Mister Car Wash, Inc. - Quarter Report: 2023 September (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

10-Q

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, 2023


☐	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)

(520) 615-4000

(Registrant’s telephone number, including area code)

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.

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 October 31, 2023, the registrant had 314,069,896 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	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	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	35

Signatures		36

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 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 intent, belief and expectations about our future results of operations and financial position, business strategy and approach are 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. However, the absence of these words or similar terminology does not mean that a statement is not forward-looking.

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 in this Quarterly Report on Form 10-Q 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, 2022 (the “2022 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:

•

An overall decline in the health of the economy and other factors impacting consumer spending, such as natural disasters, the occurrence of a recession, inflation and worsening in economic conditions may affect consumer purchases and reduce demand for our services.

•

Our ability to attract new customers, retain existing customers and maintain or grow the number of Unlimited Wash Club ® (“UWC”) Members.

•

If we fail to acquire, open and operate new locations in a timely and cost-effective manner and enter into new markets, our 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.

•

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 key or sufficient qualified personnel or increases in 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, including environmental, and changes in such laws and regulations, or failure to comply with existing or future laws and regulations, could adversely affect our business.

•

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.

•

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.

Any forward-looking statement that we make in this Quarterly Report on Form 10-Q speaks only as of the date hereof. 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.

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
(Amounts in thousands, except share and per share data)	September 30, 2023		December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	62,133	$	65,152
Restricted cash		107		70
Accounts receivable, net		5,816		3,941
Other receivables		14,987		15,182
Inventory, net		9,222		9,174
Prepaid expenses and other current assets		13,026		12,618
Total current assets		105,291		106,137

Property and equipment, net		660,733		560,874
Operating lease right of use assets, net		829,790		776,689
Other intangible assets, net		119,341		123,615
Goodwill		1,135,506		1,109,815
Other assets		9,013		9,102
Total assets	$	2,859,674	$	2,686,232

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	34,791	$	25,649
Accrued payroll and related expenses		22,200		17,218
Other accrued expenses		41,551		41,196
Current maturities of operating lease liability		42,898		40,367
Current maturities of finance lease liability		726		668
Deferred revenue		32,779		29,395
Total current liabilities		174,945		154,493

Long-term portion of debt, net		897,022		895,830
Operating lease liability		806,448		759,775
Financing lease liability		14,230		14,779
Deferred tax liability		68,268		53,395
Other long-term liabilities		6,044		6,832
Total liabilities		1,966,957		1,885,104

Stockholders’ equity:
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 313,970,741 and 306,626,530 shares outstanding as of September 30, 2023 and December 31, 2022, respectively		3,145		3,072
Additional paid-in capital		807,342		783,579
Retained earnings		82,230		14,477
Total stockholders’ equity		892,717		801,128
Total liabilities and stockholders’ equity	$	2,859,674	$	2,686,232

See accompanying notes to unaudited condensed consolidated financial statements.

Mister Car Wash, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income

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

(Unaudited)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2023		2022			2023			2022
Net revenues	$	234,076	$	217,576		$	696,930		$	662,154
Cost of labor and chemicals		72,760		68,228			210,376			203,117
Other store operating expenses		90,514		82,343			270,317			239,173
General and administrative		26,426		24,743			78,438			74,040
(Gain) loss on sale of assets, net		1,321		(649	)		(3,470	)		(3,336	)
Total costs and expenses		191,021		174,665			555,661			512,994
Operating income		43,055		42,911			141,269			149,160

Other expense:
Interest expense, net		19,100		10,100			55,143			27,028
Total other expense		19,100		10,100			55,143			27,028
Income before taxes		23,955		32,811			86,126			122,132
Income tax provision		4,470		8,814			18,373			26,988
Net income	$	19,485	$	23,997		$	67,753		$	95,144

Other comprehensive income, net of tax:
(Loss) gain on interest rate swap		-		(1,795	)		-			375
Total comprehensive income	$	19,485	$	22,202		$	67,753		$	95,519

Net income per share:
Basic	$	0.06	$	0.08		$	0.22		$	0.31
Diluted	$	0.06	$	0.07		$	0.21		$	0.29
Weighted-average common shares outstanding:
Basic		312,883,586		304,290,590			309,850,600			302,641,749
Diluted		328,844,569		326,881,152			328,265,878			327,773,344

See accompanying notes to unaudited condensed consolidated financial statements.

Mister Car Wash, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2023			2022
Cash flows from operating activities:
Net income	$	67,753		$	95,144
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		51,418			45,274
Stock-based compensation expense		17,643			16,959
Gain on sale of assets, net		(3,470	)		(3,336	)
Amortization of debt issuance costs		1,270			1,270
Non-cash lease expense		33,337			29,602
Deferred income tax		14,748			21,526
Changes in assets and liabilities:
Accounts receivable, net		(1,874	)		(1,663	)
Other receivables		212			8,355
Inventory, net		88			(2,431	)
Prepaid expenses and other current assets		(408	)		(2,458	)
Accounts payable		3,777			6,424
Accrued expenses		8,170			4,295
Deferred revenue		3,288			660
Operating lease liability		(29,689	)		(32,103	)
Other noncurrent assets and liabilities		(777	)		(2,065	)
Net cash provided by operating activities	$	165,486		$	185,453

Cash flows from investing activities:
Purchases of property and equipment		(218,692	)		(132,014	)
Acquisition of car wash operations, net of cash		(51,890	)		(65,533	)
Proceeds from sale of property and equipment		96,930			63,763
Net cash used in investing activities	$	(173,652	)	$	(133,784	)

Cash flows from financing activities:
Proceeds from issuance of common stock under employee plans		6,176			5,941
Payments on debt borrowings		-			(2,100	)
Principal payments on finance lease obligations		(492	)		(421	)
Other financing activities		(500	)		-
Net cash provided by financing activities	$	5,184		$	3,420

Net change in cash and cash equivalents and restricted cash during period		(2,982	)		55,089
Cash and cash equivalents and restricted cash at beginning of period		65,222			19,858
Cash and cash equivalents and restricted cash at end of period	$	62,240		$	74,947

Supplemental disclosure of cash flow information:
Cash paid for interest	$	56,164		$	25,900
Cash paid for income taxes	$	2,409		$	2,416

Supplemental disclosure of non-cash investing and financing activities:
Property and equipment in accounts payable	$	15,167		$	10,965
Property and equipment in other accrued expenses	$	16,439		$	3,886
Stock option exercise proceeds in other receivables	$	17		$	-

See accompanying notes to unaudited condensed consolidated financial statements.

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, 2023


	Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income		Retained Earnings (Accumulated Deficit)		Stockholders’ Equity
	Shares		Amount
Balance as of December 31, 2022		306,626,530	$	3,072	$	783,579		$	—	$	14,477	$	801,128
Stock-based compensation expense		—		—		5,361			—		—		5,361
Vesting of restricted stock units		4,296		—		—			—		—		—
Exercise of stock options		1,471,021		15		1,101			—		—		1,116
Net income		—		—		—			—		21,136		21,136
Balance as of March 31, 2023		308,101,847	$	3,087	$	790,041		$	-	$	35,613	$	828,741
Stock-based compensation expense		—		—		5,993			—		—		5,993
Issuance of common stock under employee plans		207,042		2		1,591			—		—		1,593
Vesting of restricted stock units		634,069		6		(6	)		—		—		—
Exercise of stock options		2,815,372		28		1,879			—		—		1,907
Net income		—		—		—			—		27,132		27,132
Balance as of June 30, 2023		311,758,330	$	3,123	$	799,498		$	-	$	62,745	$	865,366
Stock-based compensation expense		—		—		6,289			—		—		6,289
Exercise of stock options		2,212,411		22		1,555			—		—		1,577
Net income		—		—		—			—		19,485		19,485
Balance as of September 30, 2023		313,970,741	$	3,145	$	807,342		$	-	$	82,230	$	892,717

Nine Months Ended September 30, 2022


	Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income			Retained Earnings (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
Shares repurchased		—		—		—			—			—			—
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

See accompanying notes to unaudited condensed consolidated financial statements.

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., a Delaware corporation, together with its subsidiaries (collectively, “we,” “us,” “our” or the “Company”), is based in Tucson, Arizona and is a provider of conveyorized car wash services. We primarily operate Express Exterior Locations, which offer express exterior cleaning services along with free vacuum services, and interior cleaning services at select locations. As of September 30, 2023, we operated 462 car washes in 21 states.

2. Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements as of September 30, 2023 and for the three and nine months ended September 30, 2023 and 2022 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 audited 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 our audited consolidated financial statements and the notes thereto for the year ended December 31, 2022 included in the 2022 Form 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 our consolidated financial position as of September 30, 2023, consolidated results of operations and comprehensive income for the three and nine months ended September 30, 2023 and 2022, and consolidated cash flows for the nine months ended September 30, 2023 and 2022. Such adjustments are of a normal and recurring nature. The consolidated results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the consolidated results of operations that may be expected for any other future interim or annual period.

Principles of Consolidation

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 we have 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 $78 and $76 as of September 30, 2023 and December 31, 2022, respectively. The activity in the allowance for doubtful accounts was immaterial for the three and nine months ended September 30, 2023 and 2022.

Other Receivables

Other receivables consisted of the following for the periods presented:


	As of
	September 30, 2023		December 31, 2022
Payroll tax withholding and exercise proceeds receivable	$	31	$	273
Construction receivable		7,600		6,199
Income tax receivable		2,208		4,387
Insurance receivable		3,771		2,627
Other		1,377		1,696
Total other receivables	$	14,987	$	15,182

Inventory, Net

Inventory consisted of the following for the periods presented:


	As of
	September 30, 2023			December 31, 2022
Chemical washing solutions	$	9,410		$	9,357
Reserve for obsolescence		(188	)		(183	)
Total inventory, net	$	9,222		$	9,174

The activity in the reserve for obsolescence was immaterial for the three and nine months ended September 30, 2023 and 2022.

Revenue Recognition

The following table summarizes the composition of our net revenues for the periods presented:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Recognized over time	$	167,670	$	150,873	$	489,294	$	440,809
Recognized at a point in time		66,320		66,590		207,319		220,420
Other revenue		86		113		317		925
Net revenues	$	234,076	$	217,576	$	696,930	$	662,154

Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income 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 because they would have an antidilutive effect. 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,
	2023		2022		2023		2022
Numerator:
Net income	$	19,485	$	23,997	$	67,753	$	95,144

Denominator:
Weighted-average common shares outstanding - basic		312,883,586		304,290,590		309,850,600		302,641,749
Effect of potentially dilutive securities:
Stock options		15,573,984		22,377,790		17,912,009		24,433,580
Restricted stock units		289,840		154,987		463,687		678,005
Employee stock purchase plan		97,159		57,785		39,582		20,010
Weighted-average common shares outstanding - diluted		328,844,569		326,881,152		328,265,878		327,773,344

Net income per share - basic	$	0.06	$	0.08	$	0.22	$	0.31
Net income per share - diluted	$	0.06	$	0.07	$	0.21	$	0.29

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,
	2023		2022		2023		2022
Stock options		3,798,034		2,384,530		3,343,733		2,188,289
Restricted stock units		8,049		15,165		199,888		60,612
Employee stock purchase plan		-		7,186		30,594		34,466

Recently Adopted Accounting Pronouncements

There have been no new accounting standards issued which would require either disclosure or adoption in the current period.

3. Property and Equipment, Net

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


	As of
	September 30, 2023			December 31, 2022
Land	$	104,643		$	94,594
Buildings and improvements		228,008			189,998
Finance leases		16,604			16,604
Leasehold improvements		125,249			115,811
Vehicles and equipment		257,854			229,453
Furniture, fixtures and equipment		95,307			86,613
Construction in progress		94,252			53,373
Property and equipment, gross		921,917			786,446
Less: accumulated depreciation		(258,147	)		(223,288	)
Less: accumulated amortization - finance leases		(3,037	)		(2,284	)
Property and equipment, net	$	660,733		$	560,874

For the three months ended September 30, 2023 and 2022, depreciation expense was $15,633 and $13,314, respectively. For the nine months ended September 30, 2023 and 2022, depreciation expense was $45,567 and $39,446, respectively.

For the three months ended September 30, 2023 and 2022, amortization expense on finance leases was $251 and $250, respectively. For the nine months ended September 30, 2023 and 2022, amortization expense on finance leases was $753 and $739, respectively.

4. Other Intangible Assets, Net

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


	September 30, 2023				December 31, 2022
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Trade names and Trademarks	$	107,000	$	-	$	107,200	$	200
CPC Unity System		42,900		38,968		42,900		35,750
Customer relationships		9,700		6,308		11,800		8,240
Covenants not to compete		13,230		8,213		12,590		6,685
Other intangible assets, net	$	172,830	$	53,489	$	174,490	$	50,875

For the three months ended September 30, 2023 and 2022, amortization expense associated with our finite-lived intangible assets was $1,715 and $1,629, respectively. For the nine months ended September 30, 2023 and 2022, amortization expense associated with our finite-lived intangible assets was $5,098 and $5,089, respectively.

As of September 30, 2023, estimated future amortization expense was as follows:


Fiscal Year Ending:
2023 (remaining three months)	$	1,686
2024		5,038
2025		1,827
2026		1,585
2027		757
Thereafter		1,448
Total estimated future amortization expense	$	12,341

5. Goodwill

Goodwill consisted of the following for the periods presented:


	As of
	September 30, 2023		December 31, 2022
Balance at beginning of period	$	1,109,815	$	1,060,221
Current period acquisitions		25,691		57,856
Other provisional adjustments		-		(8,262	)
Balance at end of period	$	1,135,506	$	1,109,815

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, 2023		December 31, 2022
Utilities	$	5,769	$	5,439
Accrued other tax expense		11,690		8,863
Insurance expense		4,475		3,275
Greenfield development accruals		16,439		18,772
Other		3,178		4,847
Total other accrued expenses	$	41,551	$	41,196

Greenfield development accruals represent property and equipment costs, primarily related to land and buildings and improvements not yet invoiced as of September 30, 2023 and December 31, 2022.

7. Income Taxes

The effective income tax rates on continuing operations for the nine months ended September 30, 2023 and 2022 were 21.3% and 22.1%, 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, 2023 included taxes on earnings at an anticipated annual effective tax rate of 25.6% and a net, favorable tax impact of $3,638 related primarily to discrete tax benefits originating from stock options exercised during the nine months ended September 30, 2023.

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 26.6% 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 1.0% decrease in the annual effective tax rate relates primarily to an anticipated reduction in state income tax liabilities.

In 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. Also in 2022, the Inflation Reduction Act (“IRA”) of 2022 was signed into law. The IRA created 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. Similar to the prior quarter, we do not currently expect these laws to have a material effect on our consolidated financial statements.

For the nine months ended September 30, 2023 and 2022, we did not record any unrecognized tax benefits or interest and penalties related to any uncertain tax positions.

8. Debt

Long-term debt consisted of the following as of the periods presented:


	As of
	September 30, 2023			December 31, 2022
Credit agreement
First lien term loan	$	901,201		$	901,201
Less: unamortized discount and debt issuance costs		(4,179	)		(5,371	)
First lien term loan, net		897,022			895,830

Total long-term portion of debt, net	$	897,022		$	895,830

As of September 30, 2023, annual maturities of debt were as follows:


Fiscal Year Ending:
2023 (remaining six months)	$	-
2024		-
2025		-
2026		901,201
2027		-
Thereafter		-
Total maturities of debt	$	901,201

As of September 30, 2023 and December 31, 2022, unamortized discount and debt issuance costs were $4,459 and $5,729, respectively, and accumulated amortization of discount and debt issuance costs was $5,716 and $4,446, respectively.

For the three months ended September 30, 2023 and 2022, the amortization of debt issuance costs in interest expense, net in the unaudited condensed consolidated statements of operations and comprehensive income was approximately $428.

For the nine months ended September 30, 2023 and 2022, the amortization of debt issuance costs in interest expense, net in the unaudited condensed consolidated statements of operations and comprehensive income was approximately $1,270.

Credit Agreement

On August 21, 2014, we 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 us.

Under the First Lien Term Loan under the Credit Agreement, we 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 Revolving Commitment under the Credit Agreement, we had the option of selecting either (i) a Base Rate interest rate plus a variable margin of 2.50% to 3.00%, based on our 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 our First Lien Net Leverage Ratio.

First Lien Term Loan

In February 2020, we entered into Amendment No. 1 to Amended and Restated First Lien Credit Agreement (“Amended First Lien Credit Agreement”) which amended and restated the Amended and Restated First Lien Credit Agreement entered into in May 2019 (the “First Lien Credit Agreement”). The Amended First Lien Credit Agreement changed the interest rate spreads associated with the First Lien Credit Agreement where (i) the variable margin associated with the Base Rate interest rate plus a variable margin based on our 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 our First Lien Net Leverage Ratio changed from 3.25% to 3.50% to 3.00% to 3.25%.

In December 2021, in connection with the Clean Streak Ventures acquisition, we entered into Amendment No. 3 to the Amended and Restated First Lien Credit Agreement which amended and restated the Amended and Restated First Lien Credit Agreement entered into in May 2019. Under the terms of the Amended First Lien Credit Agreement, 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 debt issuance costs.

In December 2022, we entered into Amendment No. 4 to the Amended and Restated First Lien Credit Agreement with the lenders party thereto, and Jeffries Finance LLC, as administrative agent, to transition from LIBOR to Eurocurrency rate SOFR spread, whereas all revolver borrowings and term loan borrowings under the existing credit agreement will be SOFR based. All other terms governing this term loan facility remained substantially the same.

As of September 30, 2023 and December 31, 2022, the amount outstanding under the First Lien Term Loan was $901,201. As of September 30, 2023 and December 31, 2022, the interest rate on the First Lien Term Loan was 8.42% and 7.42%, respectively.

The Amended and Restated First Lien Credit Agreement requires us to maintain compliance with a First Lien Net Leverage Ratio. As of September 30, 2023, we were in compliance with the First Lien Net Leverage Ratio financial covenant of the Amended and Restated First Lien Credit Agreement.

Revolving Commitment

In May 2019, as a part of the Amended and Restated First Lien Credit Agreement, the Revolving Commitment was increased from $50,000 to $75,000. We had the option of selecting either a Base Rate interest rate plus a variable margin based on our First Lien Net Leverage Ratio (ranging from 2.0% to 2.5%) or a Eurodollar Rate interest rate for one, two, three or six months plus a variable margin based on our First Lien Net Leverage Ratio (ranging from 3.0% to 3.5%).

In June 2021, we entered into Amendment No. 2 to Amended and Restated First Lien Credit Agreement 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 our initial public offering (the “IPO”) in June 2021.

As of September 30, 2023 and December 31, 2022, 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, 2023 and December 31, 2022, the available borrowing capacity under the Revolving Commitment was $148,642 and $148,581, respectively.

In addition, an unused commitment fee based on our First Lien Net Leverage Ratio is payable on the average of the unused borrowing capacity under the Revolving Commitment. As of September 30, 2023 and December 31, 2022, the unused commitment fee was 0.25%.

Standby Letters of Credit

As of September 30, 2023, we have 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 subsequent to the First Lien Credit Agreement. 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 to Amended and Restated First Lien Credit Agreement. Letters of credit under the Revolving Commitment reduce the maximum available borrowing capacity under the Revolving Commitment. As of September 30, 2023 and December 31, 2022, the amounts associated with outstanding letters of credit were $1,358 and $1,419, respectively, and unused letters of credit under the Revolving Commitment were $8,642 and $8,581, respectively.

9. Fair Value Measurements

The following table presents financial liabilities which are measured at fair value on a recurring basis as of September 30, 2023:


	Fair Value Measurements
	Total		Level 1		Level 2		Level 3
Liabilities:
Contingent Consideration	$	4,750	$	-	$	-	$	4,750

The following table presents financial liabilities which are measured at fair value on a recurring basis as of December 31, 2022:


	Fair Value Measurements
	Total		Level 1		Level 2		Level 3
Liabilities:
Contingent Consideration	$	5,250	$	-	$	-	$	5,250

We measure the fair value of our 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.

As of September 30, 2023 and December 31, 2022, the fair value of our First Lien Term Loan approximated its carrying value due to the debt’s variable interest rate terms.

As of September 30, 2023, we recognized assets in cash investments of $5,077, of which $4,992 are held in commercial paper and categorized as Level 2 assets and $85 held in money market funds, which are categorized as Level 1 assets. As of December 31, 2022, we recognized assets in cash investments of $5,032, of which $4,992 are held in commercial paper and categorized as Level 2 assets and $40 held in money market funds, which are categorized as Level 1 assets. These investments are highly liquid and have maturities of less than 90 days and are readily convertible to known amounts of cash, therefore, they are recorded within Cash and cash equivalents on the consolidated balance sheet. During the three and nine months ended September 30, 2023, interest income related to cash investments was not material.

We recognized a Level 3 contingent consideration liability in connection with the Downtowner Car Wash acquisition in December 2021. We 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 our most recent financial projection for future periods subject to earn-out payments. There are two components to the contingent consideration: a payment when we obtain 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 acquired business. A change in the forecasted revenue or projected opening dates could result in a significantly lower or higher fair value measurement. We 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, 2023. During the three and nine months ended September 30, 2023, a payment was made upon receipt of certificate of occupancy of $0 and $500, respectively.

During the three and nine months ended September 30, 2023 and 2022, there were no transfers between fair value measurement levels.

10. Interest Rate Swap

In May 2020, we entered into a pay-fixed, receive-floating interest rate swap (the “Swap”) to mitigate variability in forecasted interest payments on an amortizing notional amount of $550,000 of our variable-rate First Lien Term Loan. We designated the Swap as a cash flow hedge. In October 2022, the interest rate swap expired and was not replaced by a new interest rate swap.

For the three months ended September 30, 2023 and 2022, 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 $0 and ($601), respectively.

For the nine months ended September 30, 2023 and 2022, amounts reported in other comprehensive income in the accompanying unaudited condensed consolidated statements of operations and comprehensive income are net of tax of $0 and $125, respectively.

11. Leases

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


		As of
	Classification	September 30, 2023		December 31, 2022
Assets
Operating	Operating right of use assets, net	$	829,790	$	776,689
Finance	Property and equipment, net		13,567		14,320
Total lease assets		$	843,357	$	791,009

Liabilities
Current
Operating	Current maturities of operating lease liability	$	42,898	$	40,367
Finance	Current maturities of finance lease liability		726		668
Long-term
Operating	Operating lease liability		806,448		759,775
Finance	Financing lease liability		14,230		14,779
Total lease liabilities		$	864,302	$	815,589

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022

Operating lease expense(1)	$	26,361	$	22,796	$	75,680	$	65,653
Finance lease expense
Amortization of lease assets		251		250		753		739
Interest on lease liabilities		271		282		820		850
Short-term lease expense		12		7		38		23
Variable lease expense(2)		2,949		3,103		11,765		10,732
Total	$	29,844	$	26,438	$	89,056	$	77,997

(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.

(2)

Variable lease costs consist of property taxes, property insurance, and common area or other maintenance costs for our 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.

The following includes supplemental information for the periods presented:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Operating cash flows from operating leases	$	25,758		$	22,820		$	74,458		$	66,162
Operating cash flows from finance leases	$	271		$	282		$	820		$	850
Financing cash flows from finance leases	$	168		$	147		$	492		$	421

Operating lease ROU assets obtained in exchange for lease liabilities	$	27,365		$	44,471		$	86,420		$	72,482
Finance lease ROU assets obtained in exchange for lease liabilities	$	-		$	-		$	-		$	103

Weighted-average remaining operating lease term		13.97			14.22			13.97			14.22
Weighted-average remaining finance lease term		15.77			16.57			15.77			16.57

Weighted-average operating lease discount rate		7.98	%		7.18	%		7.98	%		7.18	%
Weighted-average finance lease discount rate		7.33	%		7.33	%		7.33	%		7.33	%

As of September 30, 2023, lease obligation maturities were as follows:


Fiscal Year Ending:	Operating Leases			Finance Leases
2023 (remaining three months)	$	26,073		$	443
2024		105,065			1,780
2025		105,249			1,786
2026		104,287			1,792
2027		100,695			1,819
2028		94,837			1,846
Thereafter		910,458			18,426
Total future minimum obligations	$	1,446,664		$	27,892
Less: Present value discount		(597,318	)		(12,936	)
Present value of net future minimum lease obligations	$	849,346		$	14,956
Less: current portion		(42,898	)		(726	)
Long-term obligations	$	806,448		$	14,230

Forward-Starting Leases

As of September 30, 2023, we entered into 12 leases that had not yet commenced related to build-to-suit arrangements for car wash locations. These leases will commence in the remainder of 2023, or 2024 or 2025 with initial lease terms of 15 to 20 years.

As of December 31, 2022, we entered into seven leases that had not yet commenced related to build-to-suit arrangements for car wash locations. These leases will commence in 2023, or 2024 or 2025 with initial lease terms of 15 to 20 years.

Sale-Leaseback Transactions

During the three months ended September 30, 2023 and 2022, we completed two sale-leaseback transactions related to car wash locations with aggregate consideration of $10,455 and $60,894, respectively, resulting in a net loss of $373 and net gain of $860, respectively, which are included in (Gain) loss on sale of assets, net in the accompanying unaudited condensed consolidated statements of operations and comprehensive income. Contemporaneously with the closing of the sales, we 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, 2023, the cumulative initial annual rent for the properties was approximately $640, subject to annual escalations. These leases are accounted for as operating leases. For the sale-leaseback transactions consummated 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.

During the nine months ended September 30, 2023 and 2022, we completed 14 and three sale-leaseback transactions related to car wash locations, respectively, with aggregate consideration of $99,710 and $64,694, respectively, resulting in a net gain of $4,893 and $4,063, respectively, which are included in (Gain) loss on sale of assets, net in the accompanying unaudited condensed consolidated statements of operations and comprehensive income. Contemporaneously with the closing of the sales, we 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, 2023, the cumulative initial annual rent for the properties was approximately $6,227, 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, 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.

12. Stockholders’ Equity

As of September 30, 2023, there were 1,000,000,000 shares of common stock authorized, 317,144,968 shares of common stock issued, and 313,970,741 shares of common stock outstanding.

As of December 31, 2022, there were 1,000,000,000 shares of common stock authorized, 309,800,757 shares of common stock issued, and 306,626,530 shares of common stock outstanding.

As of September 30, 2023 and December 31, 2022, there were 5,000,000 shares of preferred stock authorized and none were issued or outstanding.

We use the cost method to account for treasury stock. As of September 30, 2023, and December 31, 2022, we had 3,174,227 shares of treasury stock. As of September 30, 2023 and December 31, 2022, 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”), we may grant incentive stock options or nonqualified stock options to purchase shares of our common stock to our employees, directors, officers, outside advisors and non-employee consultants.

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. In June 2021, we 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 our stockholders and became effective on June 25, 2021. Under the 2021 Plan, we may grant incentive stock options, nonqualified stock options, restricted stock units ("RSUs"), restricted stock, and other stock- or cash-based awards to our employees, directors, officers, and non-employee consultants. Initially, the maximum number of shares of our 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 our common stock upon vesting. The fair value is calculated based upon our 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 our stockholders and became effective in June 2021. The 2021 ESPP authorizes the initial issuance of up to 5,000,000 shares of our 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. We 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 our 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, 2023 is 7,322,350.

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 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,
	2023	2022
Expected volatility	36.30% - 53.9%	34.33% - 52.72%
Risk-free interest rate	4.53% - 5.26%	0.07% - 1.54%
Expected term (in years)	0.49 - 0.50	0.49 - 0.50
Expected dividend yield	None	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,
	2023	2022
Expected volatility	43.74% - 44.68%	35.63% - 35.87%
Risk-free interest rate	3.68% - 4.21%	2.96% - 3.34%
Expected term (in years)	6.0 - 6.26	6.0
Expected dividend yield	None	None

Stock Options

A summary of our 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, 2022		15,651,622			9,882,278			25,533,900		$	2.31
Granted		1,704,740			-			1,704,740		$	8.90
Exercised		(4,585,715	)		(1,729,694	)		(6,315,409	)	$	0.72
Forfeited		(228,332	)		(7,682	)		(236,014	)	$	11.34
Outstanding as of September 30, 2023		12,542,315			8,144,902			20,687,217		$	3.23
Options vested or expected to vest as of September 30, 2023		11,568,556			8,144,902			19,713,458		$	7.26
Options exercisable as of September 30, 2023		8,590,062			8,144,902			16,734,964		$	1.80

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, 2022		3,704,919	-		$	3.90	$	-
Non-vested as of September 30, 2023		3,952,253		-	$	4.26	$	-
Granted during the period		1,704,740		-	$	4.36	$	-
Vested during the period		1,266,754		-	$	3.24	$	-
Forfeited/canceled during the period		190,652		-	$	5.18	$	-

We granted 1,704,740 Time Vesting Options with a grant date fair value of $7,425 during the nine months ended September 30, 2023. There were no Performance Vesting Options granted during the nine months ended September 30, 2023.

The fair value of shares attributable to stock options that vested during the nine months ended September 30, 2023 was $10,257.

As of September 30, 2023, the weighted-average remaining contractual life of outstanding stock options was approximately 3.9 years.

Restricted Stock Units

The following table summarizes our RSU activity since December 31, 2022:


	Restricted Stock Units			Weighted-Average Grant Date Fair Value
Unvested as of December 31, 2022		2,075,859		$	13.55
Granted		2,488,793		$	8.40
Vested		(638,365	)	$	13.58
Forfeited		(276,525	)	$	11.55
Unvested as of September 30, 2023		3,649,762		$	10.18

We granted 2,488,793 RSUs with a grant date fair value of $20,901 during the nine months ended September 30, 2023.

The fair value of shares attributable to RSUs that vested during the nine months ended September 30, 2023 was $5,348.

As of September 30, 2023, the weighted-average remaining contractual life of outstanding RSUs was approximately 9.15 years.

Stock-Based Compensation Expense

We estimated a forfeiture rate of 8.82% for awards with service-based vesting conditions based on historical experience and future expectations of the vesting of these share-based payments. We 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 for the periods presented is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Cost of labor and chemicals	$	2,330	$	2,268	$	6,474	$	6,168
General and administrative		3,959		3,193		11,169		10,791
Total stock-based compensation expense	$	6,289	$	5,461	$	17,643	$	16,959

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Time Vesting Options	$	1,749	$	1,521	$	5,119	$	5,388
RSUs		4,344		3,587		11,784		10,505
2021 ESPP		196		353		740		1,066
Total stock-based compensation expense	$	6,289	$	5,461	$	17,643	$	16,959

As of September 30, 2023, total unrecognized compensation expense related to unvested Time Vesting Options was $8,741, which is expected to be recognized over a weighted-average period of 2.59 years.

As of September 30, 2023, 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, 2023, total unrecognized compensation expense related to unvested RSUs was $23,576, which is expected to be recognized over a weighted-average period of 2.59 years.

As of September 30, 2023, total unrecognized compensation expense related to unvested stock purchase rights under the 2021 ESPP was $111, which is expected to be recognized over a weighted-average period of 0.13 years.

14. Business Combinations

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

We account 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, we 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. We expensed $195 and $82 of acquisition-related costs for the three months ended September 30, 2023 and 2022, respectively. We expensed $228 and $517 of acquisition-related costs for the nine months ended September 30, 2023 and 2022, 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.

For the three and nine months ended September 30, 2023, goodwill of $25,691 was recorded. For the three and nine months ended September 30, 2023, the amount of acquired goodwill not deductible for income tax purposes was $0. 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.

2023 Acquisitions

During the three months ended September 30, 2023, we acquired the assets and liabilities of five conveyorized car washes in one acquisition for total consideration of $46,905, which was paid in cash. During the nine months ended September 30, 2023, we acquired the assets and liabilities of six conveyorized car washes in two acquisitions for total consideration of $51,890, which was paid in cash. The acquisitions resulted in the preliminary recognition of $25,691 of goodwill, $22,455 of property and equipment, $3,580 of ROU assets, $640 of intangible assets, $100 of other net liabilities, and $376 of a bargain purchase gain. The bargain purchase gain is not material and is recorded within (Gain) loss on sale of assets, net on the condensed consolidated statements of operations and comprehensive income. We do not believe these acquisitions are material to our overall consolidated financial statements.

The acquisitions were located in the following markets:


Location (Seller)	Number of Washes	Month Acquired
Arizona (Dynamite Car Wash)	1	April
California (Cruizers Car Wash)	5	July

2022 Acquisitions

For the year ended December 31, 2022, we acquired the assets and liabilities of 11 conveyorized car washes in four acquisitions for total consideration of approximately $98,548, which was paid in cash. These acquisitions resulted in the preliminary recognition of $57,856 of goodwill, $37,174 of property and equipment, $1,540 of intangible assets related to covenant not to compete, $1,978 of other assets and liabilities. There were no adjustments related to 2022 acquisitions 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
California (Rapid Xpress)	3	December

15. Commitments and Contingencies

From time to time, we are party to pending or threatened lawsuits arising out of or incident to the ordinary course of business. We carry 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.

Class Action Litigation

On February 14, 2023, a plaintiff filed a purported class action lawsuit in the Stanislaus County Superior Court, California, on behalf of all non-exempt employees employed by Defendants Prime Shine LLC in California any time between February 14, 2019, and the present, against Prime Shine, LLC and Does 1 – 20 inclusive. Plaintiff alleges eight claims for violations of the California Labor Code and one claim for violation of the California Business & Professions Code. On June 13, 2023, Plaintiff filed a First Amended Complaint to add a claim for penalties pursuant to the Private Attorneys General Act. Plaintiff seeks, among other things, an unspecified amount for unpaid wages, actual, consequential, and incidental losses, penalties, and attorneys’ fees and costs. The parties agreed to an informal exchange of information in lieu of formal discovery prior to mediation with an experienced wage-and-hour mediator. After undergoing mediation in October 2023, both parties reached a consensus to resolve the lawsuit. This agreement is contingent upon the formalization through a written settlement document and subsequent approval from the California Department of Labor and the court. Should all these conditions be met, the class action lawsuit will be considered settled. Management believes, based on currently available information, that the ultimate outcome of the proceeding described above will not have a material adverse effect on the Company’s financial condition or results of operations.

Insurance

We carry 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, 2023 and December 31, 2022, we accrued $4,455 and $3,230, 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, 2023 and December 31, 2022, we recorded $3,771 and $2,627, 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 us utilize, or in the past have utilized, hazardous substances generally in compliance with applicable law. Periodically, we have had minor claims asserted against it by regulatory agencies or private parties for environmental matters relating to the handling of hazardous substances by us, 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 us, may not result in additional environmental claims being asserted against us or additional investigations or remedial actions being required. We are not aware of any significant remediation matters as of September 30, 2023. Because of various factors including the difficulty of identifying the 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, we are unable to reasonably estimate the ultimate cost of claims asserted against us related to environmental matters; however, we do not believe such costs will be material to our unaudited condensed consolidated financial statements.

In addition to potential claims asserted against us, there are certain regulatory obligations associated with these facilities. We also have 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 we have recognized a provisional amount. As of September 30, 2023 and December 31, 2022, we recorded an environmental remediation accrual of $10 and $12, which is included in other accrued expenses in the accompanying unaudited condensed consolidated balance sheets.

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 2022 Form 10-K. This discussion contains forward-looking statements based upon our current plans, expectations and beliefs. These forward-looking statements involve risks and uncertainties, and 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 2022 Form 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 462 car washes in 21 states as of September 30, 2023. 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® (“UWC”), as a flexible, quick, and convenient option for customers to keep their cars clean. 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, which we believe help us to 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 2022 Form 10-K.


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


	•		Number and loyalty of UWC Members. Members of our monthly subscription service are known as Unlimited Wash Club Members, or 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 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

More recently, a component of our growth strategy has been to grow through greenfield development of Mister Car Wash locations, with particular focus on Express Exterior Locations, and we anticipate continued pursuit of this strategy in the future. In the three and nine months ended September 30, 2023, we successfully opened eight and 21 greenfield locations, respectively, with the expectation of driving the majority of our future location growth through greenfield development. We believe such a strategy will drive a more controllable pipeline of comparable store sales growth and unit growth for future locations in existing and adjacent markets.

The comparability of our results may be impacted by the inclusion of the 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.

Acquisitions

In the three months ended September 30, 2023, we completed one acquisition consisting of five properties that operated as conveyorized car washes. In the nine months ended September 30, 2023, we completed two acquisitions consisting of six 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 modernized 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, 2023 and 2022.


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2023			2022			2023			2022
Financial and Operating Data
Location count (end of period)		462			420			462			420
Comparable store sales growth		1.7	%		2.9	%		0.1	%		5.3	%
UWC Members (in thousands, end of period)		2,071			1,860			2,071			1,860
UWC sales as a percentage of total wash sales		71	%		69	%		70	%		67	%
Net income	$	19,485		$	23,997		$	67,753		$	95,144
Net income margin		8.3	%		11.0	%		9.7	%		14.4	%
Adjusted EBITDA(1)	$	71,598		$	66,132		$	216,434		$	215,457
Adjusted EBITDA margin(1)		30.6	%		30.4	%		31.1	%		32.5	%

(1) See “Adjusted EBITDA and Adjusted EBITDA Margin” below for more information and for a reconciliation of these measures to Net income and Net income margin, the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP.

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, acquired locations and offset by closed 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, 2023, we increased our location count by 13 locations, comprised of eight greenfield locations and five acquired locations. In the nine months ended September 30, 2023, we increased our location count by 26 locations, comprised of 21 greenfield locations and six acquired locations, offset by one location that was closed during the first quarter.

Our Express Exterior Locations, which offer express exterior cleaning services, comprise 390 of our current locations and our Interior Cleaning Locations, which offer both express exterior cleaning services and interior cleaning services, comprise 72 of our current locations.

Comparable Store Sales Growth

We consider a location 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 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 sales are only

one measure we use to assess the success of our growth strategy. For the three months ended September 30, 2023, comparable store sales increased 1.7% compared to an increase of 2.9% in the three months ended September 30, 2022.

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 2.1 million and approximately 1.9 million UWC Members as of September 30, 2023 and September 30, 2022, respectively. There were approximately 1.9 million UWC Members as of December 31, 2022.

Our UWC Members grew by approximately 11% from September 30, 2022 through September 30, 2023 and approximately 10% from December 31, 2022 through September 30, 2023.

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 71% and 69% of our total wash sales for the three months ended September 30, 2023 and 2022, respectively. UWC sales were 70% and 67% of our total wash sales for the nine months ended September 30, 2023 and 2022, respectively.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA is a non-GAAP measure of our operating 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”). Adjusted EBITDA is defined as net income before interest expense, net, income tax provision, depreciation and amortization expense, (gain) loss on sale of assets, stock-based compensation expense and related taxes, acquisition expenses, non-cash rent expense, expenses associated with the completion of our initial public offering, or IPO, in June 2021, 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 nonrecurring 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 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;


	•		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 $71.6 million and $66.1 million in the three months ended September 30, 2023 and 2022, respectively. Our Adjusted EBITDA margin was 30.6% and 30.4% in the three months ended September 30, 2023 and 2022, respectively. Adjusted EBITDA was approximately $216.4 million and $215.5 million in the nine months ended September 30, 2023 and 2022, respectively. Our Adjusted EBITDA margin was 31.1% and 32.5% in the nine months ended September 30, 2023 and 2022, respectively. The Adjusted EBITDA increase in the three and nine months ended September 30, 2023 compared to the prior year periods are primarily attributable to the increase in car wash sales due to growth in UWC Members and the year-over-year addition of 42 locations. The following is a reconciliation of our net income to Adjusted EBITDA for the periods presented.


	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2023			2022			2023			2022
Reconciliation of net income to Adjusted EBITDA:
Net income	$	19,485		$	23,997		$	67,753		$	95,144
Interest expense, net		19,100			10,100			55,143			27,028
Income tax provision		4,470			8,814			18,373			26,988
Depreciation and amortization expense		17,599			15,193			51,418			45,274
(Gain) loss on sale of assets, net (a)		1,321			(649	)		(3,470	)		(3,336	)
Stock-based compensation expense (b)		6,522			5,461			17,876			16,959
Acquisition expenses (c)		912			1,303			2,651			2,541
Non-cash rent expense (d)		1,409			745			3,623			1,820
Expenses associated with initial public offering (e)		-			-			-			272
Other (f)		780			1,168			3,067			2,767
Adjusted EBITDA	$	71,598		$	66,132		$	216,434		$	215,457
Net Revenues	$	234,076		$	217,576		$	696,930		$	662,154
Adjusted EBITDA margin		30.6	%		30.4	%		31.1	%		32.5	%

(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 as well as related taxes.

(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 the difference between cash paid for rent expense and U.S. GAAP rent expense.

(e)

Represents nonrecurring expenses associated with the consummation of our IPO in June 2021.

(f)

Consists of other items as determined by management not to be reflective of our ongoing operating performance, such as costs associated with 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.

Results of Operations for the Three Months Ended September 30, 2023 and 2022 (Unaudited)

The unaudited results of operations data for the three months ended September 30, 2023 and 2022 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,
	2023					2022
(Dollars in thousands)	Amount		% of Revenue			Amount			% of Revenue
Net revenues	$	234,076		100	%	$	217,576			100	%

Store operating costs:
Cost of labor and chemicals		72,760		31	%		68,228			31	%
Other store operating expenses		90,514		39	%		82,343			38	%
General and administrative		26,426		11	%		24,743			11	%
(Gain) loss on sale of assets, net		1,321		1	%		(649	)		(0	)%
Total costs and expenses		191,021		82	%		174,665			80	%
Operating income		43,055		18	%		42,911			20	%
Other expense:
Interest expense, net		19,100		8	%		10,100			5	%
Total other expense		19,100		8	%		10,100			5	%
Income before taxes		23,955		10	%		32,811			15	%
Income tax provision		4,470		2	%		8,814			4	%
Net income		19,485		8	%		23,997			11	%

Net Revenues


	Three Months Ended September 30,
(Dollars in thousands)	2023		2022		$ Change		% Change
Net revenues	$	234,076	$	217,576	$	16,500		8	%

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 42 locations.

Store Operating Costs

Cost of Labor and Chemicals


	Three Months Ended September 30,
(Dollars in thousands)	2023			2022			$ Change		% Change
Cost of labor and chemicals	$	72,760		$	68,228		$	4,532		7	%
Percentage of net revenues		31	%		31	%

The increase in the cost of labor and chemicals is primarily attributable to the year-over-year addition of 42 locations.

Other Store Operating Expenses


	Three Months Ended September 30,
(Dollars in thousands)	2023			2022			$ Change		% Change
Other store operating expenses	$	90,514		$	82,343		$	8,171		10	%
Percentage of net revenues		39	%		38	%

The increase in other store operating expenses was attributable to the year-over-year addition of 42 locations and some inflationary pressures on our utilities and maintenance expenses. Rent expense increased approximately $3.8 million primarily due to the addition of 50 new car wash leases.

General and Administrative


	Three Months Ended September 30,
(Dollars in thousands)	2023			2022			$ Change		% Change
General and administrative	$	26,426		$	24,743		$	1,683		7	%
Percentage of net revenues		11	%		11	%

The increase in general and administrative expenses was primarily driven by an increase of approximately $1.3 million in salaries and benefits, an increase of approximately $1.0 million in stock-based compensation expenses, and an increase of approximately $0.3 million in marketing expenses to support a new product offering, partially offset by a decrease of approximately $0.6 million in corporate insurances and a decrease of approximately $0.4 million in acquisition and new build expenses. As a percentage of net revenues, general and administrative expenses for the three months ended September 30, 2023 remained consistent to the prior year period.

(Gain) loss on Sale of Assets, Net


	Three Months Ended September 30,
(Dollars in thousands)	2023			2022			$ Change		% Change
(Gain) loss on sale of assets, net	$	1,321		$	(649	)	$	1,970		(304	)%
Percentage of net revenues		1	%		(0	)%

The change in (gain) loss on sale of assets, net was primarily driven by losses associated with our sale-leaseback transactions in the current year.

Other Expense


	Three Months Ended September 30,
(Dollars in thousands)	2023			2022			$ Change		% Change
Other expense	$	19,100		$	10,100		$	9,000		89	%
Percentage of net revenues		8	%		5	%

The increase in other expense was primarily driven by an increase in interest expense due to higher average interest rates as compared to the prior year period and the expiration of our interest rate hedge in October 2022.

Income Tax Provision


	Three Months Ended September 30,
(Dollars in thousands)	2023			2022			$ Change			% Change
Income tax provision	$	4,470		$	8,814		$	(4,344	)		(49	)%
Percentage of net revenues		2	%		4	%

The decrease in income tax provision was primarily driven by reduced pre-tax income, net of the increased impact of income tax benefits from equity awards in the current quarter.

Results of Operations for the Nine Months Ended September 30, 2023 and 2022 (Unaudited)

The unaudited results of operations data for the nine months ended September 30, 2023 and 2022 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,
	2023						2022
(Dollars in thousands)	Amount			% of Revenue			Amount			% of Revenue
Net revenues	$	696,930			100	%	$	662,154			100	%

Store operating costs:
Cost of labor and chemicals		210,376			30	%		203,117			31	%
Other store operating expenses		270,317			39	%		239,173			36	%
General and administrative		78,438			11	%		74,040			11	%
Gain on sale of assets, net		(3,470	)		(0	)%		(3,336	)		(1	)%
Total costs and expenses		555,661			80	%		512,994			77	%
Operating income		141,269			20	%		149,160			23	%
Other expense:
Interest expense, net		55,143			8	%		27,028			4	%
Total other expense		55,143			8	%		27,028			4	%
Income before taxes		86,126			12	%		122,132			18	%
Income tax provision		18,373			3	%		26,988			4	%
Net income		67,753			10	%		95,144			14	%

Net Revenues


	Nine Months Ended September 30,
(Dollars in thousands)	2023		2022		$ Change		% Change
Net revenues	$	696,930	$	662,154	$	34,776		5	%

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 42 locations.

Store Operating Costs

Cost of Labor and Chemicals


	Nine Months Ended September 30,
(Dollars in thousands)	2023			2022			$ Change		% Change
Cost of labor and chemicals	$	210,376		$	203,117		$	7,259		4	%
Percentage of net revenues		30	%		31	%

The increase in the cost of labor and chemicals is primarily attributable to the year-over-year addition of 42 locations and some inflationary pressures on our wash chemicals and supplies. The increase from additional stores and inflationary pressures were partially offset by a decrease of approximately $4.4 million in store labor costs from optimized scheduling guidelines implemented in the second half of fiscal year 2022.

Other Store Operating Expenses


	Nine Months Ended September 30,
(Dollars in thousands)	2023			2022			$ Change		% Change
Other store operating expenses	$	270,317		$	239,173		$	31,144		13	%
Percentage of net revenues		39	%		36	%

The increase in other store operating expenses was attributable to the year-over-year addition of 42 locations and some inflationary pressures on our utilities and maintenance expenses. Rent expense increased approximately $11.0 million primarily due to the addition of 50 new car wash leases.

General and Administrative


	Nine Months Ended September 30,
(Dollars in thousands)	2023			2022			$ Change		% Change
General and administrative	$	78,438		$	74,040		$	4,398		6	%
Percentage of net revenues		11	%		11	%

The increase in general and administrative expenses was primarily driven by an increase of approximately $3.2 million in salaries and benefits, an increase of approximately $1.8 million in marketing expenses and an increase of approximately $0.6 million in stock-based compensation expenses, partially offset by a decrease of approximately $1.2 million in corporate insurances. As a percentage of net revenues, general and administrative expenses for the nine months ended September 30, 2023 remained consistent to the prior year period.

(Gain) loss on Sale of Assets, Net


	Nine Months Ended September 30,
(Dollars in thousands)	2023			2022			$ Change			% Change
(Gain) loss on sale of assets, net	$	(3,470	)	$	(3,336	)	$	(134	)		4	%
Percentage of net revenues		(0	)%		(1	)%

The change in (gain) loss on sale of assets, net was primarily driven by gains associated with our sale-leaseback transactions in the current year.

Other Expense


	Nine Months Ended September 30,
(Dollars in thousands)	2023			2022			$ Change		% Change
Other expense	$	55,143		$	27,028		$	28,115		104	%
Percentage of net revenues		8	%		4	%

Income Tax Provision


	Nine Months Ended September 30,
(Dollars in thousands)	2023			2022			$ Change			% Change
Income tax provision	$	18,373		$	26,988		$	(8,615	)		(32	)%
Percentage of net revenues		3	%		4	%

The decrease in income tax provision was primarily driven by reduced pre-tax income, net of the reduced impact of income tax benefits from equity awards in the current year.

Liquidity and Capital Resources

Funding Requirements

Our primary requirements for liquidity and capital are to fund our investments in our core business, which includes lease payments, pursue greenfield development, acquisitions of new locations and to service our indebtedness. Historically, these cash requirements have been met through funds raised by the sale of our common stock, utilization of our Revolving Commitment, First Lien Term Loan, sale-leaseback transactions, and cash provided by operations.

As of September 30, 2023 and December 31, 2022, we had cash and cash equivalents of $62.1 million and $65.2 million, respectively, and $148.6 million of available borrowing capacity under our Revolving Commitment.

For a description of our Credit Facilities, please see Note 8 Debt in the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. As of September 30, 2023, we were in compliance with the covenants under the Amended and Restated First Lien Credit Agreement.

We believe that our sources of liquidity and capital will be sufficient to finance our growth strategy and resulting operations, as well as planned capital expenditures, for the next 12 months and the foreseeable future. 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, 2023 and 2022 (Unaudited)

The following table shows summary cash flow information for the nine months ended September 30, 2023 and 2022:


	Nine Months Ended September 30,
(Dollars in thousands)	2023			2022
Net cash provided by operating activities	$	165,486		$	185,453
Net cash used in investing activities		(173,652	)		(133,784	)
Net cash provided by financing activities		5,184			3,420
Net change in cash and cash equivalents, and restricted cash	$	(2,982	)	$	55,089

Operating Activities. Net cash used in operating activities consists of net income adjusted for certain non-cash items, including stock-based compensation expense, depreciation of property and equipment, gains on sale of assets, net, 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, 2023, net cash provided by operating activities was $165.5 million and was comprised of net income of $67.8 million, increased by $114.9 million as a result of non-cash adjustments comprised primarily of depreciation and amortization expense, stock-based compensation expense, non-cash lease expense, deferred income taxes, a gain on sale of assets, net, and amortization of debt issuance costs. Changes in working capital balances decreased cash provided by operating activities by $17.2 million and were primarily driven by operating lease payments, an increase in accounts receivable, net, offset by increases in accounts payable, accrued expenses, and deferred revenue.

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 sale of assets, 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.

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, 2023, net cash used in investing activities was $173.7 million and was primarily comprised of investments in property and equipment to support our greenfield development and other initiatives and two acquisitions, offset by the sale of property and equipment.

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.

Financing Activities. Our net cash provided by financing activities primarily consists of payments on our First Lien Term Loan and Revolving Commitment, payments on finance lease obligations, as well as issuance of common stock under employee plans.

For the nine months ended September 30, 2023, net cash provided by financing activities was $5.2 million and was primarily comprised of proceeds from exercise of stock options, partially offset by payments on finance lease obligations.

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 repayments of our First Lien Term Loan and payments on finance lease obligations.

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 2022 Form 10-K. There have been no material changes to our significant accounting policies during the three and nine months ended September 30, 2023.

Recent Accounting Pronouncements

See the section titled “Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements” 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.

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, 2023 and December 31, 2022, we had $901.2 million 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, 2023, 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.

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.

Evaluation of Disclosure Controls and Procedures

In order to ensure that the information we must disclose in our filings with the Securities and Exchange Commission (the "SEC") is recorded, processed, summarized and reported on a timely basis, we have developed and implemented disclosure controls and procedures. Our management, with the participation of our President and Chief Executive Officer and our 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 September 30, 2023. Based on that evaluation, our management, including the President and Chief Executive Officer and the Chief Financial Officer, has concluded that our disclosure controls and procedures were effective as of September 30, 2023 in ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to our management, including the President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are subjected from time-to-time 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 any 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.

Class Action Litigation

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 2022 Form 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 2022 Form 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.

Rule 10b5-1 Trading Plan Elections

During the quarter ended September 30, 2023, none of our directors or officers (as defined in Rule 16a-1 of the Exchange Act) adopted, modified or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement (as such terms are defined under Item 408 of Regulation S-K) except as described below.

On September 29, 2023, John Lai, Chief Executive Officer, terminated a Rule 10b5-1 trading arrangement intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act as then applicable at the time of adoption (the

“Terminated Plan”). The Terminated Plan was originally adopted on March 13, 2023 and provided for the potential sale of up to 8,277,573 shares of the Company’s common stock until September 2, 2024.

Item 6. Exhibits.


Exhibit Number	Description	Form	File. No	Exhibit	Filing Date	Filed/Furnished Herewith
3.1	Amended and Restated Certificate of Incorporation of the Company	8-K	001-40542	3.2	06/01/2022
3.2	Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company	8-K	001-40542	3.1	06/01/2023
3.3	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.

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 3, 2023	By:	/s/ John Lai
		John Lai
		Chairperson, President and Chief Executive Officer (Principal Executive Officer)

Date: November 3, 2023	By:	/s/ Jedidiah Gold
		Jedidiah Gold
		Chief Financial Officer (Principal Financial Officer)