would commence at approximately the six-month period beginning with an enrollment date and ending with the next exercise date, except that the first offering period commenced on the effective date of the Company's registration statement and ended on November 9, 2021.

 

The 2021 ESPP provides that the number of shares reserved and available for issuance under the 2021 ESPP will automatically increase on January 1 of each calendar year from January 1, 2022 through January 1, 2031 by an amount equal to the lesser of (i) 0.5% of the outstanding number of shares of common stock on the immediately preceding December 31 and (ii) such lesser number of shares of common stock as determined by the Board. The number of shares reserved and available for issuance under the 2021 ESPP as of January 1, 2022 is 6,057,993.

 

Share-Based Payment Valuation

The grant date fair value of Time Vesting Options granted is determined using the Black-Scholes option-pricing model. The grant date fair value of Performance Vesting Options is determined using a Monte Carlo simulation model and a barrier-adjusted Black-Scholes

18


 

option-pricing model. The grant date fair value of stock purchase rights granted under the 2021 ESPP is determined using the Black-Scholes option-pricing model.

2021 ESPP Valuation

The following table presents, on a weighted-average basis, the assumptions used in the Black-Scholes option-pricing model to determine the grant date fair value of stock purchase rights granted under the 2021 ESPP during the periods presented:

 

 

Nine Months Ended September 30,

 

2022

Expected volatility

34.33% - 52.72%

Risk-free interest rate

0.07% - 1.54%

Expected term (in years)

0.49 - 0.50

Expected dividend yield

None

 

Time Vesting Options

The following table presents, on a weighted-average basis, the assumptions used in the Black-Scholes option-pricing model to determine the grant date fair value of Time Vesting Options granted under the 2014 Plan and 2021 Plan during the periods presented:

 

Nine Months Ended September 30,

 

2022

 

2021

Expected volatility

35.63% - 35.87%

 

40.83% - 44.75%

Risk-free interest rate

2.96% - 3.34%

 

0.9% - 1.19%

Expected term (in years)

6.0

 

6.43 - 6.5

Expected dividend yield

None

 

None

 

Performance Vesting Options

The following table presents, on a weighted-average basis, the assumptions used in the Black-Scholes option-pricing model to determine the grant date fair value of Performance Vesting Options granted under the 2014 Plan during the periods presented:

 

Nine Months Ended September 30,

 

2022

 

2021

Expected volatility

-

 

60.00%

Risk-free interest rate

-

 

0.63%

Expected term (in years)

-

 

5.2

Expected dividend yield

-

 

None

 

Stock Options

A summary of the Company’s stock option activity during the period presented is as follows:

 

 

Time Vesting Options

 

 

Performance Vesting Options

 

 

Total Number of Stock Options

 

 

Weighted-Average Exercise Price

 

Outstanding as of December 31, 2021

 

18,513,356

 

 

 

12,239,595

 

 

 

30,752,951

 

 

$

2.01

 

Granted

 

412,703

 

 

 

-

 

 

 

412,703

 

 

$

12.31

 

Exercised

 

(2,131,052

)

 

 

(1,506,933

)

 

 

(3,637,985

)

 

$

0.96

 

Forfeited

 

(277,091

)

 

 

-

 

 

 

(277,091

)

 

$

7.16

 

Outstanding as of September 30, 2022

 

16,517,916

 

 

 

10,732,662

 

 

 

27,250,578

 

 

$

2.26

 

Options vested or expected to vest as of September 30, 2022

 

16,028,201

 

 

 

10,732,662

 

 

 

26,760,863

 

 

$

5.82

 

Options exercisable as of September 30, 2022

 

12,624,906

 

 

 

10,732,662

 

 

 

23,357,568

 

 

$

1.15

 

 

19


 

The number and weighted-average grant date fair value of stock options during the period presented are as follows:

 

 

Number of Stock Options

 

Weighted-Average
Grant Date Fair Value

 

 

Time Vesting Options

 

 

Performance Vesting Options

 

Time Vesting Options

 

 

Performance Vesting Options

 

Non-vested as of December 31, 2021

 

5,266,469

 

 

-

 

$

3.45

 

 

$

-

 

Non-vested as of September 30, 2022

 

3,893,010

 

 

-

 

$

3.90

 

 

$

-

 

Granted during the period

 

412,703

 

 

-

 

$

4.89

 

 

$

-

 

Vested during the period

 

(1,509,071

)

 

-

 

$

2.72

 

 

$

-

 

Forfeited/canceled during the period

 

(277,091

)

 

-

 

$

3.13

 

 

$

-

 

 

The Company granted 412,703 Time Vesting Options with a grant date fair value of $2,018 during the nine months ended September 30, 2022. There were no Performance Vesting Options granted during the nine months ended September 30, 2022.

The fair value of shares attributable to stock options that vested during the nine months ended September 30, 2022 was $19,254.

As of September 30, 2022, the weighted-average remaining contractual life of outstanding stock options was approximately 4.12 years.

Restricted Stock Units

The following table summarizes the Company’s RSU activity since December 31, 2021:

 

 

Restricted Stock Units

 

 

Weighted-Average Grant Date Fair Value

 

Unvested as of December 31, 2021

 

1,683,077

 

 

$

15.14

 

Granted

 

1,126,748

 

 

$

12.28

 

Vested

 

(457,372

)

 

$

15.00

 

Forfeited

 

(190,418

)

 

$

14.01

 

Unvested as of September 30, 2022

 

2,162,035

 

 

$

13.78

 

 

The Company granted 1,126,748 RSUs with a grant date fair value of $13,835 during the nine months ended September 30, 2022.

The fair value of shares attributable to RSUs that vested during the nine months ended September 30, 2022 was $4,976.

As of September 30, 2022, the weighted-average remaining contractual life of outstanding RSUs was approximately 9.22 years.

Stock-Based Compensation Expense

The Company estimated a forfeiture rate of 6.96% for awards with service-based vesting conditions based on historical experience and future expectations of the vesting of these share-based payments. The Company used this rate as an assumption in calculating stock-based compensation expense for Time Vesting Options, RSUs, and stock purchase rights granted under the 2021 ESPP.

Total stock-based compensation expense, by caption, recorded in the unaudited condensed consolidated statements of operations and comprehensive income (loss) for the periods presented is as follows:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Cost of labor and chemicals

$

2,268

 

 

$

2,806

 

 

$

6,168

 

 

$

34,248

 

General and administrative

 

3,193

 

 

 

3,945

 

 

 

10,791

 

 

 

176,044

 

Total stock-based compensation expense

$

5,461

 

 

$

6,751

 

 

$

16,959

 

 

$

210,292

 

 

Total stock-based compensation expense, by award type, recorded in the unaudited condensed consolidated statements of operations and comprehensive income (loss) for the periods presented is as follows:

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Time Vesting Options

$

1,521

 

 

$

2,184

 

 

$

5,388

 

 

$

3,458

 

Performance Vesting Options

 

-

 

 

 

-

 

 

 

-

 

 

 

201,985

 

RSUs

 

3,587

 

 

 

3,076

 

 

 

10,505

 

 

 

3,358

 

2021 ESPP

 

353

 

 

 

1,491

 

 

 

1,066

 

 

 

1,491

 

Total stock-based compensation expense

$

5,461

 

 

$

6,751

 

 

$

16,959

 

 

$

210,292

 

As of September 30, 2022, total unrecognized compensation expense related to unvested Time Vesting Options was $9,121, which is expected to be recognized over a weighted-average period of 3.23 years.

20


 

As of September 30, 2022, there was no unrecognized compensation expense related to unvested Performance Vesting Options as the completion of the IPO satisfied the performance condition and as a result, all outstanding Performance Vesting Options vested.

As of September 30, 2022, total unrecognized compensation expense related to unvested RSUs was $20,017, which is expected to be recognized over a weighted-average period of 2.73 years.

As of September 30, 2022, total unrecognized compensation expense related to unvested stock purchase rights under the 2021 ESPP was $177, which is expected to be recognized over a weighted-average period of 0.13 years.

Modification of Stock Options

In February 2021, the Company modified a total of 7,874,304 shares of Performance Vesting Options for 12 grantees to provide for an additional service-based vesting condition related to the acceleration of vesting in connection with a grantees’ death. The modification resulted in an incremental increase to unrecognized compensation expense related to unvested Performance Vesting Options of $75,217, which was recognized in June 2021 in connection with the completion of the IPO. The Company did not recognize current incremental stock-based compensation expense in connection with the modification during the three months ended March 31, 2021 because the grants vest upon the earlier of a performance condition or a service condition.

In June 2021, the Company modified all outstanding shares of Performance Vesting Options to remove, subject to the successful completion of the IPO, the requirement that the Principal Stockholders receive the Target Proceeds and the Maximum Amount as conditions for the Performance Vesting Options to vest. This modification resulted in incremental stock-based compensation expense of $117,708, which was recognized in the three months ended June 30, 2021 in connection with the completion of the IPO.

14. Business Combinations

From time to time, the Company may pursue acquisitions of conveyorized car washes that either strategically fit with the Company’s business or expand the Company’s presence in new and attractive markets.

The Company accounts for business combinations under the acquisition method of accounting. The assets acquired and liabilities assumed in connection with business acquisitions are recorded at the date of acquisition at their estimated fair values, with any excess of the purchase price over the estimated fair values of the net assets acquired and intangible assets assigned, recorded as goodwill. Significant judgment is required in estimating the fair value of assets acquired and liabilities assumed and in assigning their respective useful lives. Accordingly, the Company may engage third-party valuation specialists to assist in these determinations. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management; but are inherently uncertain.

The unaudited condensed consolidated financial statements reflect the operations of an acquired business starting from the effective date of the acquisition. The Company expensed $82 and $26 of acquisition-related costs for the three months ended September 30, 2022 and 2021, respectively. The Company expensed $517 and $269 of acquisition-related costs for the nine months ended September 30, 2022 and 2021, respectively. These acquisition-related costs are expensed as incurred and are included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss).

For the three and nine months ended September 30, 2022, the amount of acquired goodwill not deductible for income tax purposes was $692 and $1,078, respectively. For the three and nine months ended September 30, 2021, the amount of acquired goodwill not deductible for income tax purposes was $114 and $1,196, respectively.

2022 Acquisitions

For the three months ended September 30, 2022, the Company acquired the assets and liabilities of three conveyorized car washes in one acquisition for total consideration of approximately $22,800, which was paid in cash. For the nine months ended September 30, 2022, the Company acquired the assets and liabilities of eight conveyorized car washes in three acquisitions for total consideration of $77,407, which were paid in cash. The acquisitions resulted in the preliminary recognition of $55,113 of goodwill, $21,058 of property and equipment, $1,050 of intangible assets related to covenants not to compete, and $185 in other assets and liabilities. Adjustments related to 2022 acquisitions were not material in the current year.
 

The weighted-average amortization period for the acquired covenants not to compete is 5.0 years.

The acquisitions were located in the following markets:

 

Location (Seller)

Number of Washes

 

Month Acquired

Georgia (Bamboo Carwash)

1

 

April

California (Speedwash)

4

 

April

Minnesota (Top Wash)

3

 

August

2021 Acquisitions

21


 

In 2021, the Company acquired the assets and liabilities of 37 conveyorized car washes in five acquisitions for total consideration of approximately $524,839, which was paid in cash. These acquisitions resulted in the preliminary recognition of $323,477 of goodwill, $202,708 of property and equipment, $4,300 of intangible assets related to customer relationships, $3,970 of intangible assets related to covenants not to compete, and $9,665 of net liabilities. In connection with the Downtowner Car Wash acquisition, the Company recognized a contingent consideration liability of $5,750. See Note 9 Fair Value Measurements for additional information regarding the contingent consideration liability. During the nine months ended September 30, 2022, as a result of receiving $11,845 in escrow funds associated with an acquired location that did not receive zoning permits as required under the purchase agreement, the Company recorded an adjustment during the measurement period to its Clean Streak Ventures LLC purchase price allocation which reduced goodwill by $10,670 and land by $1,175. Additional adjustments related to 2021 acquisitions were not material in the current year.

The weighted-average amortization periods for the acquired customer relationships and covenants not to compete are 7.0 years and 5.0 years, respectively.

The acquisitions were located in the following markets:

 

Location (Seller)

Number of Washes

 

Month Acquired

Florida (Superwash Express)

5

 

June

Texas (Super Suds Car Wash)

1

 

July

Texas (Daddy O's Car Wash)

3

 

November

Florida (Downtowner Car Wash)

5

 

December

Florida (Clean Streak Ventures LLC)

23

 

December

 

15. Related-Party Transactions

For various advisory and monitoring services provided to the Company, Leonard Green & Partners ("LGP"), the majority owner of the Company, historically received $1,000 annually for various advisory and monitoring services provided to the Company pursuant to a management services agreement. For the three and nine months ended September 30, 2022, the Company did not pay fees and expenses to LGP. For the three and nine months ended September 30, 2021, total fees and expenses paid by the Company to LGP were $0 and $500, respectively. Fees and expenses paid to LGP are included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss). The management services agreement terminated in June 2021 upon the consummation of the IPO.

LGP was one of the Company’s creditors under the Amended Second Lien Credit Agreement with an investment in 2020 of $5,625 in the Second Lien Term Loan. The Company made a voluntary prepayment of all outstanding balances under the Second Lien Term Loan in June 2021. See Note 8 Debt for additional information.

16. Commitments and Contingencies

Litigation

From time to time, the Company is party to pending or threatened lawsuits arising out of or incident to the ordinary course of business. The Company carries professional and general liability insurance coverage and other insurance coverages. In the opinion of management and upon consultation with legal counsel, none of the pending or threatened lawsuits will have a material effect upon the consolidated financial position, operations, or cash flows of the Company.

Insurance

The Company carries a broad range of insurance coverage, including general and business auto liability, commercial property, workers’ compensation, cyber risk, and general umbrella policies. As of September 30, 2022 and December 31, 2021, the Company accrued $3,731 and $3,169, respectively, for assessments on insurance claims filed, which are included in other accrued expenses in the accompanying unaudited condensed consolidated balance sheets. As of September 30, 2022 and December 31, 2021, the Company recorded $2,977 and $2,594, respectively, in receivables from its non-healthcare insurance carriers related to these insurance claims, which are included in other receivables in the accompanying unaudited condensed consolidated balance sheets. The receivables are paid when the claim is finalized and the reserved amounts on these claims are expected to be paid within one year.

Environmental Matters

Operations at certain facilities currently or previously owned or leased by the Company utilize, or in the past have utilized, hazardous substances generally in compliance with applicable law. Periodically, the Company has had minor claims asserted against it by regulatory agencies or private parties for environmental matters relating to the handling of hazardous substances by the Company, and it has incurred obligations for investigations or remedial actions with respect to certain of these matters. There can be no assurances that activities at these facilities, or future facilities owned or operated by the Company, may not result in additional environmental claims being asserted against the Company or additional investigations or remedial actions being required. The Company is not aware of any significant remediation matters as of September 30, 2022. Because of various factors including the difficulty of identifying the

22


 

responsible parties for any particular site, the complexity of determining the relative liability among them, the uncertainty as to the most desirable remediation techniques and the amount of damages and clean-up costs and the time period during which such costs may be incurred, the Company is unable to reasonably estimate the ultimate cost of claims asserted against the Company related to environmental matters; however, the Company does not believe such costs will be material to its unaudited condensed consolidated financial statements.

In addition to potential claims asserted against the Company, there are certain regulatory obligations associated with these facilities. The Company also has a third-party specialist to review the sites subject to these regulations annually, for the purpose of assigning future cost. A third party has conducted a preliminary assessment of site restoration provisions arising from these regulations and the Company has recognized a provisional amount. As of September 30, 2022 and December 31, 2021, the Company recorded an environmental remediation accrual of $12, which is included in other accrued expenses in the accompanying unaudited condensed consolidated balance sheets.

23


 

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

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes included in our 2021 10-K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in other parts of this Quarterly Report on Form 10-Q and in Part I, Item 1A. “Risk Factors” and in Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2021 10-K.

Who We Are

Mister Car Wash, Inc. is the largest national car wash brand, primarily offering express exterior cleaning services, with interior cleaning services at select locations, across 420 car washes in 21 states as of September 30, 2022. Founded in 1996, we employ an efficient, repeatable, and scalable process, which we call the “Mister Experience,” to deliver a clean, dry, and shiny car every time. The core pillars of the “Mister Experience” are greeting every customer with a wave and smile, providing the highest quality car wash, and delivering the experience quickly and conveniently. We offer a monthly subscription program, which we call the Unlimited Wash Club(R) (“UWC”), as a flexible, quick, and convenient option for customers to keep their cars clean. As of September 30, 2022 and September 30, 2021, we had approximately 1.9 million and approximately 1.6 million UWC Members, respectively. This represented an increase of approximately 19% over the same time last year. For the three months ended September 30, 2022 and 2021, UWC sales represented 69% and 66% of our total wash sales, respectively, and UWC volume represented 77% and 74% of our total wash volume, respectively. Our scale and over 25 years of innovation allow us to drive operating efficiencies and invest in training, infrastructure, and technology that improve speed of service, quality, and sustainability and realize strong financial performance.

Factors Affecting Our Business and Trends

We believe that our business and growth depend on a number of factors that present significant opportunities for us and may pose risks and challenges, including those discussed below and in Part I, Item 1A. “Risk Factors” of our 2021 10-K.

 

 

 

Growth in comparable store sales. Comparable store sales have been a strong driver of our net revenue growth and we expect it to continue to play a key role in our future growth and profitability. We will seek to continue to grow our comparable store sales by increasing the number of UWC Members, increasing efficiency and throughput of our car wash locations, increasing marketing spend to add new customers, and increasing customer visitation frequency.

 

 

 

Number and loyalty of UWC Members. The UWC program is a critical element of our business. UWC Members contribute a significant portion of our net revenue and provide recurring revenue through their monthly Membership fees.

 

 

 

Labor management. Hiring and retaining skilled team members and experienced management represents one of our largest costs. We believe people are the key to our success and we have been able to successfully attract and retain engaged, high-quality team Members by paying competitive wages, offering attractive benefit packages, and providing robust training and development opportunities. While the competition for skilled labor is intense and subject to high turnover, we believe our approach to wages and benefits will continue to allow us to attract suitable team Members and management to support our growth.

 

Factors Affecting the Comparability of Our Results of Operations

Our results have been affected by, and may in the future be affected by, the following factors, which must be understood in order to assess the comparability of our period-to-period financial performance and condition.

Greenfield Location Development

Our primary historical growth strategy has involved acquiring local and regional car wash operators, upgrading the facilities and equipment, training the team to provide the “Mister Experience,” and converting the site to the “Mister” brand. More recently, we have also grown through greenfield development of Mister Car Wash locations, with particular focus on Express Exterior Locations, and anticipate further pursuit of this strategy in the future. In the three and nine months ended September 30, 2022, we successfully opened eight and 15 greenfield locations, respectively. Our future location growth will be dependent on greenfield development.

The comparability of our results may be impacted by the inclusion of financial performance of greenfield locations that have not delivered a full fiscal year of financial results nor matured to average unit volumes, which we typically expect after approximately three full years of operation.

24


 

Acquisitions

In the three months ended September 30, 2022, we completed one acquisition consisting of three properties that operated as conveyorized car washes. In the nine months ended September 30, 2022, we completed three acquisitions consisting of eight properties that operated as conveyorized car washes.

Following an acquisition, we implement a variety of operational improvements to unify branding and enhance profitability. As soon as feasible, we fully integrate and transition acquired locations to the “Mister” brand and make investments to improve site flow, upgrade tunnel equipment and technology, and install our proprietary Unity Chemical system, which is a unique blend of our signature products utilizing the newest technology and services to make a better car wash experience for our customers. We also establish member-only lanes, optimize service offerings and implement training initiatives that we have successfully utilized to improve team member engagement and drive UWC growth post-acquisition. The costs associated with these onboarding initiatives, which vary by site, can impact the comparability of our results.

The comparability of our results may also be impacted by the inclusion of financial performance of our acquisitions that have not delivered a full fiscal year of financial results under Mister Car Wash’s ownership.

See Note 14 Business Combinations to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional discussion.

Key Performance Indicators

We prepare and analyze various operating and financial data to assess the performance of our business and to help in the allocation of our resources. The key operating performance and financial metrics and indicators we use are set forth below, as of and for the three and nine months ended September 30, 2022 and 2021.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

2022

 

 

2021

 

 

2022

 

 

2021

 

Financial and Operating Data

 

 

 

 

 

 

 

 

 

 

 

Location count (end of period)

 

420

 

 

 

360

 

 

 

420

 

 

 

360

 

Comparable store sales growth

 

2.9

%

 

 

21.3

%

 

 

5.3

%

 

 

38.6

%

UWC Members (in thousands, end of period)

 

1,860

 

 

 

1,564

 

 

 

1,860

 

 

 

1,564

 

UWC sales as a percentage of total wash sales

 

69

%

 

 

66

%

 

 

67

%

 

 

63

%

Net income (loss)

$

23,997

 

 

$

27,366

 

 

$

95,144

 

 

$

(58,350

)

Net income (loss) margin

 

11.0

%

 

 

14.1

%

 

 

14.4

%

 

 

(10.3

)%

Adjusted EBITDA

$

66,132

 

 

$

62,450

 

 

$

215,457

 

 

$

197,000

 

Adjusted EBITDA margin

 

30.4

%

 

 

32.1

%

 

 

32.5

%

 

 

34.8

%

 

Location Count (end of period)

Our location count refers to the total number of car wash locations at the end of a period, inclusive of new greenfield locations and acquired locations. The total number of locations that we operate, as well as the timing of location openings, acquisitions, and closings, have, and will continue to have, an impact on our performance. In the three months ended September 30, 2022, we increased our location count by 11 locations, comprised of eight greenfield locations and three acquired locations. In the nine months ended September 30, 2022, we increased our location count by 24 locations, comprised of 15 greenfield locations and nine acquired locations. One location, which was part of a 2021 acquisition, opened during the second quarter of 2022 and is included as an acquired location above.

Our Express Exterior Locations, which offer express exterior cleaning services, comprise 345 of our current locations and our Interior Cleaning Locations, which offer both express exterior cleaning services and interior cleaning services, comprise 75 of our current locations.

Comparable Store Sales Growth

A location is considered a comparable store on the first day of the 13th full calendar month following a location’s first day of operations. A location converted from an Interior Cleaning Location format to an Express Exterior Location format is excluded when the location did not offer interior cleaning services in the current period but did offer interior cleaning services in the prior year period. Comparable store sales growth is the percentage change in total wash sales of all comparable store car washes.

Opening new locations is a primary component of our growth strategy and as we continue to execute on our growth strategy, we expect that a significant portion of our sales growth will be attributable to non-comparable store sales. Accordingly, comparable store

25


 

sales are only one measure we use to assess the success of our growth strategy. For the three months ended September 30, 2022, comparable store sales increased to 2.9% compared to an increase of 21.3% in the three months ended September 30, 2021.

UWC Members (end of period)

Members of our monthly subscription service are known as Unlimited Wash Club Members, or UWC Members. We view the number of UWC Members and the growth in the number of UWC Members on a net basis from period to period as key indicators of our revenue growth. The number of UWC Members has grown over time as we have acquired new customers and retained previously acquired customers. There were approximately 1.9 million and approximately 1.6 million UWC Members as of September 30, 2022 and September 30, 2021, respectively. There were approximately 1.7 million UWC Members as of December 31, 2021.

Our UWC Members grew by approximately 19% from September 30, 2021 through September 30, 2022 and approximately 12% from December 31, 2021 through September 30, 2022.

UWC Sales as a Percentage of Total Wash Sales

UWC sales as a percentage of total wash sales represents the penetration of our subscription membership program as a percentage of our overall wash sales. Total wash sales are defined as the net revenue generated from express exterior cleaning services and interior cleaning services for both UWC Members and retail customers. UWC sales as a percentage of total wash sales is calculated as sales generated from UWC Members as a percentage of total wash sales. We have consistently grown this measure over time as we educate customers as to the value of our subscription offering. UWC sales were 69% and 66% of our total wash sales for the three months ended September 30, 2022 and 2021, respectively. UWC sales were 67% and 63% of our total wash sales for the nine months ended September 30, 2022 and 2021, respectively.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA is a non-GAAP measure of our financial performance and should not be considered as an alternative to net income as a measure of financial performance or any other performance measure derived in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. Adjusted EBITDA is defined as net income (loss) before interest expense, net, income tax provision (benefit), depreciation and amortization expense, (gain) loss on sale of assets, loss on extinguishment of debt, stock-based compensation expense, acquisition expenses, management fees, non-cash rent expense, expenses associated with the IPO, expenses associated with the secondary public offering, and other nonrecurring charges. Adjusted EBITDA margin is defined as Adjusted EBITDA divided by net revenues for a given period.

We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our ongoing operating performance. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in our presentation of Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of Adjusted EBITDA in future periods, and any such modification may be material. In addition, Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries.

Our management believes Adjusted EBITDA is helpful in highlighting trends in our core operating performance compared to other measures, which can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We also use Adjusted EBITDA in connection with establishing discretionary annual incentive compensation; to supplement U.S. GAAP measures of performance in the evaluation of the effectiveness of our business strategies; to make budgeting decisions; and because our Amended A&R First Lien Credit Agreement uses measures similar to Adjusted EBITDA to measure our compliance with certain covenants.

Adjusted EBITDA has its limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations include:

 

 

 

Adjusted EBITDA does not reflect our cash expenditure or future requirements for capital expenditures or contractual commitments;

 

 

 

Adjusted EBITDA does not reflect changes in our cash requirements for our working capital needs;

 

 

 

Adjusted EBITDA does not reflect the interest expense and the cash requirements necessary to service interest or principal payments on our debt;

 

 

 

Adjusted EBITDA does not reflect cash requirements for replacement of assets that are being depreciated and amortized;

 

26


 

 

 

 

Adjusted EBITDA does not reflect non-cash compensation, which is a key element of our overall long-term compensation;

 

 

 

Adjusted EBITDA does not reflect the impact of certain cash charges or cash receipts resulting from matters we do not find indicative of our ongoing operations; and

 

 

 

other companies in our industry may calculate Adjusted EBITDA differently than we do.

Adjusted EBITDA was approximately $66.1 million and $62.5 million in the three months ended September 30, 2022 and 2021, respectively. Our Adjusted EBITDA margin was 30.4% and 32.1% in the three months ended September 30, 2022 and 2021, respectively. Adjusted EBITDA was approximately $215.5 million and $197.0 million in the nine months ended September 30, 2022 and 2021, respectively. Our Adjusted EBITDA margin was 32.5% and 34.8% in the nine months ended September 30, 2022 and 2021. The following is a reconciliation of our net income (loss) to Adjusted EBITDA for the periods presented.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Reconciliation of net income (loss) to Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

23,997

 

 

$

27,366

 

 

$

95,144

 

 

$

(58,350

)

Interest expense, net

 

 

10,100

 

 

$

5,717

 

 

 

27,028

 

 

 

33,416

 

Income tax provision (benefit)

 

 

8,814

 

 

 

6,440

 

 

 

26,988

 

 

 

(29,747

)

Depreciation and amortization expense

 

 

15,193

 

 

 

12,980

 

 

 

45,274

 

 

 

36,530

 

(Gain) loss on sale of assets (a)

 

 

(649

)

 

 

748

 

 

 

(3,336

)

 

 

(5,559

)

Loss on extinguishment of debt

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,183

 

Stock-based compensation expense (b)

 

 

5,461

 

 

 

6,751

 

 

 

16,959

 

 

 

210,292

 

Acquisition expenses (c)

 

 

1,303

 

 

 

968

 

 

 

2,541

 

 

 

1,977

 

Management fees (d)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

500

 

Non-cash rent expense (e)

 

 

745

 

 

 

380

 

 

 

1,820

 

 

 

1,136

 

Expenses associated with initial public offering (f)

 

 

-

 

 

 

124

 

 

 

272

 

 

 

1,574

 

Expenses associated with secondary public offering (g)

 

 

-

 

 

 

498

 

 

 

-

 

 

 

498

 

Other (h)

 

 

1,168

 

 

 

478

 

 

 

2,767

 

 

 

1,550

 

Adjusted EBITDA

 

$

66,132

 

 

$

62,450

 

 

$

215,457

 

 

$

197,000

 

Net Revenues

 

$

217,576

 

 

$

194,310

 

 

$

662,154

 

 

$

566,898

 

Adjusted EBITDA margin

 

 

30.4

%

 

 

32.1

%

 

 

32.5

%

 

 

34.8

%

(a)
Consists of gains and losses on the disposition of assets associated with sale-leaseback transactions, store closures or the sale of property and equipment.
(b)
Represents non-cash expense associated with our share-based payments.
(c)
Represents expenses incurred in strategic acquisitions, including professional fees for accounting and auditing services, appraisals, legal fees and financial services, one-time costs associated with supplies for rebranding the acquired stores, and distinct travel expenses for related, distinct integration efforts by team members who are not part of our dedicated integration team.
(d)
Represents fees paid to Leonard Green & Partners in accordance with our management services agreement, which terminated on the consummation of our initial public offering in June 2021 (“IPO”).
(e)
Represents the difference between cash paid for rent expense and U.S. GAAP rent expense.
(f)
Represents nonrecurring expenses associated with the consummation of our IPO in June 2021.
(g)
Represents nonrecurring expenses associated with the consummation of our secondary public offering in August 2021.
(h)
Consists of other items as determined by management not to be reflective of our ongoing operating performance, such as costs associated with our one-time rebranding initiative costs, severance pay, non-deferred legal fees and other expenses related to credit agreement amendments, legal settlements and legal fees related to contract terminations, and nonrecurring strategic project costs.

Components of Our Results of Operations

Net Revenues

27


 

We recognize revenue in two main streams: (i) the UWC program that entitles the customer to unlimited washes for a monthly subscription fee, cancellable at any time and (ii) retail car washes and other services. In the UWC program, we enter into a contract with the customer that falls under the definition of a customer contract under ASC 606, Revenue from Contracts with Customers. Customers are automatically charged on a credit card or debit card on the same date of the month that they originally signed up. Our performance obligations are to provide unlimited car wash services for a monthly fee. Revenue from the UWC program is recognized ratably over the month in which it is earned and amounts unearned are recorded as deferred revenue on the unaudited condensed consolidated balance sheets; all amounts recorded as deferred revenue at year-end are recognized as revenue in the following year. Revenue from retail car wash and other services is recognized at the point in time at which services are rendered and the customer pays with cash, debit card, or credit card. Revenues are net of sales tax, refunds, and discounts applied as a reduction of revenue at the time of payment.

Store Operating Costs

Store operating costs consist of cost of labor and chemicals and other car wash store operating expenses.

Cost of Labor and Chemicals

Cost of labor and chemicals include compensation and related employee benefit expenses associated with car wash employees, maintenance employees, warehouse employees, chemicals and associated supplies, including wages, cash bonuses, stock-based compensation, taxes, insurance, and workers compensation payments as reported in the unaudited condensed consolidated statements of operations and comprehensive income included elsewhere in this Quarterly Report on Form 10-Q.

Other Store Operating Expenses

Other store operating expenses includes all other costs related to the operations of car wash and warehouse locations such as credit card fees, car damages, office and lobby supplies, information technology costs associated with the locations, telecommunications, advertising, non-healthcare related insurance, rent, repairs and maintenance related to assets, utilities, property taxes, and depreciation expense on assets at the car wash and warehouse locations.

General and Administrative

General and administrative expenses include compensation expenses and the related employee benefits of headquarters employees, including wages, cash bonuses, stock-based compensation, taxes, insurance, and workers compensation payments, as well as information technology expenses, administrative office expenses, professional services and other related expenses, depreciation expense on held-for-use assets used at our headquarters, and amortization expense associated with our intangible assets.

We will continue to incur significant expenses on an ongoing basis that we did not incur as a private company. Those costs include additional director and officer liability insurance expenses, as well as third-party and internal resources related to accounting, auditing, Sarbanes-Oxley Act compliance, legal, and investor and public relations expenses. We expect such expenses to further increase after we are no longer an emerging growth company starting in 2023. These costs will generally be expensed under general and administrative expenses in the unaudited condensed consolidated statements of operations and comprehensive income (loss) included elsewhere in this Quarterly Report on Form 10-Q.

(Gain) Loss on Sale of Assets

(Gain) Loss on sale of assets includes gains and losses on the sale-leaseback of our locations and sale of property and equipment.

Interest Expense, net

Interest expense, net consists primarily of cash and non-cash interest expense on borrowings, partially offset by interest income earned on our cash balances.

Loss on Extinguishment of Debt

Loss on extinguishment of debt includes losses associated with amendments to our existing debt that are accounted for as extinguishments, as well as losses associated with partial or whole payments on our debt that qualify for extinguishment accounting.

Income Tax Provision (Benefit)

28


 

We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized differently in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates.

We have adopted a more-likely-than-not threshold for financial statement recognition and measurement of an uncertain tax position taken or expected to be taken in a tax return. We recognize interest and penalties related to uncertain tax positions in income tax provision in our unaudited condensed consolidated statements of operations and comprehensive income (loss) included elsewhere in this Quarterly Report on Form 10-Q.

Results of Operations for the Three Months Ended September 30, 2022 and 2021 (Unaudited)

The unaudited results of operations data for the three months ended September 30, 2022 and 2021 have been derived from the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

 

 

 

Three Months Ended September 30,

 

 

 

2022

 

 

2021

 

(Dollars in thousands)

 

Amount

 

 

% of Revenue

 

 

Amount

 

 

% of Revenue

 

Net revenues

 

$

217,576

 

 

 

100

%

 

$

194,310

 

 

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Store operating costs:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of labor and chemicals

 

 

68,228

 

 

 

31

%

 

 

63,438

 

 

 

33

%

Other store operating expenses

 

 

82,343

 

 

 

38

%

 

 

68,435

 

 

 

35

%

General and administrative

 

 

24,743

 

 

 

11

%

 

 

22,166

 

 

 

11

%

(Gain) loss on sale of assets

 

 

(649

)

 

 

(0

)%

 

 

748

 

 

 

0

%

Total costs and expenses

 

 

174,665

 

 

 

80

%

 

 

154,787

 

 

 

80

%

Operating income (loss)

 

 

42,911

 

 

 

20

%

 

 

39,523

 

 

 

20

%

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

10,100

 

 

 

5

%

 

 

5,717

 

 

 

3

%

Loss on extinguishment of debt

 

 

-

 

 

 

0

%

 

 

-

 

 

 

0

%

Total other expense

 

 

10,100

 

 

 

5

%

 

 

5,717

 

 

 

3

%

Income (loss) before taxes

 

 

32,811

 

 

 

15

%

 

 

33,806

 

 

 

17

%

Income tax provision (benefit)

 

 

8,814

 

 

 

4

%

 

 

6,440

 

 

 

3

%

Net income (loss)

 

$

23,997

 

 

 

11

%

 

$

27,366

 

 

 

14

%

 

Net Revenues

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

Net revenues

 

$

217,576

 

 

$

194,310

 

 

$

23,266

 

 

 

12

%

 

Net revenues were $217.6 million for the three months ended September 30, 2022 compared to $194.3 million for the three months ended September 30, 2021, an increase of $23.3 million, or 12%. The increase in net revenues was primarily attributable to the increase in car wash sales due to growth in UWC Members and the year-over-year addition of 60 locations.

Store Operating Costs

Cost of Labor and Chemicals

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

Cost of labor and chemicals

 

$

68,228

 

 

$

63,438

 

 

$

4,790

 

 

 

8

%

Percentage of net revenues

 

 

31

%

 

 

33

%

 

 

 

 

 

 

 

Cost of labor and chemicals was $68.2 million for the three months ended September 30, 2022 compared to $63.4 million for the three months ended September 30, 2021, an increase of $4.8 million, or 8%. The increase in the cost of labor and chemicals is primarily driven by an increase in labor and benefits of approximately $3.6 million and an increase in wash chemicals and supplies of approximately $1.2 million during the three months ended September 30, 2022, both attributable to an increase in volume and the

29


 

year-over-year addition of 60 locations, as well as some inflationary pressures on both our labor and chemicals. As a percentage of net revenues, costs of labor and chemicals for the three months ended September 30, 2022 decreased by approximately 2% due to improved labor staffing and express volume mix as compared to the prior year period.

Other Store Operating Expenses

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

Other store operating expenses

 

$

82,343

 

 

$

68,435

 

 

$

13,908

 

 

 

20

%

Percentage of net revenues

 

 

38

%

 

 

35

%

 

 

 

 

 

 

 

Other store operating expenses were $82.3 million for the three months ended September 30, 2022 compared to $68.4 million for the three months ended September 30, 2021, an increase of $13.9 million, or 20%. The increase in other store operating expenses was attributable to the year-over-year addition of 60 locations and some inflationary pressures on our utilities and maintenance expenses. Rent expense increased approximately $2.9 million with the addition of 49 new land and building leases.

General and Administrative

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

General and administrative

 

$

24,743

 

 

$

22,166

 

 

$

2,577

 

 

 

12

%

Percentage of net revenues

 

 

11

%

 

 

11

%

 

 

 

 

 

 

 

General and administrative expenses were $24.7 million for the three months ended September 30, 2022 compared to $22.2 million for the three months ended September 30, 2021, an increase of $2.6 million, or 12%. The increase in general and administrative expenses was primarily driven by an increase of approximately $0.9 million in salaries and benefits and an increase of approximately $2.4 million in other costs, which were primarily attributable to the increased costs of being a public company and increase in corporate headcount. These increases were offset by a decrease of approximately $0.7 million in stock-based compensation costs.

(Gain) Loss on Sale of Assets

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

(Gain) loss on sale of assets

 

$

(649

)

 

$

748

 

 

$

(1,397

)

 

 

(187

)%

Percentage of net revenues

 

 

(0

)%

 

 

0

%

 

 

 

 

 

 

 

(Gain) loss on sale of assets reflected a gain of $0.6 million for the three months ended September 30, 2022 compared to a loss of $0.7 million for the three months ended September 30, 2021, a decrease of $1.4 million, or 187%. The decrease in (gain) loss on sale of assets was primarily driven by gains associated with our sale-leaseback transactions in the current year.

Other Expense

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

Other expense

 

$

10,100

 

 

$

5,717

 

 

$

4,383

 

 

 

77

%

Percentage of net revenues

 

 

5

%

 

 

3

%

 

 

 

 

 

 

 

Other expense was $10.1 million for the three months ended September 30, 2022 compared to $5.7 million for the three months ended September 30, 2021, an increase of $4.4 million, or 77%. The increase in other expense was primarily driven by an increase in interest expense due to higher average interest rates and borrowing levels as compared to the prior year period.

30


 

Income Tax Provision (Benefit)

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

Income tax provision (benefit)

 

$

8,814

 

 

$

6,440

 

 

$

2,374

 

 

 

37

%

Percentage of net revenues

 

 

4

%

 

 

3

%

 

 

 

 

 

 

 

Income tax provision was $8.8 million for the three months ended September 30, 2022 compared to $6.4 million for the three months ended September 30, 2021, an increase of $2.4 million, or 37%. The increase in income tax provision was primarily driven by reduced net, income tax benefits from equity awards.

 

31


 

Results of Operations for the Nine Months Ended September 30, 2022 and 2021 (Unaudited)

The unaudited results of operations data for the nine months ended September 30, 2022 and 2021 have been derived from the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

(Dollars in thousands)

 

Amount

 

 

% of Revenue

 

 

Amount

 

 

% of Revenue

 

Net revenues

 

$

662,154

 

 

 

100

%

 

$

566,898

 

 

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Store operating costs:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of labor and chemicals

 

 

203,117

 

 

 

31

%

 

 

203,051

 

 

 

36

%

Other store operating expenses

 

 

239,173

 

 

 

36

%

 

 

194,889

 

 

 

34

%

General and administrative

 

 

74,040

 

 

 

11

%

 

 

226,015

 

 

 

40

%

(Gain) loss on sale of assets

 

 

(3,336

)

 

 

(1

)%

 

 

(5,559

)

 

 

(1

)%

Total costs and expenses

 

 

512,994

 

 

 

77

%

 

 

618,396

 

 

 

109

%

Operating income (loss)

 

 

149,160

 

 

 

23

%

 

 

(51,498

)

 

 

(9

)%

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

27,028

 

 

 

4

%

 

 

33,416

 

 

 

6

%

Loss on extinguishment of debt

 

 

-

 

 

 

0

%

 

 

3,183

 

 

 

1

%

Total other expense

 

 

27,028

 

 

 

4

%

 

 

36,599

 

 

 

6

%

Income (loss) before taxes

 

 

122,132

 

 

 

18

%

 

 

(88,097

)

 

 

(16

)%

Income tax provision (benefit)

 

 

26,988

 

 

 

4

%

 

 

(29,747

)

 

 

(5

)%

Net income (loss)

 

$

95,144

 

 

 

14

%

 

$

(58,350

)

 

 

(10

)%

Net Revenues

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

Net revenues

 

$

662,154

 

 

$

566,898

 

 

$

95,256

 

 

 

17

%

 

Net revenues were $662.2 million for the nine months ended September 30, 2022 compared to $566.9 million for the nine months ended September 30, 2021, an increase of $95.3 million, or 17%. The increase in net revenues was primarily attributable to the increase in car wash sales due to growth in UWC Members and the year-over-year addition of 60 locations.

Store Operating Costs

Cost of Labor and Chemicals

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

Cost of labor and chemicals

 

$

203,117

 

 

$

203,051

 

 

$

66

 

 

 

0

%

Percentage of net revenues

 

 

31

%

 

 

36

%

 

 

 

 

 

 

 

Cost of labor and chemicals was $203.1 million for the nine months ended September 30, 2022 compared to $203.1 million for the nine months ended September 30, 2021, an increase of less than $0.1 million, or 0%. The net change in the cost of labor and chemicals is primarily driven by an increase in labor and benefits of approximately $27.4 million and an increase in wash chemicals and supplies of approximately $3.9 million during the nine months ended September 30, 2022, both attributable to an increase in volume and the year-over-year addition of 60 locations, as well as some inflationary pressures on both our labor and chemicals. The prior year period reflected the recognition of stock-based compensation expense of $31.3 million related to our performance-based vesting stock options that vested on the consummation of our IPO in June 2021 which offset the current year increases. As a percentage of net revenues, costs of labor and chemicals for the nine months ended September 30, 2022 decreased by approximately 5% due to improved labor staffing and express volume mix as compared to the prior year period, as well as the prior year period recognition of stock-based compensation expense as noted above.

Other Store Operating Expenses

32


 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

Other store operating expenses

 

$

239,173

 

 

$

194,889

 

 

$

44,284

 

 

 

23

%

Percentage of net revenues

 

 

36

%

 

 

34

%

 

 

 

 

 

 

 

Other store operating expenses were $239.2 million for the nine months ended September 30, 2022 compared to $194.9 million for the nine months ended September 30, 2021, an increase of $44.3 million, or 23%. The increase in other store operating expenses was attributable to the year-over-year addition of 60 locations and some inflationary pressures on our utilities and maintenance expenses. Rent expense increased approximately $7.8 million with the addition of 49 new land and building leases.

General and Administrative

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

General and administrative

 

$

74,040

 

 

$

226,015

 

 

$

(151,975

)

 

 

(67

)%

Percentage of net revenues

 

 

11

%

 

 

40

%

 

 

 

 

 

 

 

General and administrative expenses were $74.0 million for the nine months ended September 30, 2022 compared to $226.0 million for the nine months ended September 30, 2021, a decrease of $152.0 million, or 67%. The decrease in general and administrative expenses was primarily driven by the prior year recognition of stock-based compensation expense of $170.7 million related to the performance-based vesting stock options that vested on the consummation of our IPO in June 2021. This decrease was partially offset by an increase of approximately $5.9 million in salaries and benefits, an increase of approximately $5.5 million in stock-based compensation expense not related to the performance-based vesting stock options noted above, and an increase of approximately $6.2 million in other costs, which were primarily attributable to the increased costs of being a public company and increase in corporate headcount.

(Gain) Loss on Sale of Assets

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

(Gain) loss on sale of assets

 

$

(3,336

)

 

$

(5,559

)

 

$

2,223

 

 

 

(40

)%

Percentage of net revenues

 

 

(1

)%

 

 

(1

)%

 

 

 

 

 

 

 

Gain on sale of assets was $3.3 million for the nine months ended September 30, 2022 compared to $5.6 million for the nine months ended September 30, 2021, a decrease of $2.2 million, or 40%. The (gain) loss on sale of assets was primarily driven by gains associated with our sale-leaseback transactions in both years.

Other Expense

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

Other expense

 

$

27,028

 

 

$

36,599

 

 

$

(9,571

)

 

 

(26

)%

Percentage of net revenues

 

 

4

%

 

 

6

%

 

 

 

 

 

 

 

Other expense was $27.0 million for the nine months ended September 30, 2022 compared to $36.6 million for the nine months ended September 30, 2021, a decrease of $9.6 million, or 26%. The decrease in other expense was primarily driven by a $6.4 million reduction in interest expense, resulting from the June 2021 pay down of the First Lien Term Loan and the June 2021 pay-off of the Second Lien Term Loan and a $3.2 million loss on extinguishment of debt recorded in the prior year period.

33


 

Income Tax Provision (Benefit)

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

$ Change

 

 

% Change

 

Income tax provision (benefit)

 

$

26,988

 

 

$

(29,747

)

 

$

56,735

 

 

 

(191

)%

Percentage of net revenues

 

 

4

%

 

 

(5

)%

 

 

 

 

 

 

 

Income tax provision was $27.0 million for the nine months ended September 30, 2022 compared to a benefit of $29.7 million for the nine months ended September 30, 2021, an increase of $56.7 million, or 191%. The increase in income tax provision was primarily driven by increased income before taxes for the nine months ended September 30, 2022.

Liquidity and Capital Resources

Funding Requirements

Our primary requirements for liquidity and capital are to fund our investments in our core business, to pursue greenfield expansion and acquisitions, and to service our indebtedness. Historically, these cash requirements have been met through funds raised by the sale of common equity, utilization of our Revolving Commitment, First Lien Term Loan, Second Lien Term Loan, sale-leaseback transactions, and cash provided by operations. As of September 30, 2022 and December 31, 2021, we had cash and cash equivalents of $74.9 million and $19.7 million, respectively, and $149.0 million and $149.5 million, respectively, of available borrowing capacity under our Revolving Commitment.

In June 2021, we entered into Amendment No. 2, which increased the commitments under the Revolving Commitment from $75.0 million to $150.0 million. In June 2021, we made a voluntary prepayment of all outstanding balances under our Second Lien Term Loan, which included $242.7 million in outstanding principal and $6.1 million in accrued interest expense, and a voluntary prepayment of $190.4 million of outstanding principal under our First Lien Term Loan. These voluntary prepayments were funded with the net proceeds of our IPO and the Amended Second Lien Credit Agreement was terminated.

In December 2021, in connection with the Clean Streak Ventures acquisition, we entered into Amendment No. 3, which increased the principal borrowings under the First Lien Term Loan by $290.0 million to $903.0 million. For a description of our credit facilities, please see Note 8 Debt in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

As of September 30, 2022, we were in compliance with the covenants under the Amended A&R First Lien Credit Agreement.

We believe that our sources of liquidity and capital will be sufficient to finance our growth strategy and resulting operations, planned capital expenditures, and the additional expenses we expect to incur as a public company for at least the next 12 months. However, we cannot assure you that cash provided by operating activities or cash and cash equivalents will be sufficient to meet our future needs. If we are unable to generate sufficient cash flows from operations in the future, we may have to obtain additional financing. If we obtain additional capital by issuing equity, the interests of our existing stockholders will be diluted. If we incur additional indebtedness, that indebtedness may contain significant financial and other covenants that may significantly restrict our operations. We cannot assure you that we could obtain additional financing on favorable terms or at all.

Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (Unaudited)

The following table shows summary cash flow information for the nine months ended September 30, 2022 and 2021:

 

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2022

 

 

2021

 

Net cash provided by operating activities

 

$

185,453

 

 

$

153,309

 

Net cash used in investing activities

 

 

(133,784

)

 

 

(90,458

)

Net cash provided by (used in) financing activities

 

 

3,420

 

 

 

(18,221

)

Net increase in cash and cash equivalents, and restricted cash

 

$

55,089

 

 

$

44,630

 

 

Operating Activities. Net cash provided by operating activities consists of net income (loss) adjusted for certain non-cash items, including stock-based compensation expense, property and equipment depreciation, gains on the disposal of property and equipment, amortization of leased assets and deferred income taxes, as well as the effect of changes in other working capital amounts.

For the nine months ended September 30, 2022, net cash provided by operating activities was $185.5 million and was comprised of net income of $95.1 million, increased by $111.3 million as a result of non-cash adjustments comprised primarily of stock-based compensation expense, depreciation and amortization expense, non-cash lease expense, deferred income taxes, a gain on disposal of

34


 

property and equipment, and amortization of deferred financing costs. Changes in working capital balances decreased cash provided by operating activities by $21.0 million and were primarily driven by increases in the operating lease liability, other noncurrent assets and liabilities and prepaid expenses and other current assets, offset by a decrease in other receivables, accounts payable and accrued expenses.

For the nine months ended September 30, 2021, net cash provided by operating activities was $153.3 million and was comprised of net loss of $58.4 million, increased by $238.6 million as a result of non-cash adjustments comprised primarily of stock-based compensation expense, deferred income taxes, depreciation and amortization expense, non-cash lease expense, a gain on disposal of property and equipment, and a loss on extinguishment of debt. Changes in working capital balances increased cash provided by operating activities by $27.0 million and were primarily driven by decreases in the operating lease liability and other noncurrent assets and liabilities, and increases in accounts receivable, net and prepaid expenses and other current assets, partially offset by increases in accounts payable, accrued expenses, and a decrease in deferred revenue.

Investing Activities. Our net cash used in investing activities primarily consists of purchases and sale of property and equipment and acquisition of car washes.

For the nine months ended September 30, 2022, net cash used in investing activities was $133.8 million and was primarily comprised of investment in property and equipment to support our greenfield development and other initiatives and three acquisitions, partially offset by the sale of property and equipment.

For the nine months ended September 30, 2021, net cash used in investing activities was $90.5 million and was comprised of purchases of property and equipment primarily to support our greenfield and other initiatives and three acquisitions, partially offset by the sale of property and equipment including sale-leaseback transactions.

 

Financing Activities. Our net cash used in financing activities primarily consists of proceeds and payments on our First Lien Term Loan, Second Lien Term Loan, and Revolving Commitment, as well as proceeds from our IPO.

For the nine months ended September 30, 2022, net cash provided by financing activities was $3.4 million and was primarily comprised of proceeds from exercise of stock options, partially offset by payments on debt borrowings.

For the nine months ended September 30, 2021, net cash used in financing activities was $18.2 million and was primarily comprised of repayments of our First Lien Term Loan and Second Lien Term Loan and payments of issuance costs associated with our IPO, partially offset by proceeds from the consummation of our IPO in June 2021.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.

On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, goodwill and other intangible assets, income taxes and stock-based compensation. We base our estimates on historical experience, current developments and on various other assumptions that we believe to be reasonable under these circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that cannot readily be determined from other sources. There can be no assurance that actual results will not differ from those estimates.

The significant accounting policies and estimates used in preparation of the unaudited condensed consolidated financial statements are described in our 2021 10-K. There have been no material changes to our significant accounting policies during the three and nine months ended September 30, 2022.

Recent Accounting Pronouncements

See the sections titled “Summary of Significant Accounting Policies—Recently issued accounting pronouncements not yet adopted” in Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.

35


 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk from changes in interest rates and inflation. All these market risks arise in the normal course of business, as we do not engage in speculative trading activities. The following analysis provides quantitative information regarding these risks.

Interest Rate Risk

Our First Lien Term Loan bears interest at variable rates, which exposes us to market risks relating to changes in interest rates. Interest rate risk is highly sensitive due to many factors, including U.S. monetary and tax policies, U.S. and international economic factors, and other factors beyond our control. As of September 30, 2022 and December 31, 2021, we had $901.2 million and $903.3 million, respectively, of variable rate debt outstanding under our First Lien Term Loan. Based on the balance outstanding under our First Lien Term Loan as of September 30, 2022, an increase or decrease of 100 basis points in the effective interest rate on the First Lien Term Loan would cause an increase or decrease in interest expense of approximately $9 million over the next 12 months.

In May 2020, we entered into an interest rate swap to mitigate variability in forecasted interest payments on an amortizing notional of $550.0 million of our variable-rate First Lien Term Loan. We designated the interest rate swap as a pay-fixed, receive-floating interest rate swap instrument and are accounting for this derivative as a cash flow hedge. This interest rate swap matured on October 20, 2022.

Impact of Inflation

Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we have recently experienced the effects of inflation on our results of operations and financial condition. In light of the current inflationary market conditions, we cannot assure you that our results of operations and financial condition will not be materially impacted by inflation in the future.

Item 4. Controls and Procedures.

 

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act has been appropriately recorded, processed, summarized and reported on a timely basis and are effective in ensuring that such information is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2022, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the three months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

36


 

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are from time to time subject to various claims, lawsuits and other legal proceedings, including intellectual property claims. Some of these claims, lawsuits and other legal proceedings involve highly complex issues, and often these issues are subject to substantial uncertainties. Accordingly, our potential liability with respect to a large portion of such claims, lawsuits and other legal proceedings cannot be estimated with certainty. Management, with the assistance of legal counsel, periodically reviews the status of each significant matter and assesses potential financial exposure. We recognize provisions for claims or pending litigation when we determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertain nature of litigation, the ultimate outcome or actual cost of settlement may materially vary from estimates. If management’s estimates prove incorrect, we could incur a charge to earnings which could have a material and adverse effect on our business, results of operations, and financial condition. We are not party to any material legal proceedings.

Item 1A. Risk Factors.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors disclosed in Part I. Item 1A. "Risk Factors” and in Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2021 10-K, before making an investment decision. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks or uncertainties. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. There have been no material changes to the risk factors described in Part I. Item 1A. "Risk Factors" of our 2021 10-K.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

 

Exhibit

Number

 

Description

Form

File. No

Exhibit

Filing Date

Filed/Furnished Herewith

2.1+ ^

 

Equity Purchase Agreement, dated December 8, 2021, by and among Sunshine Acquisition Sub Corp., Clean Streak Ventures, LLC, MDKMH Partners, Inc., Clean Streak Ventures Intermediate Holdco, LLC (the “CSV Seller”), MKH Capital Partners Offshore Fund I, LP (the “CSV Blocker Seller” and together with the CSV Seller, each a “Seller” and together the “Sellers”), and Clean Streak Ventures Holdco, LLC, as the representative of the Sellers

10-Q

001-40542

2.1

05/13/2022

 

3.1

 

Amended and Restated Certificate of Incorporation of the Company

8-K

001-40542

3.2

06/01/2022

 

3.2

 

Amended and Restated Bylaws of the Company

8-K

001-40542

3.2

07/02/2021

 

31.1

 

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

*

31.2

 

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

*

32.1

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

**

32.2

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

**

101.INS

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

 

 

 

 

*

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

 

*

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

*

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

*

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

*

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

*

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

 

 

 

*

 

 

 

 

 

 

 

 

 

* Filed herewith.

** Furnished herewith.

+ Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC.

^ Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K.

38


 

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.

 

 

 

Mister Car Wash, Inc.

 

 

 

 

Date: November 10, 2022

 

By:

/s/ John Lai

 

 

 

John Lai

 

 

 

Chairperson, President and Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

Date: November 10, 2022

 

By:

/s/ Jedidiah Gold

 

 

 

Jedidiah Gold

 

 

 

Chief Financial Officer

(Principal Financial Officer)

 

39