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Filed Pursuant to Rule 424(b)(5)
Registration No. 333-258186

 

PROSPECTUS SUPPLEMENT

(to Prospectus dated July 29, 2021)

 

LOGO

 

 

 

Common Stock   12,000,000 Shares

 

 

The selling stockholders identified in this prospectus supplement are offering 12,000,000 shares of our common stock. We are not selling any shares of common stock under this prospectus supplement, and we will not receive any of the proceeds from the sale of shares of our common stock by the selling stockholders.

Our common stock is listed on the New York Stock Exchange under the symbol “MCW.”

The last reported sale price of our common stock was $20.57 per share on August 23, 2021. You should read this prospectus supplement and the accompanying prospectus carefully before you invest.

We are a “controlled company” within the meaning of the corporate governance standards of The New York Stock Exchange. As long as investment funds affiliated with or advised by Leonard Green & Partners, L.P. (“LGP”) owns a majority of our common stock, it will be able to control all of our major corporate decisions. Additionally, pursuant to the terms of the stockholders agreement described in this prospectus supplement and accompanying prospectus, LGP will be entitled to nominate a certain number of our directors following this offering even if LGP owns less than a majority of our common stock.

We are an “emerging growth company” under the federal securities laws and, as such, may elect to comply with certain reduced public reporting requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

 

 

Investing in our common stock involves risk. See “Risk Factors” beginning on page S-5 of this prospectus supplement, page 47 of the accompanying prospectus, dated July 29, 2021 and page 15 of the prospectus supplement dated August 23, 2021 to read about factors you should consider before buying shares of our common stock.

Neither the Securities and Exchange Commission, or the SEC, nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus supplement. Any representation to the contrary is a criminal offense.

 

 

 

     Per share      Total  

Public Offering Price

   $ 19.57      $ 234,840,000  

Underwriting discount(1)

   $ 0.15      $ 1,800,000  

Proceeds, before expenses, to selling stockholders

   $ 19.42      $ 233,040,000  

 

(1)

See “Underwriting” for a description of the compensation payable to the underwriters.

The selling stockholders have granted the underwriter an option for a period of 30 days to purchase up to an additional 1,800,000 shares of common stock.

The underwriter expects to deliver the shares against payment on or about August 26, 2021.

Morgan Stanley

 


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TABLE OF CONTENTS

Prospectus Supplement Related to this Offering

 

     Page  

About this Prospectus Supplement

     S-iii  

Prospectus Supplement Summary

     S-1  

Risk Factors

     S-5  

Cautionary Note Regarding Forward-Looking Statements

     S-8  

Use of Proceeds

     S-10  

Market Price of Our Common Stock

     S-11  

Dividend Policy

     S-12  

Principal and Selling Stockholders

     S-13  

Material U.S. Federal Tax Considerations for Non-U.S. Holders of Our Common Stock

     S-16  

Certain ERISA Considerations

     S-20  

Underwriting

     S-21  

Legal Matters

     S-31  

Experts

     S-31  

Where You Can Find More Information

     S-31  

Prospectus Supplement dated August 23, 2021

 

         Page  
 

FORWARD-LOOKING STATEMENTS

     2  
 

RISK FACTOR SUMMARY

     4  

PART I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements (Unaudited)

  
 

Condensed Consolidated Balance Sheets

     5  
 

Condensed Consolidated Statements of Operations and Comprehensive Loss

     6  
 

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

     7  
 

Condensed Consolidated Statements of Cash Flows

     9  
 

Notes to Unaudited Condensed Consolidated Financial Statements

     10  

Item 2.

 

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

     30  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     46  

Item 4.

 

Controls and Procedures

     46  

PART II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     47  

Item 1A.

 

Risk Factors

     47  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     67  

Item 3.

 

Defaults Upon Senior Securities

     68  

Item 4.

 

Mine Safety Disclosures

     68  

Item 5.

 

Other Information

     68  

Item 6.

 

Exhibits

     68  

Signatures

     70  

 

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Prospectus dated July 29, 2021

 

About This Prospectus

     ii  

Market and Industry Data

     ii  

Basis of Presentation

     ii  

Certain Trademarks

     iii  

Key Performance Indicators and Non-GAAP Financial Measures

     iv  

Prospectus Summary

     1  

Risk Factors

     15  

Cautionary Note Regarding Forward-Looking Statements

     35  

Use of Proceeds

     37  

Determination of Offering Price

     38  

Dividend Policy

     39  

Selected Consolidated Financial Data

     40  

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

     44  

Business

     66  

Management

     87  

Executive Compensation

     93  

Principal and Selling Stockholders

     109  

Certain Relationships and Related Party Transactions

     111  

Description of Capital Stock

     113  

Description of Certain Indebtedness

     118  

Plan of Distribution

     122  

Legal Matters

     125  

Experts

     125  

Where You Can Find More Information

     125  

Index to Consolidated Financial Statements

     F-1  

 

 

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ABOUT THIS PROSPECTUS SUPPLEMENT

This document consists of multiple parts. The first is the prospectus supplement relating to this offering, which describes the specific terms of this offering. The other parts are the accompanying prospectus dated July 29, 2021 and a prospectus supplement filed for the purpose of updating the information in the accompanying prospectus for the information included in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021 (the “second quarter prospectus supplement”). Generally, when we refer only to the “prospectus,” we are referring to all parts combined. This prospectus supplement may add to, update or change information in the accompanying prospectus or the second quarter prospectus supplement.

If information in this prospectus supplement is inconsistent with the accompanying prospectus and the second quarter prospectus supplement, you should rely on this prospectus supplement. If information in the second quarter prospectus supplement is inconsistent with the accompanying prospectus, you should rely on the second quarter prospectus supplement. This document includes important information about us, the shares of common stock being offered and other information you should know before investing in these securities.

You should rely only on the information contained in this prospectus supplement, the accompanying prospectus, the second quarter prospectus supplement or in any free writing prospectus we may authorize to be delivered or made available to you. Neither we, nor the selling stockholders, nor the underwriter (nor any of our or their respective affiliates) have authorized anyone to provide any information other than that contained in this prospectus supplement, the accompanying prospectus, the second quarter prospectus supplement or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. Neither we, nor the selling stockholders, nor the underwriter (or any of our or their respective affiliates) take any responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. The selling stockholders and the underwriter (or any of its respective affiliates) are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus supplement is only accurate as of the date on the front cover page of this prospectus supplement. Our business, financial condition, results of operations and prospects may have changed since that date.

This prospectus supplement is a part of a registration statement on Form S-1 that we filed with the Securities and Exchange Commission (the “SEC”) using a “shelf” registration or continuous offering process. Under this shelf process, the selling stockholders may from time to time sell shares of our common stock covered by the accompanying prospectus. You should read this prospectus supplement, the accompanying prospectus and the second quarter prospectus supplement before deciding to invest in shares of our common stock. You may obtain this information without charge by following the instructions under “Where You Can Find More Information” appearing elsewhere in this prospectus supplement.

Unless otherwise indicated or unless the context requires otherwise, all references to the “Company,” “Mister Car Wash,” “Mister,” “we,” “us” and “our” mean Mister Car Wash, Inc. (f.k.a. Hotshine Holdings, Inc.) and, unless the context otherwise requires, its consolidated subsidiaries.

 

 

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PROSPECTUS SUPPLEMENT SUMMARY

This summary highlights selected information contained elsewhere in this prospectus supplement, the accompanying prospectus and the second quarter prospectus supplement. Because this is only a summary, it does not contain all the information that may be important to you. You should read the entire prospectus supplement, the accompanying prospectus and the second quarter prospectus supplement carefully, especially “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus supplement, the accompanying prospectus and the second quarter prospectus supplement before deciding to invest in our common stock.

Our Mission: Inspiring People to Shine

We believe that a car wash can be so much more than just a car wash.

By delivering a clean, dry and shiny car at the end of our car wash tunnels, we lift the spirits of our customers with an affordable, feel-good experience.

By relentlessly improving our processes to drive speed, consistency and quality, we provide reliable convenience that keeps our millions of customers coming back time and time again.

And by putting our team members first and empowering them to thrive, we have created a culture of passionate, engaged team members focused on delivering happiness to our customers.

At Mister Car Wash, we believe that a car wash is more than just a car wash: it is an opportunity to Inspire People to Shine.

Who We Are

Mister Car Wash is the largest national car wash brand, offering express exterior and interior cleaning services to customers across 351 car wash locations in 21 states, as of June 30, 2021. 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 providing elevated hospitality to our guests, delivering the highest quality car wash and ensuring the experience is quick and convenient. We offer a monthly subscription program, which we call Unlimited Wash Club (“UWC”), as a flexible, quick and convenient option for customers to keep their cars clean.

Summary Risk Factors

We are subject to a number of risks, including risks that may prevent us from achieving our business objectives or that may adversely affect our business, financial condition and results of operations. You should carefully consider the risks discussed in the section titled “Risk Factors,” including the following risks, before investing in our common stock:

 

   

Increased competition in the car wash industry may impact our future growth.

 

   

We may be unable to sustain or increase demand for our UWC subscription program, which could adversely affect our business, financial condition and results of operations and rate of growth.

 

   

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.


 

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An overall decline in the health of the economy and other factors impacting consumer spending, such as natural disasters and fluctuations in inflation may affect consumer purchases, reduce demand for our services and materially and adversely affect our business, results of operations and financial condition.

 

   

If we are not able to maintain and enhance our reputation and brand recognition, our business and results of operations may be harmed.

 

   

If we fail to open and operate new locations in a timely and cost-effective manner or fail to successfully enter new markets, our financial performance could be materially and adversely affected.

 

   

If we are unable to identify attractive acquisition targets and acquire them at attractive prices, we may be unsuccessful in growing our business.

 

   

Changes in labor and chemical costs, other operating costs, interest rates and inflation could materially and adversely affect our results of operations.

 

   

Our indebtedness could adversely affect our financial health and competitive position.

 

   

The terms of our First Lien Term Loan and Revolving Commitment impose certain operating and financial restrictions on us that may impair our ability to adapt to changing competitive or economic conditions.

 

   

Our business is subject to various laws and regulations, and changes in such laws and regulations, or failure to comply with existing or future laws or regulations, could adversely affect our business.

 

   

Our locations are subject to certain environmental laws and regulations.

 

   

We are subject to data security and privacy risks that could negatively impact our results of operations or reputation.

 

   

Because LGP owns a significant percentage of our common stock, it may control all major corporate decisions and its interests may conflict with your interests as an owner of our common stock and our interests.

 

   

We are a “controlled company” within the meaning of New York Stock Exchange rules and, as a result, will qualify for, and may rely on, exemptions from certain corporate governance requirements.

Our business also faces a number of other challenges and risks discussed throughout this prospectus supplement. You should read the entire prospectus carefully, including “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes included elsewhere in this prospectus supplement, before deciding to invest in our common stock.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable, in general, to public companies that are not emerging growth companies. These provisions include:

 

   

the option to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in this prospectus supplement;

 

   

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002;


 

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reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

   

exemptions from the requirements of holding nonbinding, advisory stockholder votes on executive compensation or on any golden parachute payments not previously approved.

We will remain an emerging growth company until the earliest to occur of: (i) the last day of the first fiscal year in which our annual gross revenue exceeds $1.07 billion; (ii) the date that we become a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates as of the end of the second quarter of that fiscal year; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of the completion of the IPO.

We have elected to take advantage of certain of the reduced disclosure obligations in the registration statement of which this prospectus supplement is a part and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide may be different than the information you receive from other public companies in which you hold stock.

As an emerging growth companies, we elected to take advantage of the extended transition period provided in Section 13(a) of the Exchange Act, for complying with new or revised accounting standards. In other words, as an emerging growth company, we can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. As a result of these elections, some investors may find our common stock less attractive than they would have otherwise. The result may be a less active trading market for our common stock, and the price of our common stock may become more volatile. See “Risk Factors—Risks Related to Ownership of Our Common Stock—We are an “emerging growth company” and our compliance with the reduced reporting and disclosure requirements applicable to “emerging growth companies” may make our common stock less attractive to investors.”


 

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The Offering

The following summary contains basic information about our common stock and the offering and is not intended to be complete. It does not contain all the information that may be important to you. For a more complete understanding of our common stock, you should read the section in the accompanying prospectus entitled “Description of Capital Stock” and the documents referred to therein.

 

Common stock offered by the selling stockholders

12,000,000 shares.

 

Common stock to be outstanding after this offering

296,073,997 shares.

 

Option to purchase additional common stock

The underwriter has an option to purchase up to an aggregate of 1,800,000 additional shares of common stock from the selling stockholders. The underwriter can exercise this option at any time within 30 days from the date of this prospectus supplement.

 

Use of proceeds

The selling stockholders will receive all of the net proceeds from this offering. We will not receive any of the proceeds from the sale of common stock offered by the selling stockholders. See “Use of Proceeds.”

 

Dividend Policy

We do not expect to pay any dividends on our common stock for the foreseeable future. See “Dividend Policy.”

 

NYSE symbol

“MCW.”

 

Risk factors

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page S-5 of this prospectus supplement, on page 16 of the accompanying prospectus and on page 47 of the second quarter prospectus supplement for a discussion of factors you should carefully consider before investing in our common stock.

 

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RISK FACTORS

You should carefully consider the risks described below, together with all of the other information included in this prospectus, the accompanying prospectus and the second quarter prospectus supplement, including our consolidated financial statement and related notes, 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. Furthermore, the potential impact of the COVID-19 pandemic on our business operations and financial results and on the world economy as a whole may heighten the risks described below.

Risks Related to Ownership of Our Common Stock

Because LGP owns a significant percentage of our common stock, it may control all major corporate decisions and its interests may conflict with your interests as an owner of our common stock and our interests.

We are controlled by LGP, which prior to this offering owned approximately 78% of our common stock and after this offering will own approximately 74% of our common stock (or 73% if the underwriter exercises its option to purchase additional shares. Accordingly, LGP currently controls the election of our directors and could exercise a controlling interest over our business, affairs and policies, including the appointment of our management and the entering into of business combinations or dispositions and other corporate transactions. Pursuant to the stockholders agreement we entered in connection with the consummation of our initial public offering (the “Stockholders Agreement”), LGP is entitled to designate individuals to be included in the slate of nominees recommended by our board of directors for election to our board of directors. So long as LGP owns, in the aggregate, (i) at least 91,911,863 shares of our common stock, LGP will be entitled to nominate four directors, (ii) less than 91,911,863 but at least 68,933,897 shares of our common stock, it will be entitled to nominate three directors, (iii) less than 68,933,987 but at least 45,955,932 shares of our common stock, it will be entitled to nominate two directors, (iv) less than 45,955,932 but at least 22,977,966 shares of our common stock, it will be entitled to nominate one director and (v) less than 22,977,966 shares of our common stock, it will not be entitled to nominate a director. See the section of the accompanying prospectus titled “Certain Relationships and Related Party Transactions—Stockholders Agreement.” The directors LGP elects have the authority to incur additional debt, issue or repurchase stock, declare dividends and make other decisions that could be detrimental to shareholders. Even if LGP were to own or control less than a majority of our total outstanding shares of common stock, it will be able to influence the outcome of corporate actions so long as it owns a significant portion of our total outstanding shares of common stock.

LGP may have interests that are different from yours and may vote in a way with which you disagree and that may be adverse to your interests. In addition, LGP’s concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could cause the market price of our common stock to decline or prevent our stockholders from realizing a premium over the market price for their common stock.

Additionally, LGP is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us or supply us with goods and services. LGP may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. Stockholders should consider that the interests of LGP may differ from their interests in material respects.

Sales of a substantial number of shares of our common stock in the public market by our existing stockholders could cause our stock price to fall.

Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise

 

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capital through the sale of additional equity securities. In connection with the IPO, substantially all of our pre-IPO stockholders entered lock-up agreements with the underwriters of the IPO. The lock-up agreements entered by LGP and our other pre-IPO institutional investors restrict the transfer and sale of shares of our common stock for 120 days from the date of the prospectus for the IPO, subject to certain exceptions that include certain price-based releases. The lock-up agreements entered by our management and other pre-IPO stockholders restrict the transfer and sale of shares of our common stock for 180 days from the date of the prospectus for the IPO, subject to certain exceptions. On July 26, 2021, BofA Securities, Inc. and Morgan Stanley & Co. LLC, as representatives of all of the underwriters in our IPO, waived the lock-up restriction with respect to up to 6,546,806 shares of our common stock held by certain of our officers. The waiver for the shares held by certain of our officers was conditioned on LGP and certain other institutional investors qualifying to sell shares of our common stock upon satisfaction of the trading price requirements in the lock-up agreements of LGP and the other institutional investors, which trading pricing requirements have been satisfied, and extends only to the same proportion of shares of common stock actually sold by LGP and the other institutional investors during the term of the lock-up agreement. The underwriters in our IPO also waived the lock-up restriction with respect to an additional 1,823,495 shares of our common stock held by certain other of our current and former employees, effective no earlier than August 15, 2021. Sales of a substantial number of such shares upon these waivers, any future waivers or expiration of the lock-up agreements, or the perception that such sales may occur, could have a material and adverse effect on the trading price of our common stock. In connection with this offering, the selling stockholders will enter into 75-day lock-up agreements with Morgan Stanley & Co. LLC. See “Underwriting.”

LGP and other holders of our outstanding common stock have rights, subject to certain conditions, to require us to file registration statements for the public sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders and to cause us to engage in an underwritten offering or other public sale of the shares that are the subject of the registration statement of which this prospectus supplement forms a part. We filed the registration statement of which the accompanying prospectus is a part pursuant to these rights, and after this offering, the remaining shares held by LGP and other holders of our outstanding common stock included in such registration statement will remain eligible for sale pursuant to such prospectus. The sale of these or other shares pursuant to a registration under the Securities Act of 1933, as amended, or the Securities Act, would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by our affiliates as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

We are a “controlled company” within the meaning of New York Stock Exchange rules and, as a result, will qualify for, and may rely on, exemptions from certain corporate governance requirements.

As of the date of this prospectus supplement, LGP controls a majority of our outstanding common stock. As a result, we are, and after this offering we will continue to be, a “controlled company” within the meaning of New York Stock Exchange corporate governance standards. A company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” within the meaning of New York Stock Exchange rules and may elect not to comply with certain corporate governance requirements of the New York Stock Exchange, including:

 

   

the requirement that a majority of our board of directors consist of independent directors;

 

   

the requirement that we have a nominating and corporate governance committee that is comprised entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that we have a compensation committee that is comprised entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.

 

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In reliance on the exemptions listed above, we do not have a compensation committee that consists entirely of independent directors. We may also elect to rely on additional exemptions for so long as we remain a “controlled company.” As a result, in the future our board of directors and those committees may have more directors who do not meet New York Stock Exchange independence standards than they would if those standards were to apply. The independence standards are intended to ensure that directors who meet those standards are free of any conflicting interest that could influence their actions as directors. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of The New York Stock Exchange.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus supplement, the accompanying prospectus and the second quarter prospectus supplement contain forward-looking statements. You can generally identify forward-looking statements by our use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “seek,” “vision,” or “should,” or the negative thereof or other variations thereon or comparable terminology. Forward-looking statements include those we make regarding the following matters:

 

   

developments involving our competitors and our industry;

 

   

our ability to attract new customers, retain existing customers and maintain or grow our number of UWC Members;

 

   

potential future impacts of the COVID-19 pandemic;

 

   

expectations regarding our industry;

 

   

our ability to maintain comparable store sales growth;

 

   

our ability to continue to identify and open greenfield locations;

 

   

our estimates of greenfield location expansions and our whitespace opportunity;

 

   

our ability to continue to identify suitable acquisition targets and consummate such acquisitions on attractive terms;

 

   

our ability to attract and retain a qualified management team and other team members while controlling our labor costs;

 

   

the impact of our debt and lease obligations on our ability to raise additional capital to fund our operations and maintain flexibility in operating our business;

 

   

our reliance on and relationships with third-party suppliers;

 

   

our ability to maintain security and prevent unauthorized access to electronic and other confidential information;

 

   

our ability to respond to risks associated with existing and future payment options;

 

   

our ability to maintain and enhance a strong brand image;

 

   

our ability to maintain adequate insurance coverage;

 

   

our status as a “controlled company” and LGP’s control of us as a public company;

 

   

the impact of evolving governmental laws and regulations and the outcomes of legal proceedings; and

 

   

the effects of potential changes to U.S. regulations and policies on our business.

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in this prospectus supplement, the accompanying prospectus and the second quarter prospectus supplement under the headings “Prospectus Supplement Summary” and “Risk Factors,” may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Furthermore, the potential impact of the COVID-19 pandemic on our business operations and financial results and on the world economy as a whole may heighten the risks and uncertainties that affect our forward-looking statements described above. Given these risks and uncertainties, you are

 

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cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included elsewhere in this prospectus supplement, the accompanying prospectus and the second quarter prospectus supplement are not guarantees of future performance and our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from the forward-looking statements included elsewhere in this prospectus supplement, the accompanying prospectus and the second quarter prospectus supplement. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate, are consistent with the forward-looking statements included elsewhere in this prospectus supplement, they may not be predictive of results or developments in future periods.

Any forward-looking statement that we make in this prospectus supplement, the accompanying prospectus and the second quarter prospectus speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus supplement.

 

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USE OF PROCEEDS

We will not receive any proceeds from the sale of common stock by the selling stockholders. We will, however, bear the costs associated with the sale of shares by the selling stockholders, other than underwriting discounts and commissions. For more information, see “Selling Stockholders” and “Underwriting.”

 

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MARKET PRICE OF OUR COMMON STOCK

Our common stock began trading on the New York Stock Exchange under the symbol “MCW” on June 25, 2021. Prior to that time, there was no public market for our common stock. On August 23, 2021, the last reported sale price of our common stock on the New York Stock Exchange was $20.57 per share.

As of July 31, 2021, we had approximately 166 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.

 

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DIVIDEND POLICY

We currently intend to retain any future earnings to fund the development and expansion of our business, and, therefore, we do not anticipate paying cash dividends on our capital stock in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our results of operations, financial condition, capital requirements, contractual restrictions, restrictions under our credit facilities and any other agreements governing our indebtedness and other factors deemed relevant by our board of directors. See in the accompanying prospectus “Description of Certain Indebtedness” and in the second quarter prospectus supplement “Risk Factors—Risks Relating to Our Indebtedness and Capital Requirements—We are a holding company and depend on our subsidiaries for cash to fund operations and expenses, including future dividend payments, if any” and “Risk Factors—Risks Relating to Ownership of Our Common Stock—We do not intend to pay dividends for the foreseeable future.”

 

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information regarding the beneficial ownership of our common stock as

of August 12, 2021 and as adjusted to reflect the sale of the shares of common stock by the selling stockholders by:

 

   

each person or entity who is known by us to beneficially own more than 5% of our common stock;

 

   

each of our directors and named executive officers;

 

   

all of our directors and executive officers as a group; and

 

   

each of the selling stockholders.

Information with respect to beneficial ownership has been furnished to us by each director, executive officer or stockholder listed in the table below, as the case may be. The amounts and percentages of our common stock beneficially owned are reported on the basis of rules of the SEC governing the determination of beneficial ownership of securities. Under these rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days after August 12, 2021. More than one person may be deemed to be a beneficial owner of the same securities.

Percentage of beneficial ownership is based on 296,072,999 shares of common stock outstanding as of August 12, 2021. In computing the number of shares beneficially owned by an individual or entity and the percentage ownership of that person, shares of common stock subject to options, warrants or other rights held by such person that are currently exercisable or that will become exercisable or will otherwise vest within 60 days of August 12, 2021 are considered outstanding, although these shares are not considered outstanding for purposes of computing the percentage ownership of any other person.

Unless otherwise indicated below, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares of common stock, except to the extent authority is shared by spouses under applicable law. Unless otherwise indicated below, the address for each person or entity listed below is c/o Mister Car Wash, Inc., 222 East 5th Street, Tucson, Arizona, 85705.

 

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Information concerning the selling stockholders may change from time to time. Any changes to the information provided below will be set forth in a prospectus supplement if and when necessary.

 

    Common Stock
Beneficially Owned
Before This Offering
    Shares Being
Sold in This
Offering
    Shares
Sold in
Underwriter’s
Option
    Common Stock
Beneficially Owned
After This Offering
Assuming
No Exercise of Underwriter’s
Option
    Common Stock
Beneficially Owned
After This Offering
Assuming
Full Exercise of Underwriter’s
Option
 

Name of Beneficial Owner

  Number of
Shares
    Percentage
of Total
Outstanding
Common
Stock (%)
    Number of
Shares
    Percentage
of Total
Outstanding
Common
Stock (%)
    Number of
Shares
    Percentage
of Total
Outstanding
Common
Stock (%)
 

5% Stockholders

               

Green Equity Investors VI, L.P., Green Equity Investors Side VI, L.P., LGP Associates VI-A LLC and LGP Associates VI-B
LLC(1)

    229,779,656       77.6     10,566,577       1,713,939       219,213,079       74.0     217,499,140       73.5

Directors and Named Executive Officers

 

             

John Lai(2)

    12,573,441       4.1     573,388       —         11,979,880       3.9     11,979,880       3.9

Jedidiah Gold(3)

    768,902       *       —         —         768,902       *       769,902       *  

Joseph Matheny(4)

    1,255,374       *       30,000       —         1,225,374       *       1,225,374       *  

John Danhakl(1)

    229,779,656       77.6     10,566,577       1,713,939       219,213,079       74.0     217,499,140       73.5

Jonathan Seiffer(1)

    229,779,656       77.6     10,566,577       1,713,939       219,213,079       74.0     217,499,140       73.5

J. Kristofer
Galashan(1)

    229,779,656       77.6     10,566,577       1,713,939       219,213,079       74.0     217,499,140       73.5

Jeffrey Suer

    —         —         —         —         —         —         —         —    

Casey Lindsay(5)

    1,344,640       *       61,320       —         1,281,128       *       1,281,128       *  

Jodi Taylor

    —         —         —         —         —         —         —         —    

Susan Docherty

    —         —         —         —         —         —         —         —    

Dorvin Lively

    —         —         —         —         —         —         —         —    

All directors and executive officers as a group (13 persons)(6)

    247,403,105       79.9     11,298,422       —         236,080,371       76.3     234,366,432       75.7

Other Selling Stockholders:

 

             

Crescent Mezzanine
Partners(7)

    9,716,037       3.3     446,799       72,472       9,269,238       3.1     9,196,766       3.1

Penfund Capital Fund TC Limited Partnership(8)

    1,821,757       *       83,775       13,589       1,737,982       *       1,724,393       *  

Mayra Chimienti(9)

    1,033,629       *       47,137       —         985,031       *       985,031       *  

Lisa Funk(10)

    647,463       *       20,000       —         626,977       *       626,977       *  
David Hail(11)     1,963,941       *       89,562       —         1,874,379       *       1,874,379       *  
All Other Selling Stockholders(12)     2,235,313       *       81,442       —         2,152,610       *       2,152,610       *  

 

*

Represents beneficial ownership of less than 1% of our outstanding common stock.

(1)

Voting and investment power with respect to the shares of our common stock held by Green Equity Investors VI, L.P., and Green Equity Investors Side VI, L.P., LGP Associates VI-A LLC and LGP Associates VI-B LLC, or collectively, Green VI, is shared. Messrs. Danhakl, Seiffer and Galashan may also be deemed to share voting and investment power with respect to such shares due to their positions with affiliates of Green VI, and each disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. Mr. Jeffrey Suer is an investment professional with affiliates of Green VI. Each of the foregoing individuals’ address is c/o Leonard Green & Partners, L.P., 11111 Santa Monica Boulevard, Suite 2000, Los Angeles, California 90025. For a description of certain relationships between us and LGP, please refer to “Certain Relationships and Related Party Transactions.”

 

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(2)

Represents (i) 3,702,345 shares of our common stock and (ii) 8,871,096 shares of our common stock underlying options to purchase common stock that are exercisable within 60 days of August 12, 2021.

(3)

Represents 768,902 shares of our common stock underlying options to purchase common stock that are exercisable within 60 days of August 12, 2021.

(4)

Represents (i) 185,397 shares of our common stock and (ii) 1,069,977 shares of our common stock underlying options to purchase common stock that are exercisable within 60 days of August 12, 2021.

(5)

Represents (i) 52,800 shares of our common stock and (ii) 1,291,840 shares of our common stock underlying options to purchase common stock that are exercisable within 60 days of August 12, 2021.

(6)

Represents (i) 233,976,159 shares of our common stock and (ii) 13,426,946 shares of our common stock underlying options to purchase common stock that are exercisable within 60 days of August 12, 2021.

(7)

The address for Crescent Mezzanine Partners is 11100 Santa Monica Boulevard, Suite 2000, Los Angeles, CA 90025. Certain affiliates of Crescent Mezzanine Partners are lenders under our First Lien Term Loan and, prior to the IPO, were lenders under our Second Lien Term Loan.

(8)

The address for Penfund Capital Fund TC Limited Partnership is 333 Bay Street, suite 610, Toronto, Ontario Canada M5H2R2. Certain affiliates of Penfund Capital Fund TC Limited Partnership were, prior to the IPO, lenders under our Second Lien Term Loan.

(9)

Represents (i) 255,961 shares of our common stock and (ii) 777,668 shares of our common stock underlying options to purchase common stock that are exercisable within 60 days of August 12, 2021.

(10)

Represents 647,463 shares of our common stock underlying options to purchase common stock that are exercisable within 60 days of August 12, 2021.

(11)

David Hail is our Senior Vice President of Store Development. The shares above represent (i) 1,220,901 shares of our common stock and (ii) 743,040 shares of our common stock underlying options to purchase common stock that are exercisable within 60 days of August 12, 2021.

(12)

Represents shares held by four selling stockholders not listed above, who as a group, owned less than 1% of the outstanding common stock as of August 12, 2021.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF OUR COMMON STOCK

The following discussion is a summary of the material U.S. federal income tax consequences to Non-U.S. Holders (as defined below) of the purchase, ownership, and disposition of our common stock sold pursuant to this offering, but does not purport to be a complete analysis of all potential tax effects. The effects of other U.S. federal tax laws, such as estate and gift tax laws, and any applicable state, local, or non-U.S. tax laws are not discussed. This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncements of the U.S. Internal Revenue Service (the “IRS”), in each case in effect as of the date hereof. These authorities may change or be subject to differing interpretations. Any such change or differing interpretation may be applied retroactively in a manner that could adversely affect a Non-U.S. Holder. We have not sought and will not seek any rulings from the IRS regarding the matters discussed below. There can be no assurance the IRS or a court will not take a contrary position to that discussed below regarding the tax consequences of the purchase, ownership, and disposition of our common stock.

This discussion is limited to Non-U.S. Holders that hold our common stock as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all U.S. federal income tax consequences relevant to a Non-U.S. Holder’s particular circumstances, including the impact of the Medicare contribution tax on net investment income and the alternative minimum tax. In addition, it does not address consequences relevant to Non-U.S. Holders subject to special rules, including, without limitation:

 

   

U.S. expatriates and former citizens or long-term residents of the United States;

 

   

persons holding our common stock as part of a hedge, straddle, or other risk reduction strategy or as part of a conversion transaction or other integrated investment;

 

   

banks, insurance companies, and other financial institutions;

 

   

brokers, dealers, or traders in securities;

 

   

“controlled foreign corporations,” “passive foreign investment companies,” and corporations that accumulate earnings to avoid U.S. federal income tax;

 

   

partnerships or other entities or arrangements treated as partnerships for U.S. federal income tax purposes (and investors therein);

 

   

tax-exempt organizations or governmental organizations;

 

   

persons deemed to sell our common stock under the constructive sale provisions of the Code;

 

   

persons who hold or receive our common stock pursuant to the exercise of any employee stock option or otherwise as compensation;

 

   

tax-qualified retirement plans; and

 

   

“qualified foreign pension funds” as defined in Section 897(l)(2) of the Code and entities all of the interests of which are held by qualified foreign pension funds.

If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds our common stock, the tax treatment of a partner in the partnership will depend on the status of the partner, the activities of the partnership, and certain determinations made at the partner level. Accordingly, partnerships holding our common stock and the partners in such partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them.

THIS DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT TAX ADVICE. INVESTORS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF

 

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THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, AND DISPOSITION OF OUR COMMON STOCK ARISING UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX LAWS OR UNDER THE LAWS OF ANY STATE, LOCAL, OR NON-U.S. TAXING JURISDICTION OR UNDER ANY APPLICABLE INCOME TAX TREATY.

Definition of a Non-U.S. Holder

For purposes of this discussion, a “Non-U.S. Holder” is any beneficial owner of our common stock that is neither a “U.S. person” nor an entity or arrangement treated as a partnership for U.S. federal income tax purposes. A U.S. person is any person that, for U.S. federal income tax purposes, is or is treated as any of the following:

 

   

an individual who is a citizen or resident of the United States;

 

   

a corporation created or organized under the laws of the United States, any state thereof, or the District of Columbia;

 

   

an estate, the income of which is subject to U.S. federal income tax regardless of its source; or

 

   

a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code), or (2) has a valid election in effect to be treated as a United States person for U.S. federal income tax purposes.

Distributions

As described in the section entitled “Dividend Policy,” we do not anticipate declaring or paying dividends to holders of our common stock in the foreseeable future. However, if we do make distributions of cash or property on our common stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and first be applied against and reduce a Non-U.S. Holder’s adjusted tax basis in its common stock, but not below zero. Any excess will be treated as capital gain and will be treated as described below under “—Sale or Other Taxable Disposition.”

Subject to the discussion below on effectively connected income, dividends paid to a Non-U.S. Holder will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends (or such lower rate specified by an applicable income tax treaty, provided the Non-U.S. Holder furnishes a valid IRS Form W-8BEN or W-8BEN-E (or other applicable documentation) certifying qualification for the lower treaty rate). A Non-U.S. Holder that does not timely furnish the required documentation, but that qualifies for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under any applicable income tax treaty.

If dividends paid to a Non-U.S. Holder are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States to which such dividends are attributable), the Non-U.S. Holder will be exempt from the U.S. federal withholding tax described above. To claim the exemption, the Non-U.S. Holder must furnish to the applicable withholding agent a valid IRS Form W-8ECI, certifying that the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States.

Any such effectively connected dividends will be subject to U.S. federal income tax on a net income basis at the regular rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of

 

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30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected dividends, as adjusted for certain items. Non-U.S. Holders should consult their tax advisors regarding any applicable tax treaties that may provide for different rules.

Sale or Other Taxable Disposition

A Non-U.S. Holder will not be subject to U.S. federal income tax on any gain realized upon the sale or other taxable disposition of our common stock unless:

 

   

the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States to which such gain is attributable);

 

   

the Non-U.S. Holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition and certain other requirements are met; or

 

   

our common stock constitutes a U.S. real property interest (“USRPI”) by reason of our status as a U.S. real property holding corporation (“USRPHC”) for U.S. federal income tax purposes.

Gain described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected gain, as adjusted for certain items.

A Non-U.S. Holder described in the second bullet point above will be subject to U.S. federal income tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on gain realized upon the sale or other taxable disposition of our common stock, which may be offset by U.S. source capital losses of the Non-U.S. Holder (even though the individual is not considered a resident of the United States), provided the Non-U.S. Holder has timely filed U.S. federal income tax returns with respect to such losses.

With respect to the third bullet point above, we believe we currently are not, and do not anticipate becoming, a USRPHC. Because the determination of whether we are a USRPHC depends, however, on the fair market value of our USRPIs relative to the fair market value of our non-U.S. real property interests and our other business assets, there can be no assurance we currently are not a USRPHC or will not become one in the future. Even if we are or were to become a USRPHC, gain arising from the sale or other taxable disposition of our common stock by a Non-U.S. Holder will not be subject to U.S. federal income tax if our common stock is “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market and such Non-U.S. Holder owned, actually and constructively, 5% or less of our common stock throughout the shorter of the five-year period ending on the date of the sale or other taxable disposition or the Non-U.S. Holder’s holding period.

Non-U.S. Holders should consult their tax advisors regarding potentially applicable income tax treaties that may provide for different rules.

Information Reporting and Backup Withholding

Payments of dividends on our common stock will not be subject to backup withholding, provided the applicable withholding agent does not have actual knowledge or reason to know the holder is a United States person and the holder either certifies its non-U.S. status, such as by furnishing a valid IRS Form W-8BEN, W-8BEN-E, or W-8ECI, or otherwise establishes an exemption. However, information returns are required to be filed with the IRS in connection with any distributions on our common stock paid to the Non-U.S. Holder, regardless of whether such distributions constitute dividends or whether any tax was actually withheld. In addition, proceeds of the sale or other taxable disposition of our common stock within the United States or

 

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conducted through certain U.S.-related brokers generally will not be subject to backup withholding or information reporting if the applicable withholding agent receives the certification described above and does not have actual knowledge or reason to know that such holder is a United States person or the holder otherwise establishes an exemption. Proceeds of a disposition of our common stock conducted through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding or information reporting.

Copies of information returns that are filed with the IRS may also be made available under the provisions of an applicable treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides or is established.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a Non-U.S. Holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.

Additional Withholding Tax on Payments Made to Foreign Accounts

Withholding taxes may be imposed under Sections 1471 to 1474 of the Code (such Sections commonly referred to as the Foreign Account Tax Compliance Act, or “FATCA”) on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on dividends on, or (subject to the proposed Treasury Regulations discussed below) gross proceeds from the sale or other disposition of, our common stock paid to a “foreign financial institution” or a “non-financial foreign entity” (each as defined in the Code), unless (1) the foreign financial institution undertakes certain diligence and reporting obligations, (2) the non-financial foreign entity either certifies it does not have any “substantial United States owners” (as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (3) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial institution and is subject to the diligence and reporting requirements in (1) above, it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain “specified United States persons” or “United States owned foreign entities” (each as defined in the Code), annually report certain information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules.

Under the applicable Treasury Regulations and administrative guidance, withholding under FATCA generally applies to payments of dividends on our common stock. While withholding under FATCA would have applied also to payments of gross proceeds from the sale or other disposition of stock on or after January 1, 2019, proposed Treasury Regulations eliminate FATCA withholding on payments of gross proceeds entirely.

Taxpayers generally may rely on these proposed Treasury Regulations until final Treasury Regulations are issued.

Prospective investors should consult their tax advisors regarding the potential application of withholding under FATCA to their investment in our common stock.

 

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CERTAIN ERISA CONSIDERATIONS

The following is a summary of certain considerations associated with the purchase of shares of common stock by (i) “employee benefit plans” within the meaning of Section 3(3) of the U.S. Employee Retirement Income Security Act of 1974, as amended, or ERISA, that are subject to Title I of ERISA, (ii) plans, collective investment trusts, individual retirement accounts and other arrangements that are subject to Section 4975 of the Code or any other U.S. or non-U.S. federal, state, local or other laws or regulations that are substantially similar to such provisions of ERISA or the Code, or collectively, Similar Laws, and (iii) entities whose underlying assets are considered to include “plan assets” of any such plan, account or arrangement described in clauses (i) and (ii), pursuant to ERISA or otherwise (each of the foregoing described in clauses (i), (ii) and (iii) referred to hereunder as a Plan).

ERISA and the Code impose certain duties on persons who are fiduciaries of a Plan subject to Title I of ERISA or Section 4975 of the Code, or Covered Plans, and prohibit certain transactions involving the assets of a Covered Plan and its fiduciaries or other interested parties. Under ERISA and the Code, any person who exercises any discretionary authority or control over the administration of such a Covered Plan or the management or disposition of the assets of such a Covered Plan, or who renders investment advice for a fee or other compensation to such a Covered Plan, is generally considered to be a fiduciary of the Covered Plan. In considering an investment in shared of common stock a portion of the assets of any Plan, a fiduciary should determine whether the investment is in accordance with the documents and instruments governing the Plan and the applicable provisions of ERISA, the Code or any Similar Law relating to a fiduciary’s duties to the Plan including, without limitation, the prudence, diversification, delegation of control and prohibited transaction provisions of ERISA, the Code and any other applicable Similar Laws.

Section 406 of ERISA and Section 4975 of the Code prohibit Covered Plans from engaging in specified transactions involving plan assets with persons or entities who are “parties in interest,” within the meaning of ERISA, or “disqualified persons,” within the meaning of Section 4975 of the Code, unless an exemption is available. A party in interest or disqualified person who engaged in a non-exempt prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and the Code. The acquisition of shares of common stock by a Covered Plan with respect to which the issuer, selling shareholder or an underwriter is considered a party in interest or a disqualified person may constitute or result in a direct or indirect prohibited transaction under Section 406 of ERISA and/or Section 4975 of the Code, unless the investment is acquired in accordance with an applicable statutory, class or individual prohibited transaction exemption, of which there are many. Fiduciaries of Covered Plans considering acquiring shares of common stock in reliance on an exemption should carefully review the exemption to assure it is applicable.

Plans that are governmental plans, certain church plans and non-U.S. plans may not be subject to the prohibited transaction provisions of Section 406 of ERISA or Section 4975 of the Code, they may nevertheless be subject to Similar Laws. Any fiduciary of such a Plan considering an investment in shares of common stock should consult with its counsel before purchasing common stock to consider the applicable fiduciary standards and to determine the need for, and, if necessary, the availability of, any exemptive relief under any applicable Similar Law.

Fiduciaries of any Plans should consult with their counsel before acquiring any of our common stock.

The foregoing discussion is general in nature and is not intended to be all-inclusive. Due to the complexity of these rules and the penalties that may be imposed upon persons involved in non-exempt prohibited transactions, it is particularly important that fiduciaries, or other persons considering purchasing common stock on behalf of, or with the assets of, any Plan, consult with their counsel regarding the potential applicability of ERISA, Section 4975 of the Code and any Similar Laws to such investment and whether an exemption would be applicable to the purchase and holding of common stock. Neither this discussion nor anything provided in this prospectus is, or is intended to be, investment advice directed at any potential Plan purchasers, or at Plan purchasers generally, and such purchasers of any shares of common stock should consult with and rely on their own counsel and advisers as to whether an investment in the common stock is suitable for the Plan.

 

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UNDERWRITING

Under the terms and subject to the conditions in an underwriting agreement dated the date of this prospectus supplement, Morgan Stanley & Co. LLC has agreed to purchase, and the selling stockholders have agreed to sell to them, 12,000,000 shares.

The underwriter is offering the shares of common stock subject to its acceptance of the shares from the selling stockholders and subject to prior sale. The underwriting agreement provides that the obligations of the underwriter to pay for and accept delivery of the shares of common stock offered by this prospectus supplement are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriter is obligated to take and pay for all of the shares of common stock offered by this prospectus supplement if any such shares are taken. However, the underwriter is not required to take or pay for the shares covered by the underwriter’s option to purchase additional shares described below.

The underwriter initially proposes to offer part of the shares of common stock directly to the public at the offering price listed on the cover page of this prospectus and part to certain dealers at a price that represents a concession not in excess of $0.15 per share under the public offering price. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representative.

The selling stockholders have granted to the underwriter an option, exercisable for 30 days from the date of this prospectus, to purchase up to 1,800,000 additional shares of common stock at $19.42 per share. To the extent the option is exercised, the underwriter will become obligated, subject to certain conditions, to purchase the additional shares.

The following table shows the per share and total public offering price, underwriting discounts and commissions, and proceeds before expenses to the selling stockholders. These amounts are shown assuming both no exercise and full exercise of the underwriter’s option to purchase up to an additional 1,800,000 shares of common stock from the selling stockholders.

 

     Per
Share
     Total  
     No Exercise      Full Exercise  

Public offering price

   $ 19.57      $ 234,840,000      $ 270,066,000  

Underwriting discounts and commissions to be paid by the selling stockholders

   $ 0.15      $ 1,800,000      $ 2,070,000  

Proceeds, before expenses, to selling stockholders

   $ 19.42      $ 233,040,000      $ 267,996,000  

We have agreed to reimburse the underwriter for expenses relating to clearance of this offering with the Financial Industry Regulatory Authority up to $25,000.

The underwriter has informed us that it does not intend sales to discretionary accounts to exceed 5% of the total number of shares of common stock offered by it.

 

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Our common stock is listed and traded on The New York Stock Exchange under the trading symbol “MCW.”

In connection with the IPO which was completed on June 29, 2021 (see “Prospectus Summary—Recent Developments—Initial Public Offering” of the accompanying prospectus), we have agreed that, without the prior written consent of BofA Securities, Inc. and Morgan Stanley & Co. LLC on behalf of the underwriters of the IPO, we will not, and will not publicly disclose an intention to, during the period ending 180 days after the date of the prospectus relating to the IPO (the “Company Restricted Period”):

 

   

offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock;

 

   

file any registration statement with the SEC relating to the offering of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or

 

   

enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock,

whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. Notwithstanding the foregoing, such restrictions on us will not apply to: (A) the shares to be sold in this offering; (B) the issuance of shares of common stock upon the exercise of an option or warrant or the conversion of a security outstanding as described in this prospectus; (C) the grant of compensatory equity-based awards, and/or the issuance of shares of common stock with respect thereto, or the filing of any registration statement on Form S-8 (including any resale registration statement on Form S-8) relating to securities granted, issued or to be granted pursuant to any plan described in this prospectus or any assumed benefit plan contemplated by clause (B); (D) any shares of common stock issued pursuant to any non-employee director compensation plan or program disclosed in this prospectus; (E) the purchase of shares of common stock pursuant to employee stock purchase plans described in the this prospectus; (F) common stock or any securities convertible into, or exercisable or exchangeable for, common stock, or the entrance into an agreement to issue common stock or any securities convertible into, or exercisable or exchangeable for, common stock, in connection with any merger, joint venture, strategic alliances, commercial or other collaborative transaction or the acquisition or license of the business, property, technology or other assets of another individual or entity or the assumption of an employee benefit plan in connection with a merger or acquisition; provided that the aggregate number of common stock or any securities convertible into, or exercisable or exchangeable for, common stock that we may issue or agree to issue shall not exceed 10% of the total outstanding share capital of the Company immediately following the issuance of the shares; and provided further, that the recipients of any such shares of common stock and securities issued pursuant to this clause (F) during the 180-day restricted period described above shall enter into an agreement substantially in the form attached hereto on or prior to such issuance; (G) the filing of any registration statement relating to any proposed offering of shares of common stock or any securities convertible into or exercisable or exchangeable for common stock beneficially owned by LGP, provided that, no offering or sale of any common stock shall be made during the Company Restricted Period without the prior written release, waiver or consent from BofA Securities, Inc. and Morgan Stanley & Co. LLC; or (H) facilitating the establishment of a trading plan on behalf of a stockholder, officer or director of the Company pursuant to Rule 10b5-1 under the Exchange Act for the transfer of shares of common stock, provided that (i) such plan does not provide for the transfer during the Company Restricted Period and (ii) to the extent a public announcement or filing under the Exchange Act, if any, is required of or voluntarily made by the Company regarding the establishment of such plan, such announcement or filing shall include a statement to the effect that no transfer may be made under such plan during the Restricted Period.

 

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In addition, all of our directors and officers and the holders of all of our outstanding stock and stock options have also agreed in connection with the IPO that, without the prior written consent of BofA Securities, Inc. and Morgan Stanley & Co. LLC on behalf of the underwriters of the IPO, they will not, and will not publicly disclose an intention to, during the period ending 180 days after the date of this prospectus, in the case of our directors and officers, and 120 days after the date of this prospectus, in the case of LGP and certain institutional stockholders (such period, the “Holder Restricted Period”):

 

   

offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock; or

 

   

enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock

whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. In addition, each such person has agreed that, without the prior written consent of BofA Securities, Inc. and Morgan Stanley & Co. LLC on behalf of the underwriters of the IPO, such person will not, during the Holder Restricted Period, make any demand for, or exercise any right with respect to, the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for common stock.

In addition, the restrictions on our directors and officers and the holders of all of our outstanding stock and stock options described above does not apply to: (A) transactions relating to shares of common stock or other securities acquired (i) in this offering or (ii) in open market transactions after the completion of this offering; (B) transfers of shares of common stock or any security convertible into common stock as a bona fide gift, or for bona fide estate planning purposes; (C) in the case of a corporation, partnership, limited liability company or other business entity, (i) to another corporation, partnership, limited liability company or other business entity that is an affiliate (as defined in Rule 405 promulgated under the Securities Act, as amended), or to any investment fund or other entity controlled or managed by the holder of our outstanding stock and stock options or affiliates of such holder, or (ii) as part of a distribution by the undersigned to its stockholders, partners, members or other equityholders or to the estate of any such stockholders, partners, members or other equityholders; (D) by will, other testamentary document or intestacy; (E) to any member of the immediate family or to any trust for the direct or indirect benefit of our directors and officers or the holders of all of our outstanding stock and stock options or their immediate family, or if in the case of a trust, to a trustor or beneficiary of the trust or to the estate of a beneficiary of such trust (“immediate family” means any relationship by blood, current or former marriage, domestic partnership or adoption, not more remote than first cousin); (F) by operation of law, such as pursuant to a qualified domestic order, divorce settlement, divorce decree or separation agreement; (G) facilitating the establishment of a trading plan on behalf of a stockholder, officer or director of the Company pursuant to Rule 10b5 1 under the Exchange Act for the transfer of shares of common stock, provided that (i) such plan does not provide for the transfer of common stock during the Holder Restricted Period and (ii) to the extent a public announcement or filing under the Exchange Act, if any, is required of or voluntarily made by or on behalf of the holder or the Company regarding the establishment of such plan, such announcement or filing shall include a statement to the effect that no transfer of common stock may be made under such plan during the Holder Restricted Period; (H) transfers to the Company from an employee of or service provider of the Company upon death, disability or termination of employment, in each case, of such employee or service provider; (I) (i) transfers to the Company in connection with the vesting, settlement, or exercise of restricted stock units, options, warrants or other rights to purchase shares of common stock (including, in each case, by way of “net” or “cashless” exercise), including for the payment of exercise price and tax and remittance payments due as a result of the vesting, settlement, or exercise of such restricted stock units, options, warrants or rights or (ii) transfers necessary (including transfers on the open market) to generate such amount of cash needed for the payment of taxes, including estimated taxes, due as a result of the vesting or settlement of restricted stock units whether by means of a “net settlement” or otherwise, and in all such cases described in subclauses (i) and (ii), provided that

 

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any such shares of common stock received upon such exercise, vesting or settlement shall be subject to the terms of the lock-up agreement, and provided further that any such restricted stock units, options, warrants or rights are held by our directors and officers and the holders of all of our outstanding stock and stock options pursuant to an agreement or equity awards granted under a stock incentive plan or other equity award plan, each such agreement or plan which is described in this prospectus; (J) transfers to the Company in connection with the repurchase of shares of common stock issued pursuant to equity awards granted under a stock incentive plan or other equity award plan, which plan is described in this prospectus, or pursuant to the agreements pursuant to which such shares were issued, as described in this prospectus, provided that such repurchase of shares of common stock is in connection with the termination of the service-provider relationship with the Company; (K) transfers pursuant to a bona fide third-party tender offer, merger, consolidation or other similar transaction that is approved by the board of directors of the Company and made to all holders of the Company’s capital stock involving a change of control of the Company, provided that in the event that such tender offer, merger, consolidation or other similar transaction is not completed, our directors’ and officers’ and the holders’ of our outstanding stock and stock options shall remain subject to the provisions of the lock-up agreement; (L) exercise of any rights to purchase, exchange or convert any stock options granted pursuant to the Company’s equity incentive plans referred to in this prospectus, or any warrants or other securities convertible into or exercisable or exchangeable for shares of common stock, which warrants or other securities are described in this prospectus; (M) and sales of shares of common stock in this offering; provided that in the case of clauses (A), (B), (C), and (E) above no filing under Section 16(a) of the Exchange Act shall be required or shall be voluntarily made in connection with such transfer or distribution; (other than a filing on Form 5); provided that in the case of clauses (D), (F), (H), (I), (J) and (L), (i) any filing under Section 16 of the Exchange Act made during the Lock-Up Period shall clearly indicate in the footnotes thereto that (A) the filing relates to the circumstances described in the applicable clause and (B) to the extent applicable, the underlying shares of Common Stock continue to be subject to the restrictions on transfer set forth in this lock-up agreement and (2) the undersigned does not otherwise voluntarily effect any other public filings or reports regarding such exercise during the Holder Restricted Period; provided that in the case of any transfer or distribution pursuant to clause (B), (C), (D), (E) or (F), each transferee, donee or distributee shall sign and deliver a lock-up agreement substantially in the form of the lock-up agreement described here; provided that in the case of any conversion, reclassification exchange or exercise pursuant to clause (i), any such shares of common stock received upon such shall remain subject to the provisions of the lock-up agreement; and provided that in the case of clauses (B), (C), (D) and (E), such transfer shall not involve a disposition for value.

BofA Securities, Inc. and Morgan Stanley & Co. LLC, in their sole discretion, may jointly waive or release the lock-up agreements in connection with the IPO described above in whole or in part at any time.

In addition, in connection with this offering, we and the selling stockholders will agree to same lock-up terms as described above, as applicable, except that the Company Restricted Period and the Holder Restricted Period will be 75 days after the date of this prospectus supplement. Morgan Stanley & Co. LLC in its sole discretion may waive or release such lock-up agreements in connection with this offering in whole or in part at any time.

In order to facilitate the offering of the common stock, the underwriter may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriter may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriter under the option to purchase additional shares. The underwriter can close out a covered short sale by exercising the option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriter will consider, among other things, the open market price of shares compared to the price available under the option to purchase additional shares. The underwriter may also sell shares in excess of the option to purchase additional shares, creating a naked short position. The underwriter must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriter is concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors

 

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who purchase in this offering. As an additional means of facilitating this offering, the underwriter may bid for, and purchase, shares of common stock in the open market to stabilize the price of the common stock. These activities may raise or maintain the market price of the common stock above independent market levels or prevent or retard a decline in the market price of the common stock. The underwriter is not required to engage in these activities and may end any of these activities at any time.

The underwriter may offer and sell the shares through certain of their affiliates or other registered broker-dealers or selling agents.

We, the selling stockholders and the underwriter have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.

A prospectus in electronic format may be made available on websites maintained by the underwriter, or selling group members, if any, participating in this offering. The representative may agree to allocate a number of shares of common stock to the underwriter for sale to their online brokerage account holders. Internet distributions will be allocated by the representative to underwriters that may make Internet distributions on the same basis as other allocations.

The underwriter and its respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. The underwriter and its affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for us, for which they received or will receive customary fees and expenses.

In addition, in the ordinary course of their various business activities, the underwriter and its affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve our securities and instruments. The underwriter and its respective affiliates may also make investment recommendations or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long or short positions in such securities and instruments.

Selling Restrictions

European Economic Area

In relation to each Member State of the European Economic Area (each, a “Relevant State”), no securities have been offered or will be offered pursuant to the offering to the public in that Relevant State prior to the publication of a prospectus in relation to the securities which has been approved by the competent authority in that Relevant State or, where appropriate, approved in another Relevant State and notified to the competent authority in that Relevant State, all in accordance with the Prospectus Regulation, except that offers of securities may be made to the public in that Relevant State at any time under the following exemptions under the Prospectus Regulation:

(a) to any legal entity which is a qualified investor as defined under the Prospectus Regulation;

(b) to fewer than 150 natural or legal persons (other than qualified investors as defined under the Prospectus Regulation), subject to obtaining the prior consent of the representatives; or

(c) in any other circumstances falling within Article 1(4) of the Prospectus Regulation,

provided that no such offer of shares shall require us or any of our representatives to publish a prospectus pursuant to Article 3 of the Prospectus Regulation or supplement a prospectus pursuant to Article 23 of the Prospectus Regulation.

 

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In the case of any shares being offered to a financial intermediary as that term is used in Article 1(4) of the Prospectus Regulation, each such financial intermediary will be deemed to have represented, acknowledged and agreed that the shares acquired by it in the offer have not been acquired on a non-discretionary basis on behalf of, nor have they been acquired with a view to their offer or resale to, persons in circumstances which may give rise to an offer to the public other than their offer or resale in a Relevant State to qualified investors, in circumstances in which the prior consent of the representatives has been obtained to each such proposed offer or resale.

The Company, the underwriter and its affiliates will rely upon the truth and accuracy of the foregoing representations, acknowledgements and agreements.

For the purposes of this provision, the expression an “offer to the public” in relation to any shares in any Relevant State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares to be offered so as to enable an investor to decide to purchase any shares, and the expression “Prospectus Regulation” means Regulation (EU) 2017/1129 (as amended).

The above selling restriction is in addition to any other selling restrictions set out below.

In connection with the offering the underwriter is not acting for anyone other than the issuer and will not be responsible to anyone other than the issuer for providing the protections afforded to their clients nor for providing advice in relation to the offering.

Notice to Prospective Investors in the United Kingdom

An offer to the public of any shares may not be made in the United Kingdom, except that an offer to the public in the United Kingdom of any shares may be made at any time under the following exemptions under the UK Prospectus Regulation:

(a) to any legal entity which is a “qualified investor” as defined under the UK Prospectus Regulation;

(b) to fewer than 150 natural or legal persons (other than “qualified investors” as defined under the UK Prospectus Regulation), subject to obtaining the prior consent of the representatives for any such offer; or

(c) in any other circumstances falling within section 86 of the Financial Services and Markets Act 2000 (as amended, “FSMA”),

provided that no such offer of shares shall result in a requirement for the Issuer or any underwriters to publish a prospectus pursuant to section 85 of the FSMA or a supplemental prospectus pursuant to Article 23 of the UK Prospectus Regulation.

Each person who initially acquires any shares or to whom any offer is made will be deemed to have represented, acknowledged and agreed to and with the Company and the representatives that it is a qualified investor within the meaning of Article 2 of the UK Prospectus Regulation.

In the case of any shares being offered to a financial intermediary as that term is used in Article 1(4) of the UK Prospectus Regulation, each financial intermediary will also be deemed to have represented, acknowledged and agreed that the shares acquired by it in the offer have not been acquired on a non-discretionary basis on behalf of, nor have they been acquired with a view to their offer or resale to, persons in circumstances which may give rise to an offer of any shares to the public, other than their offer or resale in the United Kingdom to qualified investors as so defined or in circumstances in which the prior consent of the of the representatives has been obtained to each such proposed offer or resale.

 

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Notice to Prospective Investors in Switzerland

The shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange, or SIX, or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the shares or the offering may be publicly distributed or otherwise made publicly available in Switzerland.

Neither this document nor any other offering or marketing material relating to the offering, the Company or the shares have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of shares will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA (“FINMA”), and the offer of shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes, or CISA. The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of shares.

Notice to Prospective Investors in the Dubai International Financial Centre

This prospectus relates to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority, or DFSA. This prospectus is intended for distribution only to persons of a type specified in the Offered Securities Rules of the DFSA. It must not be delivered to, or relied on by, any other person. The DFSA has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The DFSA has not approved this prospectus nor taken steps to verify the information set forth herein and has no responsibility for the prospectus. The shares to which this prospectus relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the shares offered should conduct their own due diligence on the shares. If you do not understand the contents of this prospectus you should consult an authorized financial advisor.

Notice to Prospective Investors in Australia

No placement document, prospectus, product disclosure statement or other disclosure document has been lodged with the Australian Securities and Investments Commission, or ASIC, in relation to the offering. This prospectus does not constitute a prospectus, product disclosure statement or other disclosure document under the Corporations Act 2001, or the Corporations Act, and does not purport to include the information required for a prospectus, product disclosure statement or other disclosure document under the Corporations Act.

Any offer in Australia of the shares may only be made to persons, the Exempt Investors, who are “sophisticated investors” (within the meaning of section 708(8) of the Corporations Act), “professional investors” (within the meaning of section 708(11) of the Corporations Act) or otherwise pursuant to one or more exemptions contained in section 708 of the Corporations Act so that it is lawful to offer the shares without disclosure to investors under Chapter 6D of the Corporations Act.

The shares applied for by Exempt Investors in Australia must not be offered for sale in Australia in the period of 12 months after the date of allotment under the offering, except in circumstances where disclosure to investors under Chapter 6D of the Corporations Act would not be required pursuant to an exemption under section 708 of the Corporations Act or otherwise or where the offer is pursuant to a disclosure document which complies with Chapter 6D of the Corporations Act. Any person acquiring shares must observe such Australian on-sale restrictions.

This prospectus contains general information only and does not take account of the investment objectives, financial situation or particular needs of any particular person. It does not contain any securities recommendations or financial product advice. Before making an investment decision, investors need to consider whether the information in this prospectus is appropriate to their needs, objectives and circumstances, and, if necessary, seek expert advice on those matters.

 

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Notice to Prospective Investors in Hong Kong

The shares have not been offered or sold and will not be offered or sold in Hong Kong, by means of any document, other than (a) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or (b) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance. No advertisement, invitation or document relating to the shares has been or may be issued or has been or may be in the possession of any person for the purposes of issue, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance and any rules made under that Ordinance.

Notice to Prospective Investors in Japan

No registration pursuant to Article 4, paragraph 1 of the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948, as amended) (the “FIEL”) has been made or will be made with respect to the solicitation of the application for the acquisition of the shares of common stock.

Accordingly, the shares of common stock have not been, directly or indirectly, offered or sold and will not be, directly or indirectly, offered or sold in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan) or to others for re-offering or re-sale, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan except pursuant to an exemption from the registration requirements, and otherwise in compliance with, the FIEL and the other applicable laws and regulations of Japan.

For Qualified Institutional Investors (“QII”)

Please note that the solicitation for newly-issued or secondary securities (each as described in Paragraph 2, Article 4 of the FIEL) in relation to the shares of common stock constitutes either a “QII only private placement” or a “QII only secondary distribution” (each as described in Paragraph 1, Article 23-13 of the FIEL). Disclosure regarding any such solicitation, as is otherwise prescribed in Paragraph 1, Article 4 of the FIEL, has not been made in relation to the shares of common stock. The shares of common stock may only be transferred to QIIs.

For Non-QII Investors

Please note that the solicitation for newly-issued or secondary securities (each as described in Paragraph 2, Article 4 of the FIEL) in relation to the shares of common stock constitutes either a “small number private placement” or a “small number private secondary distribution” (each as is described in Paragraph 4, Article 23-13 of the FIEL). Disclosure regarding any such solicitation, as is otherwise prescribed in Paragraph 1, Article 4 of the FIEL, has not been made in relation to the shares of common stock. The shares of common stock may only be transferred en bloc without subdivision to a single investor.

Notice to Prospective Investors in Singapore

This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, the shares were not offered or sold or caused to be made the subject of an invitation for subscription or purchase and will not be offered or sold or caused to be made the subject of an invitation for subscription or purchase, and this prospectus or any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares, has not been circulated or distributed, nor will it be circulated or distributed, whether directly or indirectly, to any person in Singapore other than (i) to an institutional investor (as defined in Section 4A of the Securities and Futures Act (Chapter 289) of Singapore, as modified or amended from time to time, the SFA) pursuant to Section 274 of the SFA, (ii) to a relevant person (as defined in

 

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Section 275(2) of the SFA) pursuant to Section 275(1) of the SFA, or any person pursuant to Section 275(1A) of the SFA, and in accordance with the conditions specified in Section 275 of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Where the shares are subscribed or purchased under Section 275 of the SFA by a relevant person which is:

(a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or

(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor,

securities or securities-based derivatives contracts (each term as defined in Section 2(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the shares pursuant to an offer made under Section 275 of the SFA except:

(a) to an institutional investor or to a relevant person, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;

(b) where no consideration is or will be given for the transfer;

(c) where the transfer is by operation of law;

(d) as specified in Section 276(7) of the SFA; or

(e) as specified in Regulation 37A of the Securities and Futures (Offers of Investment) (Securities and Securities based Derivatives Contract) Regulations 2018.

Notice to Prospective Investors in Canada

The shares may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the shares must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.

Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.

Pursuant to section 3A.3 (or, in the case of securities issued or guaranteed by the government of a non-Canadian jurisdiction, section 3A.4) of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriter is not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.

Notice to Prospective Investors in China

This prospectus will not be circulated or distributed in the People’s Republic of China, or PRC, and the shares will not be offered or sold to any person for re-offering or resale directly or indirectly to any residents of the PRC, except pursuant to any applicable laws and regulations of the PRC. Neither this prospectus nor any advertisement or other offering material may be distributed or published in the PRC, except under circumstances that will result in compliance with applicable laws and regulations.

 

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Notice to Prospective Investors in South Korea

The shares offered by this prospectus have not been and will not be registered under the Financial Investments Services and Capital Markets Act of Korea and the decrees and regulations thereunder (the “FSCMA”), and the shares have been and will be offered in Korea as a private placement under the FSCMA. None of the shares may be offered, sold or delivered directly or indirectly, or offered or sold to any person for re-offering or resale, directly or indirectly, in Korea or to any resident of Korea except pursuant to the applicable laws and regulations of Korea, including the FSCMA and the Foreign Exchange Transaction Law of Korea and the decrees and regulations thereunder (the “FETL”). Furthermore, the purchaser of the shares will comply with all applicable regulatory requirements (including but not limited to requirements under the FETL) in connection with the purchase of the shares. By the purchase of the shares, the relevant holder thereof will be deemed to represent and warrant that if it is in Korea or is a resident of Korea, it purchased the shares pursuant to the applicable laws and regulations of Korea.

 

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LEGAL MATTERS

The validity of the shares of common stock offered hereby will be passed upon for us by Latham & Watkins LLP. The validity of the shares of common stock offered hereby will be passed upon for the underwriter by Simpson Thacher  & Bartlett LLP.

EXPERTS

The financial statements as of December 31, 2019 and 2020, and for each of the two years in the period ended December 31, 2020, included in the Registration Statement of which this prospectus supplement forms a part, have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein (which report expresses an unqualified opinion on the financial statements and includes an explanatory paragraph referring to the adoption of the new lease accounting standard). Such financial statements have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1, including exhibits and schedules, under the Securities Act with respect to the common stock to be sold pursuant to this prospectus supplement. As allowed by SEC rules, this prospectus supplement, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules that are part of the registration statement. For further information about us and our common stock, you should refer to the registration statement, including all amendments, supplements, schedules and exhibits thereto.

Statements included elsewhere in this in this prospectus supplement regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement. We are also required to file annual, quarterly and current reports, proxy statements and other information with the SEC.

You can review the registration statement, as well as our future SEC filings, by accessing the SEC’s website at www.sec.gov. You may also request copies of those documents, at no cost to you, by contacting us at the following address:

Mister Car Wash, Inc.

Attn: Investor Relations

222 East 5th StreetTucson, Arizona 85705

We are subject to the information and reporting requirements of the Exchange Act and will file annual, quarterly and current reports, proxy statements and other information with the SEC. You can request copies of these documents, for a copying fee, by writing to the SEC. We intend to furnish our stockholders with annual reports containing financial statements audited by our independent auditors.

 

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Prospectus Supplement No. 1

(To Prospectus dated July 29, 2021)

 

 

LOGO

This prospectus supplement updates, amends and supplements the prospectus dated July 29, 2021 (the “Prospectus”), which forms a part of our Registration Statement on Form S-1 (Registration No. 333-258186). Capitalized terms used in this prospectus supplement and not otherwise defined herein have the meanings specified in the Prospectus.

This prospectus supplement is being filed to update, amend and supplement the information included in the Prospectus with the information contained in our Quarterly Report on Form 10-Q filed with the SEC on August 13, 2021, which is set forth below.

This prospectus supplement is not complete without the Prospectus. This prospectus supplement should be read in conjunction with the Prospectus, which is to be delivered with this prospectus supplement, and is qualified by reference thereto, except to the extent that the information in this prospectus supplement updates or supersedes the information contained in the Prospectus. Please keep this prospectus supplement with your Prospectus for future reference.

Mister Car Wash, Inc.’s common stock is quoted on the New York Stock Exchange under the symbol “MCW.” On August 23, 2021, the closing prices of our common stock was $20.57.

INVESTING IN OUR SECURITIES INVOLVES CERTAIN RISKS. SEE “RISK FACTORS” BEGINNING ON PAGE 47 OF THE PROSPECTUS.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if the Prospectus or this prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus supplement is August 23, 2021.


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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2021

OR

 

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

For the transition period from                  to                 

Commission File Number: 001-40542

 

 

Mister Car Wash, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   47-1393909

(State or other jurisdiction of

incorporation or organization)

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

222 E 5th Street

Tucson, Arizona

  85705
(Address of principal executive offices)   (Zip Code)

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

 

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $0.01 per share   MCW   New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☐    No  ☒

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

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
Emerging growth company       

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

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

As of August 12, 2021, the registrant had 296,072,999 shares of common stock, $0.01 par value per share, outstanding.

 

 

 


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         Page  
 

FORWARD-LOOKING STATEMENTS

     2  
 

RISK FACTOR SUMMARY

     4  

PART I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements (Unaudited)

  
 

Condensed Consolidated Balance Sheets

     5  
 

Condensed Consolidated Statements of Operations and Comprehensive Loss

     6  
 

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

     7  
 

Condensed Consolidated Statements of Cash Flows

     9  
 

Notes to Unaudited Condensed Consolidated Financial Statements

     10  

Item 2.

 

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

     30  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     46  

Item 4.

 

Controls and Procedures

     46  

PART II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     47  

Item 1A.

 

Risk Factors

     47  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     67  

Item 3.

 

Defaults Upon Senior Securities

     68  

Item 4.

 

Mine Safety Disclosures

     68  

Item 5.

 

Other Information

     68  

Item 6.

 

Exhibits

     68  

Signatures

     70  

 

 

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can generally identify forward-looking statements by our use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “seek,” “vision,” or “should,” or the negative thereof or other variations thereon or comparable terminology. Forward-looking statements include those we make regarding the following matters:

 

   

developments involving our competitors and our industry;

 

   

our ability to attract new customers, retain existing customers and maintain or grow the number of our Unlimited Wash Club (“UWC”) members;

 

   

potential future impacts of the COVID-19 pandemic, including from variants thereof;

 

   

expectations regarding our industry;

 

   

our ability to maintain comparable store sales growth;

 

   

our ability to continue to identify and open greenfield locations;

 

   

our estimates of greenfield location expansions and our whitespace opportunity;

 

   

our ability to continue to identify suitable acquisition targets and consummate such acquisitions on attractive terms;

 

   

our ability to attract and retain a qualified management team and other team members while controlling our labor costs;

 

   

the impact of our debt and lease obligations on our ability to raise additional capital to fund our operations and maintain flexibility in operating our business;

 

   

our reliance on and relationships with third-party suppliers;

 

   

our ability to maintain security and prevent unauthorized access to electronic and other confidential information;

 

   

our ability to respond to risks associated with existing and future payment options;

 

   

our ability to maintain and enhance a strong brand image;

 

   

our ability to maintain adequate insurance coverage;

 

   

our status as a “controlled company” and Leonard Green & Partners, L.P.’s (“LGP”) control of us as a public company;

 

   

the impact of evolving governmental laws and regulations and the outcomes of legal proceedings; and

 

   

the effects of potential changes to U.S. regulations and policies on our business.

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in this Quarterly Report on Form 10-Q in Part I., Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item IA. “Risk Factors,” may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-

 

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looking statements. Furthermore, the potential impact of the pandemic related to COVID-19 and variants thereof on our business operations and financial results and on the world economy as a whole may heighten the risks and uncertainties that affect our forward-looking statements described above. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included elsewhere in this Quarterly Report on Form 10-Q are not guarantees of future performance and our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from the forward-looking statements included elsewhere in this Quarterly Report on Form 10-Q. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate, are consistent with the forward-looking statements included elsewhere in this Quarterly Report on Form 10-Q, they may not be predictive of results or developments in future periods.

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

 

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RISK FACTOR SUMMARY

Our business is subject to numerous risks and uncertainties, including those described in Part II. Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks and uncertainties when investing in our common stock. Some of the principal risks and uncertainties include the following.

 

   

Increased competition in the car wash industry may impact our future growth.

 

   

We may be unable to sustain or increase demand for our UWC subscription program, which could adversely affect our business, financial condition and results of operations and rate of growth.

 

   

If we fail to open and operate new locations in a timely and cost-effective manner or fail to successfully enter new markets, our financial performance could be materially and adversely affected.

 

   

The ongoing pandemic related to COVID-19 and its variants has materially and adversely affected our business, financial condition and results of operations and may continue to do so.

 

   

We may not be able to successfully implement our growth strategies on a timely basis or at all.

 

   

If we are unable to identify attractive acquisition targets and acquire them at attractive prices, we may be unsuccessful in growing our business.

 

   

We are subject to a number of risks and regulations related to credit card and debit card payments we accept.

 

   

An overall decline in the health of the economy and other factors impacting consumer spending, such as natural disasters and fluctuations in inflation may affect consumer purchases, reduce demand for our services and materially and adversely affect our business, results of operations and financial condition.

 

   

Changes in labor and chemical costs, other operating costs, interest rates and inflation could materially and adversely affect our results of operations.

 

   

Our indebtedness could adversely affect our financial health and competitive position.

 

   

The terms of our credit facilities impose certain operating and financial restrictions on us that may impair our ability to adapt to changing competitive or economic conditions.

 

   

Our business is subject to various laws and regulations and changes in such laws and regulations, or failure to comply with existing or future laws and regulations, could adversely affect our business.

 

   

Our locations are subject to certain environmental laws and regulations.

 

   

We are subject to data security and privacy risks that could negatively impact our results of operations or reputation.

 

   

We may be unable to adequately protect, and we may incur significant costs in enforcing or defending, our intellectual property and other proprietary rights.

 

   

Because LGP owns a significant percentage of our common stock, it may control all major corporate decisions and its interests may conflict with your interests as an owner of our common stock and our interests.

 

   

Our stock price may be volatile or may decline regardless of our operating performance, resulting in substantial losses for investors purchasing shares.

 

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Mister Car Wash, Inc. and Subsidiaries (f/k/a Hotshine Holdings, Inc.)

Condensed Consolidated Balance Sheets

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

(Unaudited)

 

     As of  
     June 30,
2021
    December 31,
2020
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 154,972     $ 114,647  

Restricted cash

     3,368       3,227  

Accounts receivable, net

     7,813       4,613  

Inventory

     6,407       6,415  

Prepaid expenses and other current assets

     8,843       6,068  
  

 

 

   

 

 

 

Total current assets

     181,403       134,970  
  

 

 

   

 

 

 

Property and equipment, net

     279,605       263,034  

Operating lease right of use assets, net

     696,134       681,538  

Other intangible assets, net

     125,642       127,019  

Goodwill

     755,524       737,415  

Other assets

     5,224       4,477  
  

 

 

   

 

 

 

Total assets

   $ 2,043,532     $ 1,948,453  
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable

   $ 24,160     $ 24,374  

Accrued payroll and related expenses

     20,069       11,424  

Other accrued expenses

     23,116       20,264  

Current maturities of debt

     8,400       8,400  

Current maturities of operating lease liability

     35,545       33,485  

Current maturities of finance lease liability

     526       495  

Deferred revenue

     26,495       24,505  
  

 

 

   

 

 

 

Total current liabilities

     138,311       122,947  
  

 

 

   

 

 

 

Long-term portion of debt, net

     603,649       1,054,820  

Operating lease liability

     698,751       685,479  

Financing lease liability

     15,647       15,917  

Long-term deferred tax liability

     7,397       46,082  

Other long-term liabilities

     5,760       6,558  
  

 

 

   

 

 

 

Total liabilities

     1,469,515       1,931,803  
  

 

 

   

 

 

 

Commitments and contingencies (Note 15)

    

Stockholders’ equity:

    

Common stock, $0.01 par value, 1,000,000,000 shares authorized, 296,062,478 and 261,907,622 shares outstanding as of June 30, 2021 and December 31, 2020, respectively

     2,967       2,622  

Additional paid-in capital

     733,914       91,523  

Accumulated other comprehensive loss

     (770     (1,117

Accumulated deficit

     (162,094     (76,378
  

 

 

   

 

 

 

Total stockholders’ equity

     574,017       16,650  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,043,532     $ 1,948,453  
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Mister Car Wash, Inc. and Subsidiaries (f/k/a Hotshine Holdings, Inc.)

Condensed Consolidated Statements of Operations and Comprehensive Loss

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

(Unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2021     2020     2021     2020  

Revenues, net

   $ 197,080     $ 101,856     $ 372,588     $ 257,108  

Cost of labor and chemicals

     87,864       34,059       139,613       91,629  

Other store operating expenses

     65,363       49,752       126,446       108,225  

General and administrative

     188,896       13,634       203,857       26,593  

(Gain) loss on sale of assets

     (7,097     167       (6,307     510  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     335,026       97,612       463,609       226,957  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (137,946     4,244       (91,021     30,151  

Other expense:

        

Interest expense, net

     13,740       16,229       27,699       33,424  

Loss on extinguishment of debt

     3,183       —         3,183       1,918  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     16,923       16,229       30,882       35,342  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before taxes

     (154,869     (11,985     (121,903     (5,191

Income tax benefit

     (44,569     (3,231     (36,187     (5,297
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (110,300   $ (8,754   $ (85,716   $ 106  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax:

        

Gain (loss) on interest rate swap

     28       (901     347       (901
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss

   $ (110,272   $ (9,655   $ (85,369   $ (795
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share:

        

Basic

   $ (0.42   $ (0.03   $ (0.33   $ 0.00  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.42   $ (0.03   $ (0.33   $ 0.00  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic

     264,274,968       261,742,515       263,218,870       261,744,966  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     264,274,968       261,742,515       263,218,870       273,935,572  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Mister Car Wash, Inc. and Subsidiaries (f/k/a Hotshine Holdings, Inc.)

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

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

(Unaudited)

 

    Common Stock     Additional
Paid-in
Capital
    Accumulated Other
Comprehensive Loss
    Accumulated
Deficit
    Stockholders’
Equity (Deficit)
 
    Shares     Amount  

Balance as of December 31, 2020

    261,907,622     $ 2,622     $ 91,523     $ (1,117   $ (76,378   $ 16,650  

Stock-based compensation expense

    —         —         310       —         —         310  

Exercise of stock options

    688,430       7       260       —         —         267  

Shares repurchased

    (180,681     —         (534     —         —         (534

Gain on interest rate swap

    —         —         —         319       —         319  

Net income

    —         —         —         —         24,584       24,584  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2021

    262,415,371     $ 2,629     $ 91,559     $ (798   $ (51,794   $ 41,596  

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

    31,250,000       313       439,243       —         —         439,556  

Stock-based compensation expense

    —         —         203,231       —         —         203,231  

Vesting of restricted stock units

    7,680       —         —         —         —         —    

Exercise of stock options

    2,516,784       25       1,597       —         —         1,622  

Shares repurchased

    (127,357     —         (1,716     —         —         (1,716

Gain on interest rate swap

    —         —         —         28       —         28  

Net loss

    —         —         —         —         (110,300     (110,300
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2021

    296,062,478     $ 2,967     $ 733,914     $ (770   $ (162,094   $ 574,017  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Mister Car Wash, Inc. and Subsidiaries (f/k/a Hotshine Holdings, Inc.)

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

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

(Unaudited)

 

    Common Stock     Additional
Paid-in Capital
    Accumulated Other
Comprehensive Loss
    Accumulated
Deficit
    Stockholders’
Equity (Deficit)
 
    Shares     Amount  

Balance as of December 31, 2019

    261,749,196     $ 2,620     $ 90,358     $ —       $ (156,580   $ (63,602

Adoption of new accounting standards, net of tax

    —         —         —         —         19,798       19,798  

Stock-based compensation expense

    —         —         387       —         —         387  

Shares repurchased

    (4,624     —         (324     —         —         (324

Net income

    —         —         —         —         8,860       8,860  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2020

    261,744,572     $ 2,620     $ 90,421     $ —       $ (127,922   $ (34,881

Stock-based compensation expense

    —         —         398       —         —         398  

Shares repurchased

    (2,400     —         (5     —         —         (5

Loss on interest rate swap

    —         —         —         (901     —         (901

Net loss

    —         —         —         —         (8,754     (8,754
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2020

    261,742,172     $ 2,620     $ 90,814     $ (901   $ (136,676   $ (44,143
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Mister Car Wash, Inc. and Subsidiaries (f/k/a Hotshine Holdings, Inc.)

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

 

     Six Months Ended June 30,  
             2021                     2020          

Cash flows from operating activities:

    

Net (loss) income

   $ (85,716   $ 106  

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

    

Depreciation and amortization expense

     23,550       22,097  

Stock-based compensation expense

     203,541       785  

(Gain) loss on disposal of property and equipment

     (6,307     510  

Loss on extinguishment of debt

     3,183       1,918  

Amortization of deferred financing costs

     698       827  

Non-cash lease expense

     17,182       17,026  

Deferred income tax

     (38,440     4,085  

Changes in assets and liabilities:

    

Accounts receivable

     (3,201     242  

Inventory

     41       1,113  

Prepaid expenses and other current assets

     (2,776     270  

Accounts payable

     14,926       (2,348

Accrued expenses

     8,614       21,751  

Deferred revenue

     1,838       (289

Operating lease liability

     (16,446     (14,021

Other noncurrent assets and liabilities

     (1,012     (219
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 119,675     $ 53,853  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (44,194     (27,405

Acquisition of car wash operations, net of cash acquired

     (44,652     (5,991

Proceeds from sale of property and equipment

     22,201       3,893  
  

 

 

   

 

 

 

Net cash used in investing activities

   $ (66,645   $ (29,503
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of common stock pursuant to initial public offering

     468,750       —    

Proceeds from exercise of stock options

     121       —    

Payments for repurchases of common stock

     (308     (329

Proceeds from secondary offering for employee tax withholdings

     14,874       —    

Tax withholdings paid on behalf of employees for secondary offering

     (14,874     —    

Proceeds from debt borrowings

     —         45,625  

Proceeds from revolving line of credit

     —         111,681  

Payments on debt borrowings

     (454,872     (4,200

Payments on revolving line of credit

     —         (125,681

Payments of debt extinguishment costs

     (28     —    

Payments of deferred financing costs

     (226     —    

Principal payments on finance lease obligations

     (240     (61

Payments of issuance costs pursuant to initial public offering

     (25,761     —    
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

   $ (12,564   $ 27,035  
  

 

 

   

 

 

 

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

     40,466       51,385  

Cash and cash equivalents, and restricted cash at beginning of period

     117,874       6,705  
  

 

 

   

 

 

 

Cash and cash equivalents, and restricted cash at end of period

   $ 158,340     $ 58,090  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 27,577     $ 18,901  

Cash paid for income taxes

   $ 5,594     $ 204  

Supplemental disclosure of non-cash investing and financing activities:

    

Property and equipment in accounts payable

   $ 8,782     $ 5,015  

Issuance costs pursuant to initial public offering in accounts payable and other accrued expenses

   $ 3,433     $ —    

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Mister Car Wash, Inc. and Subsidiaries (f/k/a Hotshine Holdings, Inc.)

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except per share data)

(Unaudited)

1. Nature of Business

Mister Car Wash, Inc., together with its subsidiaries (collectively, the “Company”), is a Delaware corporation based in Tucson, Arizona and a leading provider of conveyorized car wash services. The Company operates two location formats: Express Exterior Locations, which offer express exterior cleaning services, and Interior Cleaning Locations, which offer both express exterior and interior cleaning services. As of December 31, 2020, the Company closed or sold all of its quick lube facilities. As of June 30, 2021, the Company operated 351 car washes in 21 states.

Forward Stock Split

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

Initial Public Offering

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

2. Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements as of June 30, 2021 and for the three and six months ended June 30, 2021 and 2020 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2020 included in the Prospectus.

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

 

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accompanying unaudited condensed consolidated financial statements contain all adjustments which are necessary for a fair presentation of the Company’s consolidated financial position as of June 30, 2021, consolidated results of operations and comprehensive loss for the three and six months ended June 30, 2021 and 2020, and consolidated cash flows for the six months ended June 30, 2021 and 2020. Such adjustments are of a normal and recurring nature. The consolidated results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the consolidated results of operations that may be expected for the year ending December 31, 2021.

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 the Company has made pertain to the determination of deferred tax assets and liabilities; estimates utilized to determine the fair value of assets acquired and liabilities assumed in business combinations and the related goodwill and intangibles; and certain assumptions used related to the evaluation of goodwill, intangibles, and property and equipment asset impairment. Actual results could differ from those estimates.

Accounts Receivable, Net

Accounts receivable are presented net of an allowance for doubtful accounts of $101 and $197 as of June 30, 2021 and December 31, 2020, respectively. The activity in the allowance for doubtful accounts was immaterial for the three and six months ended June 30, 2021 and 2020.

Inventory

Inventory for the periods presented is as follows:

 

     As of  
     June 30, 2021      December 31, 2020  

Chemical washing solutions

   $ 6,505      $ 6,490  

Other

     32        52  
  

 

 

    

 

 

 

Total inventory, gross

     6,537        6,542  

Reserve for obsolescence

     (130      (127
  

 

 

    

 

 

 

Total inventory, net

   $ 6,407      $ 6,415  
  

 

 

    

 

 

 

The activity in the reserve for obsolescence was immaterial for the three and six months ended June 30, 2021 and 2020.

 

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Revenue Recognition

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
         2021              2020              2021              2020      

Recognized over time

   $ 122,362      $ 60,009      $ 230,630      $ 144,545  

Recognized at a point in time

     73,734        36,312        140,057        98,645  

Other revenue

     984        5,535        1,901        13,918  
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenue, net

   $ 197,080      $ 101,856      $ 372,588      $ 257,108  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (Loss) Income Per Share

Basic net (loss) income per share is computed by dividing net (loss) income by the weighted-average number of common shares outstanding for the period. Diluted net (loss) income per share is computed by dividing net (loss) 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. Potentially dilutive securities are excluded from the computation of diluted net (loss) income per share if their effect is antidilutive. Reconciliations of the numerators and denominators of the basic and diluted net (loss) income per share calculations for the periods presented are as follows:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2021     2020     2021     2020  

Numerator:

        

Net (loss) income

   $ (110,300   $ (8,754   $ (85,716   $ 106  
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Weighted-average common shares outstanding—basic

     264,274,968       261,742,515       263,218,870       261,744,966  

Effect of potentially dilutive securities:

        

Stock options

     —         —         —         12,190,606  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding—diluted

     264,274,968       261,742,515       263,218,870       273,935,572  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share—basic

   $ (0.42   $ (0.03   $ (0.33   $ 0.00  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share—diluted

   $ (0.42   $ (0.03   $ (0.33   $ 0.00  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2021      2020      2021      2020  

Stock options

     34,522,248        2,024,936        34,522,248        1,916,526  

Restricted stock units

     1,632,188        —          1,632,188        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Deferred Offering Costs

The Company capitalizes certain legal, accounting, and other third-party fees that are directly related to the Company’s equity financings, including the IPO, until such financings are consummated. After consummation of

 

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an equity financing, these costs are then recorded as a reduction of the proceeds received as a result of the financing. Should a planned equity financing be abandoned, terminated, or significantly delayed, the deferred offering costs would be immediately written off to operating expenses. Upon the closing of the IPO in June 2021, all deferred offering costs in the accompanying unaudited condensed consolidated balance sheets were reclassified from prepaid expenses and other current assets and recorded against the IPO proceeds as a reduction to additional paid-in capital. As of June 30, 2020, there were no deferred offering costs capitalized.

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”), which simplifies the accounting for income taxes by removing a variety of exceptions within the framework of ASC 740. The Company early adopted ASU No. 2019-12 on April 1, 2021 and the amendments applicable to the Company were applied prospectively. The adoption of this standard impacted the income tax benefit realized by the Company in the unaudited condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2021, and the current tax liability and net deferred tax liability recorded in other accrued expenses and long-term deferred tax liability, respectively, in the unaudited condensed consolidated balance sheet as of June 30, 2021.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) (“ASU No. 2020-04”) and issued the following subsequent amendments to ASU No. 2020-04: ASU No. 2021-01. The new guidance is intended to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. Reference rate reform is necessary due to the phase out of the London Interbank Offered Rate (“LIBOR”) at the end of 2021. The adoption of this guidance is optional and provides relief around modification and hedge accounting as it specifically arises from changing reference rates, in addition to optional expedients for cash flow hedges. The guidance will be effective from March 12, 2020 through December 31, 2022. The Company adopted ASU No. 2020-04 on April 1, 2021, and the adoption of this standard did not have an impact on the Company’s unaudited condensed consolidated financial statements or disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted

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

 

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3. Property and Equipment, Net

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

 

     As of  
     June 30, 2021      December 31, 2020  

Land

   $ 23,937      $ 28,316  

Buildings and improvements

     57,226        55,250  

Finance leases

     16,497        16,497  

Leasehold improvements

     84,263        83,561  

Vehicles and equipment

     153,268        143,435  

Furniture, fixtures and equipment

     66,758        61,350  

Construction in progress

     35,628        13,187  
  

 

 

    

 

 

 

Property and equipment, gross

     437,577        401,596  

Less: accumulated depreciation

     (157,163      (138,238

Less: accumulated depreciation—finance leases

     (809      (324
  

 

 

    

 

 

 

Property and equipment, net

   $ 279,605      $ 263,034  
  

 

 

    

 

 

 

For the three months ended June 30, 2021 and 2020, depreciation expense was $10,237 and $9,422, respectively. For the six months ended June 30, 2021 and 2020, depreciation expense was $20,208 and $18,543, respectively.

For the three months ended June 30, 2021 and 2020, amortization expense on finance leases was $243 and $15, respectively. For the six months ended June 30, 2021 and 2020, amortization expense on finance leases was $485 and $43, respectively.

4. Other Intangible Assets, Net

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

 

     June 30, 2021      December 31, 2020  
     Gross Carrying
Amount
     Accumulated
Amortization
     Gross Carrying
Amount
     Accumulated
Amortization
 

Trade names and Trademarks

   $ 107,000      $ —        $ 107,000      $ —    

CPC Unity System

     42,900        29,446        42,900        27,301  

Customer relationships

     8,700        7,479        7,600        7,376  

Covenants not to compete

     7,385        3,418        7,515        3,319  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 165,985      $ 40,343      $ 165,015      $ 37,996  
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended June 30, 2021 and 2020, amortization expense associated with the Company’s finite-lived intangible assets was $1,420 and $1,703, respectively.

For the six months ended June 30, 2021 and 2020, amortization expense associated with the Company’s finite-lived intangible assets was $2,857 and $3,511, respectively.

 

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As of June 30, 2021, estimated future amortization expense was as follows:

 

Fiscal Year Ending:

  

2021 (remaining six months)

   $ 5,123  

2022

     5,898  

2023

     5,516  

2024

     1,330  

2025

     343  

Thereafter

     432  
  

 

 

 

Total estimated future amortization expense

   $ 18,642  
  

 

 

 

5. Goodwill

Goodwill consisted of the following for the periods presented:

 

     As of  
     June 30, 2021      December 31, 2020  

Balance at beginning of period

   $ 737,415      $ 731,989  

Current period acquisitions

     18,491        21,467  

Current period dispositions

     —          (16,191

Other provisional adjustments

     (382      150  
  

 

 

    

 

 

 

Balance at end of period

   $ 755,524      $ 737,415  
  

 

 

    

 

 

 

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

6. Income Taxes

The effective income tax rates on continuing operations for the six months ended June 30, 2021 and 2020 were 29.69% and 102.04%, 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 six months ended June 30, 2021 included taxes on earnings at an anticipated annual effective tax rate of 24.82% and a favorable tax impact of $56,067 related primarily to discrete tax benefits originating from stock option exercises and stock-based compensation expenses recorded in the three months ended June 30, 2021.

The year-to-date provision for income taxes for the six months ended June 30, 2020 included taxes on earnings at an anticipated annual effective tax rate of 32.54% and a favorable tax impact of $3,608 related primarily to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that was enacted into law in March 2020.

The CARES Act permitted the Company to carry back federal net operating losses to earlier tax years where the highest federal statutory income tax rate was 35.00%, resulting in an increase in the tax benefit originally computed at 21.00% of the expected net operating loss carryforward.

For the six months ended June 30, 2021 and 2020, the Company has not recorded any unrecognized tax benefits or interest and penalties related to any uncertain tax positions.

 

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7. Debt

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

 

     As of  
     June 30, 2021      December 31, 2020  
Credit agreement      

First lien term loan

   $ 615,401      $ 827,600  

Less: debt issuance costs

     (3,352      (4,849

Less: current maturities of debt

     (8,400      (8,400
  

 

 

    

 

 

 

First lien term loan, net

     603,649        814,352  
  

 

 

    

 

 

 

Revolving commitment

     —          —    
  

 

 

    

 

 

 

Credit agreement, net

   $ 603,649      $ 814,352  
  

 

 

    

 

 

 
Second lien credit agreement      

Second lien term loan

   $ —        $ 242,673  

Less: debt issuance costs

     —          (2,205
  

 

 

    

 

 

 

Second lien credit agreement, net

   $ —        $ 240,468  
  

 

 

    

 

 

 

Total long-term portion of debt, net

   $ 603,649      $ 1,054,820  
  

 

 

    

 

 

 

As of June 30, 2021, annual maturities of debt were as follows:

 

Fiscal Year Ending:

  

2021 (remaining six months)

   $ 4,200  

2022

     8,400  

2023

     8,400  

2024

     8,400  

2025

     8,400  

Thereafter

     577,601  
  

 

 

 

Total maturities of debt

   $ 615,401  
  

 

 

 

As of June 30, 2021 and December 31, 2020, unamortized deferred financing costs were $3,866 and $7,494, respectively, and accumulated amortization of deferred financing costs was $2,308 and $3,057, respectively.

For the three months ended June 30, 2021 and 2020, the amortization of deferred financing costs in interest expense, net in the unaudited condensed consolidated statements of operations and comprehensive loss was approximately $342 and $413, respectively.

For the six months ended June 30, 2021 and 2020, the amortization of deferred financing costs in interest expense, net in the unaudited condensed consolidated statements of operations and comprehensive loss was approximately $698 and $827, respectively.

Credit Agreement

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

 

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

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

First Lien Term Loan

In February 2020, the Company entered into Amendment No. 1 to Amended and Restated First Lien Credit Agreement (“Amended First Lien Credit Agreement”) which amended and restated the Amended and Restated First Lien Credit Agreement entered into in May 2019 (“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 the Company’s First Lien Net Leverage Ratio changed from 2.25% to 2.50% to 2.00% to 2.25% and (ii) the variable margin associated with the Eurodollar Rate interest rate for one, two, three or six months plus a variable margin based on the Company’s First Lien Net Leverage Ratio changed from 3.25% to 3.50% to 3.00% to 3.25%. In connection with the Amended First Lien Credit Agreement, the Company expensed $1,918 of previously unamortized deferred financing costs as a loss on extinguishment of debt in the unaudited condensed consolidated statements of operations and comprehensive loss.

In February 2020 and March 2020, the Company borrowed $30,000 and $10,000, respectively, under the delayed draw facility under the First Lien Term Loan, utilizing the full $40,000 available under the delayed draw facility. As a result of the additional borrowings under the delayed draw facility, the quarterly principal payments associated with the First Lien Term Loan increased from $2,000 to $2,100.

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

As of June 30, 2021 and December 31, 2020, the interest rate on the First Lien Term Loan was 3.10% and 3.40%, respectively.

The Amended First Lien Credit Agreement requires the Company to maintain compliance with a First Lien Net Leverage Ratio. As of June 30, 2021, the Company was in compliance with the First Lien Net Leverage Ratio financial covenant of the Amended First Lien Credit Agreement.

Revolving Commitment

In June 2021, the Company 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 the IPO in June 2021. In connection with the amendment, the Company expensed $87 of previously unamortized deferred financing costs as a loss on extinguishment of debt in the unaudited condensed consolidated statements of operations and comprehensive loss.

 

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As of June 30, 2021 and December 31, 2020, the unused borrowing capacity of the Revolving Commitment was $150,000 and $75,000, respectively.

In addition, an unused commitment fee based on the Company’s First Lien Net Leverage Ratio is payable on the average of the unused borrowing capacity under the Revolving Commitment. As of June 30, 2021 and December 31, 2020, the unused commitment fee was 0.25% and 0.50%, respectively.

Standby Letters of Credit

As of June 30, 2021, the Company has available standby letters of credit 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. As of June 30, 2021 and December 31, 2020, the amounts associated with outstanding letters of credit were $306 and $469, respectively.

Second Lien Credit Agreement

In March 2020, the Company entered into the First Amendment to Second Lien Credit Agreement (“Amended Second Lien Credit Agreement”). The Amended Second Lien Credit Agreement provided for an incremental term loan to the Company in an aggregate amount of $5,625 under the same terms as the Second Lien Credit Agreement. The incremental term loan under the Amended Second Lien Credit Agreement is an investment from a related party (see Note 14-Related-Party Transactions). The Amended Second Lien Credit Agreement also allowed the Company to make its quarterly interest payments on the term loan under the Amended Second Lien Credit Agreement (“Second Lien Term Loan”) via payment-in-kind (“PIK”) by adding such amount to the outstanding principal amount of the Second Lien Term Loan. The Company made PIK additions to its outstanding principal amounts in the amounts of $5,906 and $6,142 in March 2020 and June 2020, respectively. The Amended Second Lien Credit Agreement also increased the interest rate of the Second Lien Term Loan to 10.50% effective January 1, 2020 to June 30, 2020.

In June 2021, the Company made a voluntary prepayment of all outstanding borrowings under the Second Lien Term Loan funded by the net proceeds from the IPO, which included outstanding principal of $242,673 and accrued interest expense of $6,050. In connection with this voluntary prepayment, the Company expensed $2,059 of previously unamortized deferred financing costs as a loss on extinguishment of debt in the unaudited condensed consolidated statements of operations and comprehensive loss.

As of December 31, 2020 and through the date of extinguishment, the interest rate on the Second Lien Term Loan was 10.00%.

8. Fair Value Measurements

The following table presents financial liabilities which are measured at fair value on a recurring basis as of June 30, 2021:

 

     Fair Value Measurements  
     Total      Level 1      Level 2      Level 3  

Liabilities:

           

Interest rate swap

   $ 1,056      $ —        $ 1,056      $ —    

 

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The following table presents financial liabilities which are measured at fair value on a recurring basis as of December 31, 2020:

 

     Fair Value Measurements  
     Total      Level 1      Level 2      Level 3  

Liabilities:

           

Interest rate swap

   $ 1,488      $ —        $ 1,488      $ —    

The Company measures the fair value of its financial assets and liabilities using the highest level of inputs that are available as of the measurement date. The carrying amounts of cash, accounts receivable, and accounts payable approximate their fair value due to the immediate or short-term maturity of these financial instruments. See Note 9-Interest Rate Swap for additional information on the interest rate swap.

The Company’s First Lien Term Loan under the Amended First Lien Credit Agreement approximates fair value to the First Lien Term Loan’s variable interest rate terms. As of June 30, 2021 and December 31, 2020, the fair value of the Company’s variable-rate debt approximated its carrying value.

As of June 30, 2021 and December 31, 2020, there were no Level 3 financial assets or financial liabilities measured at fair value on a recurring basis.

During the three and six months ended June 30, 2021 and 2020, there were no transfers between fair value measurement levels.

9. Interest Rate Swap

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

As of June 30, 2021, information pertaining to the Swap is as follows:

 

Notional Amount

   Fair Value      Pay-Fixed     Receive-Floating     Maturity Date  

$547,208

   $ 1,056        0.308     0.993     October 20, 2022  
  

 

 

    

 

 

   

 

 

   

 

 

 

As of June 30, 2021 and December 31, 2020, the current portion of the fair value of the Swap was $958 and $931, respectively, and is included in other accrued expenses in the accompanying unaudited condensed consolidated balance sheets.

As of June 30, 2021 and December 31, 2020, the long-term portion of the fair value of the Swap was $98 and $557, respectively, and is included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets.

For the three months ended June 30, 2021 and 2020, amounts reported in other comprehensive loss in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss are net of tax of $9 and $299, respectively.

For the six months ended June 30, 2021 and 2020, amounts reported in other comprehensive loss in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss are net of tax of $115 and $299, respectively.

10. Leases

The Company’s incremental borrowing rate for a lease is the rate of interest it expects to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. To determine the incremental

 

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borrowing rates used to discount the lease payments, the Company estimated its synthetic credit rating and utilized market data for similarly situated companies.

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

 

          As of  
    

Classification

   June 30, 2021      December 31, 2020  

Assets

        

Operating

   Operating right of
use assets, net
   $ 696,134      $ 681,538  

Finance

   Property and equipment, net      15,689        16,173  
     

 

 

    

 

 

 

Total lease assets

      $ 711,823      $ 697,711  
     

 

 

    

 

 

 

Liabilities

        

Current

        

Operating

   Current maturities of operating lease liability    $ 35,545      $ 33,485  

Finance

   Current maturities of finance lease liability      526        495  

Long-term

        

Operating

   Operating lease liability      698,751        685,479  

Finance

   Financing lease liability      15,647        15,917  
     

 

 

    

 

 

 

Total lease liabilities

      $ 750,469      $ 735,376  
     

 

 

    

 

 

 

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2021      2020      2021      2020  

Operating lease expense(1)

   $ 19,395      $ 19,568      $ 38,520      $ 39,039  

Finance lease expense

           

Amortization of lease assets

     243        15        485        31  

Interest on lease liabilities

     292        23        586        46  

Short-term lease expense

     15        12        19        23  

Variable lease expense(2)

     2,564        1,866        6,488        4,975  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22,509      $ 21,484      $ 46,098      $ 44,114  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 loss.

(2)

Variable lease costs consist of property taxes, property insurance, and common area or other maintenance costs for the Company’s leases of buildings.

 

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The following includes supplemental information for the periods presented:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2021     2020     2021     2020  

Operating cash flows from operating leases

   $ 19,814     $ 18,955     $ 39,341     $ 37,645  

Operating cash flows from finance leases

   $ 292     $ 22     $ 586     $ 46  

Financing cash flows from finance leases

   $ 121     $ 31     $ 240     $ 61  

Operating lease liabilities arising from obtaining ROU assets

   $ 22,421     $ 12,524     $ 32,020     $ 15,525  

Finance lease liabilities arising from obtaining ROU assets

   $ —       $ —       $ —       $ —    

Weighted-average remaining operating lease term

     14.74       15.19       14.74       15.19  

Weighted-average remaining finance lease term

     17.73       14.92       17.73       14.92  

Weighted-average operating lease discount rate

     6.40     6.25     6.40     6.25

Weighted-average finance lease discount rate

     7.33     8.98     7.33     8.98

As of June 30, 2021, lease obligation maturities were as follows:

 

Fiscal Year Ending:

   Operating Leases      Finance Leases  

2021 (remaining six months)

   $ 40,600      $ 833  

2022

     81,110        1,683  

2023

     80,674        1,716  

2024

     79,804        1,741  

2025

     79,525        1,766  

Thereafter

     791,988        23,883  
  

 

 

    

 

 

 

Total future minimum obligations

   $ 1,153,701      $ 31,622  

Less: Present value discount

     (419,405      (15,449
  

 

 

    

 

 

 

Present value of net future minimum lease obligations

   $ 734,296      $ 16,173  

Less: current portion

     (35,545      (526
  

 

 

    

 

 

 

Long-term obligations

   $ 698,751      $ 15,647  
  

 

 

    

 

 

 

Forward-Starting Leases

As of June 30, 2021, the Company entered into 11 leases that had not yet commenced related to build-to-suit arrangements for car wash locations. These leases will commence in 2021 or 2022 with initial lease terms of five to 20 years.

As of December 31, 2020, the Company entered into 10 leases that had not yet commenced related to build-to-suit arrangements for car wash locations. These leases will commence in 2021 or 2022 with initial lease terms of five to 20 years.

Sale-Leaseback Transactions

During the three months ended June 30, 2021, the Company completed three sale-leaseback transactions related to its car wash locations for aggregate consideration of $42,600, resulting in a net gain of $7,117 which is included in (gain) loss on sale of assets in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss. Contemporaneously with the closing of the sales, the Company entered into lease agreements for the properties for initial 20-year terms. For the sale-leaseback transactions consummated in

 

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the three months ended June 30, 2021, the cumulative initial annual rents for the properties was approximately $2,655, subject to annual escalations. These leases are accounted for as operating leases. During the three months ended June 30, 2020, the Company did not complete any sale-leaseback transactions.

During the six months ended June 30, 2021 and 2020, the Company completed four and one sale-leaseback transactions related to its car wash locations, respectively, with aggregate consideration of $46,267 and $3,805, respectively, resulting in a net gain of $6,846 and a net loss of $198, respectively, which are included in (gain) loss on sale of assets in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss. Contemporaneously with the closing of the sales, the Company entered into lease agreements for the properties for initial 20-year terms. For the sale-leaseback transactions consummated in the six months ended June 30, 2021, the cumulative initial annual rents for the properties was approximately $2,882, subject to annual escalations. These leases are accounted for as operating leases. For the sale-leaseback transactions consummated in the six months ended June 30, 2020, the cumulative initial annual rents for the properties was approximately $248, subject to annual escalations. These leases are accounted for as operating leases.

11. Stockholders’ Equity

As of June 30, 2021, there were 1,000,000,000 shares of common stock authorized, 299,210,538 shares of common stock issued, and 296,062,478 shares of common stock outstanding.

As of December 31, 2020, there were 1,000,000,000 shares of common stock authorized, 264,747,644 shares of common stock issued, and 261,907,622 shares of common stock outstanding.

The Company uses the cost method to account for treasury stock. Treasury stock is included in additional paid-in capital in the accompanying unaudited condensed consolidated balance sheets. As of June 30, 2021 and December 31, 2020, the Company had 3,148,060 shares and 2,840,022 shares, respectively, of treasury stock.

12. Stock-Based Compensation

The 2014 Plan

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

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

 

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market value of the common stock of the Company on the date of grant. For the avoidance of doubt, the IPO constituted a performance measurement date under the applicable option agreements for the Performance Vesting Options and the Performance Vesting Options vested in full in connection with the IPO.

The 2021 Plan

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

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

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

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

The 2021 ESPP

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

Stock Option 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.

 

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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 options with service-based vesting conditions granted during the three months ended June 30, 2021:

 

     Three Months Ended
June 30, 2021
 

Expected volatility

     44.75

Risk-free interest rate

     1.19

Expected term (in years)

     6.43  

Expected dividend yield

     0.00

Stock Options

The following table summarizes the Company’s stock option activity since December 31, 2020:

 

     Time Vesting
Options
     Performance
Vesting Options
     Total Number of
Stock Options
     Weighted-Average
Exercise Price
 

Outstanding as of December 31, 2020

     19,958,043        13,341,504        33,299,547      $ 0.78  

Granted

     3,208,581        747,936        3,956,517      $ 10.24  

Exercised

     (2,640,888      —          (2,640,888    $ 0.66  

Forfeited

     (55,776      (37,152      (92,928    $ 2.31  
  

 

 

    

 

 

    

 

 

    

Outstanding as of June 30, 2021

     20,469,960        14,052,288        34,522,248      $ 1.87  
  

 

 

    

 

 

    

 

 

    

Options vested or expected to vest as of June 30, 2021

     19,638,892        14,052,288        33,691,180      $ 0.93  
  

 

 

    

 

 

    

 

 

    

Options exercisable as of June 30, 2021

     14,447,398        14,052,288        28,499,686      $ 0.82  
  

 

 

    

 

 

    

 

 

    

The number and weighted-average grant date fair value of stock options during the periods presented is 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, 2020

     3,450,607        13,341,504      $ 0.96      $ 0.59  

Non-vested as of June 30, 2021

     6,022,562        —        $ 3.12      $ —    

Granted during the period

     3,208,581        747,936      $ 5.11      $ 2.26  

Vested during the period

     580,850        14,052,288      $ 0.89      $ 14.37  

Forfeited/canceled during the period

     55,776        37,152      $ 0.73      $ 1.27  

The total grant date fair value of Time Vesting Options and Performance Vesting Options granted during the six months ended June 30, 2021 was approximately $16,408 and $3,895, respectively.

The fair value of stock options vested during the six months ended June 30, 2021 was $315,051.

As of June 30, 2021, the weighted-average remaining contractual life of outstanding stock options was approximately 5.12 years.

 

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Restricted Stock Units

The following table summarizes the Company’s RSU activity since December 31, 2020:

 

     Restricted Stock Units      Weighted-Average Grant Date
Fair Value
 

Unvested as of December 31, 2020

     —        $ —    

Granted

     1,639,868      $ 15.00  

Vested

     (7,680    $ 15.00  

Forfeited

     —        $ —    
  

 

 

    

Unvested as of June 30, 2021

     1,632,188      $ 15.00  
  

 

 

    

The Company granted 1,639,868 RSUs during the three and six months ended June 30, 2021.

The total fair value of RSUs that vested during the three and six months ended June 30, 2021 was $165.

Stock-Based Compensation Expense

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

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
         2021              2020              2021              2020      

Cost of labor and chemicals

   $ 31,442      $ —        $ 31,442      $ —    

General and administrative

     171,789        398        172,099        785  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 203,231      $ 398      $ 203,541      $ 785  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
         2021              2020              2021              2020      

Time Vesting Options

   $ 964      $ 398      $ 1,274      $ 785  

Performance Vesting Options

     201,985        —          201,985        —    

RSUs

     282        —          282        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 203,231      $ 398      $ 203,541      $ 785  
  

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2021, total unrecognized compensation expense related to unvested Time Vesting Options was $15,654, which is expected to be recognized over a weighted-average period of 3.57 years.

As of June 30, 2021, 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.

 

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As of June 30, 2021, total unrecognized compensation expense related to unvested RSUs was $20,554, which is expected to be recognized over a weighted-average period of 3.78 years.

Modification of Stock Options

In February 2021, the Company modified a total of 7,874,304 shares of Performance Vesting Options for 12 grantees to provide for an additional service-based vesting condition related to the acceleration of vesting in connection with a grantees’ death. The Company did not recognize current incremental stock-based compensation expense in connection with the modification during the three months ended March 31, 2021 because the grants vest upon the earlier of a performance condition or a service condition, neither of which are probable of occurring until the condition is met. The modification resulted in an increase to unrecognized compensation expense related to unvested Performance Vesting Options of $75,217 during the three months ended March 31, 2021.

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

13. Business Combinations

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

The unaudited condensed consolidated financial statements reflect the operations of an acquired business starting from the effective date of the acquisition. The Company expensed $94 and $86 of acquisition-related costs for the three months ended June 30, 2021 and 2020, respectively. The Company expensed $243 and $139 of acquisition-related costs for the six months ended June 30, 2021 and 2020, respectively. These acquisition-related costs are recognized as incurred and are included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.

For the three and six months ended June 30, 2021 and the year ended December 31, 2020, the amount of acquired goodwill that was not deductible for income tax purposes was $1,082 and $5,312, respectively.

2021 Acquisitions

For the three and six months ended June 30, 2021, the Company acquired the assets and liabilities of five car washes in one acquisition for total consideration of approximately $44,700, which was paid in cash. This acquisition resulted in the preliminary recognition of $18,491 of goodwill, $24,523 of property and equipment, $1,100 of intangible assets related to customer relationships, $380 of intangible assets related to covenants not to compete, and $165 in other assets and liabilities.

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

The acquisitions were located in the following markets:

 

Location (Seller)

   Number of Washes      Month Acquired  

Florida (Superwash Express)

     5        June  

 

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Unaudited Supplemental Pro Forma Information

The following table presents unaudited supplemental pro forma information for the periods presented as if the business combination had occurred on January 1, 2020, the earliest period presented herein:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
         2021              2020              2021              2020      

Revenues, net

   $ 200,540      $ 104,137      $ 379,518      $ 262,130  

Net (loss) income

   $ (108,961    $ (8,218    $ (82,973    $ 1,512  

The unaudited pro forma results presented above primarily include amortization charges for acquired intangible assets, depreciation adjustments for property and equipment that has been revalued, adjustments for certain acquisition-related charges, and the related tax effects. The unaudited pro forma information is presented for information purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at such time.

The revenues and earnings of the acquisition reflected in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss were immaterial for the three and six month periods ended June 30, 2021.

2020 Acquisitions

For the year ended December 31, 2020, the Company acquired the assets and liabilities of ten car washes in four separate acquisitions for total consideration of approximately $33,584, which was paid in cash. These acquisitions resulted in the preliminary recognition of $21,467 of goodwill, $9,463 of property and equipment, $830 of intangible assets related to covenants not to compete, and $1,824 in other assets and liabilities.

The acquisitions were located in the following markets:

 

Location (Seller)

   Number of Washes      Month Acquired  

Florida (Love)

     1        January  

Washington (Bush)

     7        September  

Texas (Soapbox Express)

     1        November  

Florida (Avatar)

     1        December  

14. Related-Party Transactions

LGP, the majority owner of the Company, historically received $1,000 annually for various advisory and monitoring services provided to the Company. During the COVID-19 pandemic, these fees were waived for the remainder of 2020. The management services agreement with LGP that provided for the advisory and monitoring services terminated in June 2021 upon the consummation of the IPO.

For the three months ended June 30, 2021 and 2020, total fees and expenses paid by the Company to LGP were $250 and $0, respectively. For the six months ended June 30, 2021 and 2020, total fees and expenses paid by the Company to LGP were $500 and $250, respectively. Fees and expenses paid to LGP are included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.

LGP was one of the Company’s creditors under the Second Lien Credit Agreement with an investment of $5,625 allowed through the Amended Second Lien Credit Agreement. The Company made a voluntary prepayment of all outstanding balances under the Second Lien Term Loan in June 2021 (see Note 7-Debt).

 

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15. Commitments and Contingencies

Litigation

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

Insurance

The Company carries a broad range of insurance coverage, including general and business auto liability, commercial property, workers’ compensation, cyber risk, and general umbrella policies. As of June 30, 2021 and December 31, 2020, the Company accrued $2,576 and $2,467, respectively, for assessments on insurance claims filed, which are included in other accrued expenses in the accompanying unaudited condensed consolidated balance sheets. As of June 30, 2021 and December 31, 2020, the Company recorded $1,971 and $2,052, respectively, in receivables from its non-healthcare insurance carriers related to these insurance claims, which are included in accounts receivable, net in the accompanying unaudited condensed consolidated balance sheets. The receivables are paid when the claim is finalized and the reserved amounts on these claims are expected to be paid within one year.

Environmental Matters

Operations at certain facilities currently or previously owned or leased by the Company utilize, or in the past have utilized, hazardous substances generally in compliance with applicable law. Periodically, the Company has had minor claims asserted against it by regulatory agencies or private parties for environmental matters relating to the handling of hazardous substances by the Company, and it has incurred obligations for investigations or remedial actions with respect to certain of these matters. There can be no assurances that activities at these facilities, or future facilities owned or operated by the Company, may not result in additional environmental claims being asserted against the Company or additional investigations or remedial actions being required. The Company is not aware of any significant remediation matters as of June 30, 2021. 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, the Company is unable to reasonably estimate the ultimate cost of claims asserted against the Company related to environmental matters; however, the Company does not believe such costs will be material to its unaudited condensed consolidated financial statements.

In addition to potential claims asserted against the Company, there are certain regulatory obligations associated with these facilities. The Company also has a third-party specialist to review the sites subject to these regulations annually, for the purpose of assigning future cost. A third party has conducted a preliminary assessment of site restoration provisions arising from these regulations and the Company has recognized a provisional amount. As of June 30, 2021, the Company recorded an environmental remediation accrual of $73, which is included in other accrued expenses in the accompanying unaudited condensed consolidated balance sheets.

Warranties

The Company has provided certain standard pre-closing warranties in connection with the sale of its quick lube facilities, which closed in December 2020. The pre-closing warranties made by the Company in the related Asset Purchase Agreement survive for six months following the closing date. The Company is not aware of any warranty liabilities with respect to the former quick lube facilities that require accrual as of June 30, 2021.

 

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16. Subsequent Events

The Company has evaluated all subsequent events after June 30, 2021 through the date of the issuance of these unaudited condensed consolidated financial statements and has determined there have been no subsequent events for which disclosure is required.

 

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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 prospectus that forms a part of our Registration Statement on Form S-1 (File No. 333-256697) which was filed with the Securities and Exchange Commission, or SEC, pursuant to Rule 424 on June 28, 2021 (the “Prospectus”). This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Part II, Item 1A. “Risk Factors” and in other parts of this Quarterly Report on Form 10-Q.

Who We Are

Mister Car Wash, Inc. is the largest national car wash brand, offering express exterior and interior cleaning services to customers across 351 car wash locations in 21 states as of June 30, 2021. 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 them 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. As of June 30, 2021, we had 1.5 million UWC members, and in the three and six months ended June 30, 2021, UWC sales represented 62% and 62% of our total wash sales, respectively, and UWC volume represented 72% and 71% of our total wash volume, respectively. Our scale and 25 years of innovation allow us to drive operating efficiencies and invest in training, infrastructure and technology that improve speed of service, quality, and sustainability and realize strong financial performance.

Factors Affecting Our Business and Trends

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

 

   

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

 

   

Number and loyalty of UWC members. The UWC program is a critical element of our business. UWC members contribute a significant portion of our net revenue and provide recurring revenue through their monthly membership fees. Our subscription business model is a key driver of our growth and allows us to capture a significant amount of data about our members, which we utilize to optimize our service offerings and user engagement.

 

   

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.

 

   

Macroeconomic trends. Macroeconomic factors may affect consumer spending patterns and thereby our results of operations. These factors include general economic conditions, consumer confidence, employment rates, business conditions, changes in the housing and new vehicle markets, the availability of credit, interest rates, tax rates, and fuel and energy costs.

 

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Factors Affecting the Comparability of Our Results of Operations

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

Impact of COVID-19

To ensure the safety of our team members and customers and in compliance with local regulations at the onset of the COVID-19 pandemic in March 2020 and April 2020, we made the decision to temporarily suspend operations at more than 300 of our locations and pause UWC membership billing. During this period, we upgraded our safety protocols and modified our operating model by temporarily suspending all interior cleaning services from locations offering those services. While our operations were suspended, we furloughed approximately 5,500 of our hourly car wash team members. Furloughed team members were not paid by us unless they elected to use accrued paid time off; however, we did continue to provide benefits coverage to any team member who was enrolled at the time of furlough. The suspension of our operations negatively impacted our net revenues, but improved our net income margin and Adjusted EBITDA margin as express exterior cleaning services are less labor intensive compared to interior cleaning services. We also proactively undertook several measures to augment our liquidity, such as drawing on our Revolving Commitment, requesting rent deferrals, suspending all acquisition activity, and pausing all greenfield development initiatives.

By the end of May 2020, all of our locations were safely reopened and offering express exterior cleaning services, including exterior-only services at Interior Cleaning Locations, we rehired a majority of our team members, and we had surpassed all-time highs in UWC membership. As of June 30, 2021, we employed 6,288 team members. By the end of 2020, we also paid back 100% of our deferred rent and successfully resumed both greenfield development initiatives and acquisition activity. Although our actions at the beginning of the COVID-19 pandemic impacted our financial results in 2020, we believe that our people-first approach engendered goodwill and loyalty among our team members and our customers, and allowed us to emerge an even stronger business.

Keeping our customers and team members safe has always been the highest priority for Mister Car Wash. We have been closely monitoring the national and local government health guidelines in each of our communities, and we proactively implemented extensive measures in response to COVID-19 throughout our business operations.

Given the unpredictable nature of this situation, we cannot estimate with certainty the long-term impacts of the pandemic related to COVID-19 and variants thereof, on our business, financial condition, results of operations, and cash flows. Although the future economic environment is uncertain, we are confident in our ability to continue to provide car wash services to our customers, and we remain committed to serving our customers as we continue to navigate the public health challenge of COVID-19.

We are closely monitoring the impact of COVID-19 and its variants on all aspects of our business and in all of our locations. See Part II, Item 1A. “Risk Factors—Risks Relating to Our Business— The ongoing pandemic related to COVID-19 and its variants has materially and adversely affected our business, financial condition and results of operations and may continue to do so” included elsewhere in this Quarterly Report on Form 10-Q.

Greenfield Location Development

Our primary historical growth strategy has involved acquiring local and regional car wash operators, upgrading the facilities and equipment, training the team to provide the “Mister Experience,” and converting the site to the “Mister” brand. More recently, we have also grown through greenfield development of Mister Car Wash locations and anticipate further pursuit of this strategy in the future. As of June 30, 2021, we have successfully opened 24 greenfield locations, with the expectation of driving the majority of our future location

 

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growth through greenfield development. We believe such a strategy will drive improvements in our net income margins and Adjusted EBITDA margins as express exterior cleaning services are less labor intensive than interior cleaning services.

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

Acquisitions

In the three months ended June 30, 2021, we completed one acquisition of five properties that operated as conveyorized car washes. In the six months ended June 30, 2021, we completed two acquisitions including nine properties, five of which operated as conveyorized car washes at the time of acquisition and four of which previously operated as car washes; two of these four properties were conveyorized car washes and two of these four properties were self-serve washes. Once renovated and converted to the Mister brand, we will reopen the two conveyorized car wash properties, at which point they will be included in our location count. The real property and any preexisting improvements to the two self-serve wash properties will subsequently be sold.

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 operating results under our ownership.

Divestitures

In the three and six months ended June 30, 2021, we did not consummate any significant divestitures.

Key Performance Indicators

We prepare and analyze various operating and financial data to assess the performance of our business and allocate our resources. The key operating performance and financial metrics and indicators we use are set forth below, as of and for the three and six months ended June 30, 2021 and 2020.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(Dollars in thousands)    2021     2020     2021     2020  

Financial and Operating Data

        

Location count (end of period)

     351       327       351       327  

Comparable store sales growth

     93     (37 )%      50     (20 )% 

UWC Members (in thousands, end of period)

     1,534       1,106       1,534       1,106  

UWC sales as a percentage of total wash sales

     62     62     62     59

Net (loss) income

   $ (110,300   $ (8,754   $ (85,716   $ 106  

Net (loss) income margin

     (56.0 )%      (8.6 )%      (23.0 )%      0.0

Adjusted EBITDA

   $ 73,078     $ 28,154     $ 134,550     $ 68,224  

Adjusted EBITDA margin

     37.1     27.6     36.1     26.5

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 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 June 30, 2021, we increased our location count by seven locations, including two greenfield locations and five acquired locations. In the six months ended June 30, 2021, we increased our location count by nine locations, comprised of four greenfield locations and five acquired locations. Our Express Exterior Locations comprise 265 of our current locations and our Interior Cleaning Locations comprise 86 of our current locations.

 

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Comparable Store Sales Growth

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

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

UWC Members (end of period)

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 acquired new customers and retained previously acquired customers. There were approximately 1.5 million UWC members as of June 30, 2021. Our UWC program grew by approximately 0.3 million UWC members, or approximately 24%, from December 31, 2020 through June 30, 2021.

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 revenues, net 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 62% and 62% of our total wash sales for the three and six months ended June 30, 2021.

Adjusted EBITDA and Adjusted EBITDA Margin

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

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

 

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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 (as defined below) 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.

Our Adjusted EBITDA was approximately $73.1 million and $28.2 million in the three months ended June 30, 2021 and 2020, respectively, and approximately $134.6 million and $68.2 million in the six months ended June 30, 2021 and 2020, respectively. Our Adjusted EBITDA margin was 37.1% and 27.6% in in the three months ended June 30, 2021 and 2020, respectively, and approximately 36.1% and 26.5% in the six months ended June 30, 2021 and 2020, respectively. The Adjusted EBITDA and Adjusted EBITDA margin results in the three and six months ended June 30, 2021 compared to the prior year period are primarily attributable to our car wash locations remaining open and operating for the entirety of the three and six months ended June 30, 2021, as

 

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well as the increase in the number of UWC members participating in our UWC program. The following is a reconciliation of our net (loss) income to Adjusted EBITDA for the periods presented.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(Dollars in thousands)    2021      2020      2021      2020  

Reconciliation of net (loss) income to Adjusted EBITDA:

           

Net (loss) income

   $ (110,300    $ (8,754    $ (85,716    $ 106  

Interest expense, net

     13,740        16,229        27,699        33,424  

Income tax benefit

     (44,569      (3,231      (36,187      (5,297

Depreciation and amortization expense

     11,900        11,140        23,550        22,097  

(Gain) loss on sale of assets(a)

     (7,097      167        (6,307      510  

Dividend recapitalization fees and payments(b)

     —          —          —          772  

Loss on extinguishment of debt

     3,183        —          3,183        1,918  

Stock-based compensation expense(c)

     203,231        398        203,541        785  

Acquisition expenses(d)

     555        350        1,009        1,014  

Management fees(e)

     250        —          500        250  

Non-cash rent expense(f)

     378        11,151        756        11,468  

Expenses associated with initial public offering(g)

     1,450        —          1,450        —    

Other(h)

     357        704        1,072        1,177  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 73,078      $ 28,154      $ 134,550      $ 68,224  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Consists of (gains) and losses on the disposition of assets associated with store closures or the sale of property and equipment.

(b)

Represents payments to holders of our stock options made pursuant to anti-dilution provisions in connection with dividends paid to holders of our common stock and legal fees related to dividend recapitalizations.

(c)

Represents non-cash expense associated with our share-based payments, including approximately $202.0 million in stock-based compensation expense associated with our performance-based vesting stock options that vested on the consummation of our initial public offering (“IPO”) in June 2021.

(d)

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.

(e)

Represents management fees paid to Leonard Green & Partners, L.P. (“LGP”) in accordance with our management services agreement, which terminated on the consummation of our IPO in June 2021.

(f)

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

(g)

Represents non-recurring expenses associated with the consummation of our IPO in June 2021.

(h)

Consists of other nonrecurring or discrete items as determined by management not to be reflective of our ongoing operating performance, such as costs associated with our one-time rebranding initiative costs, severance pay, legal settlements and legal fees related to contract terminations, and nonrecurring strategic project costs.

Components of Our Results of Operations

Revenues, net

We recognize revenue in two main streams: (i) the UWC program that entitles the customer to unlimited washes for a monthly subscription fee, cancellable at any time and (ii) retail car washes and other services. In the UWC program, we enter into a contract with the customer that falls under the definition of a customer contract

 

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under ASC 606, Revenue from Contracts with Customers. Customers are automatically charged on a credit card or debit card on the same date of the month that they originally signed up. Our performance obligations are to provide unlimited car wash services for a monthly fee. The UWC revenue is recognized ratably over the month in which it is earned and amounts unearned are recorded as deferred revenue on the unaudited condensed consolidated balance sheets. All amounts recorded as deferred revenue at year end are recognized as revenue in the following year. Revenue from car wash and other services is recognized at the point in time at which services are rendered and the customer pays with cash, debit card, or credit card. Revenues are net of sales tax, refunds, and discounts applied as a reduction of revenue at the time of payment.

Store Operating Costs

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

Cost of Labor and Chemicals

Cost of labor and chemicals include compensation expenses associated with car wash employees, maintenance employees, warehouse employees, and chemicals and associated supplies. The related employee benefits for the aforementioned employees, such as taxes, insurance and workers compensation, are also included in the cost of labor and chemicals in the unaudited condensed consolidated statement of operations and comprehensive loss included elsewhere in this Quarterly Report on Form 10-Q.

Other Store Operating Expenses

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

General and Administrative

General and administrative expenses include compensation expenses and the related employee benefits of headquarters employees, information technology expenses, administrative office expenses, professional services and other related expenses, depreciation expense on held-for-use assets used at our headquarters, and amortization expense associated with our intangible assets.

Following the consummation of our IPO in June 2021, we will incur significant expenses on an ongoing basis that we did not incur as a private company. Those costs include additional director and officer liability insurance expenses, as well as third-party and internal resources related to accounting, auditing, Sarbanes-Oxley Act compliance, legal, and investor and public relations expenses. We expect such expenses to further increase after we are no longer an emerging growth company. These costs will generally be expensed under general and administrative expenses in the unaudited condensed consolidated statement of operations and comprehensive loss included elsewhere in this Quarterly Report on Form 10-Q.

(Gain) Loss on Sale of Assets

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

Interest Expense, net

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

 

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Loss on Extinguishment of Debt

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

Income Tax Benefit

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

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

Results of Operations for the Three Months Ended June 30, 2021 and 2020 (Unaudited)

The unaudited results of operations data for the three months ended June 30, 2021 and 2020 have been derived from the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

 

     Three Months Ended June 30,  
     2021     2020  
(Dollars in thousands)    Amount      % of
Revenue
    Amount      % of
Revenue
 

Revenues, net

   $ 197,080        100   $ 101,856        100

Store operating costs:

          

Cost of labor and chemicals

     87,864        45     34,059        33

Other store operating expenses

     65,363        33     49,752        49

General and administrative

     188,896        96     13,634        13

(Gain) loss on sale of assets

     (7,097      (4 )%      167        0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total costs and expenses

     335,026        170     97,612        96
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating (loss) income

     (137,946      (70 )%      4,244        4
  

 

 

    

 

 

   

 

 

    

 

 

 

Other expense:

          

Interest expense, net

     13,740        7     16,229        16

Loss on extinguishment of debt

     3,183        2     —          0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other expense

     16,923        9     16,229        16
  

 

 

    

 

 

   

 

 

    

 

 

 

Loss before taxes

     (154,869      (79 )%      (11,985      (12 )% 

Income tax benefit

     (44,569      (23 )%      (3,231      (3 )% 
  

 

 

    

 

 

   

 

 

    

 

 

 

Net loss

     (110,300      (56 )%      (8,754      (9 )% 
  

 

 

    

 

 

   

 

 

    

 

 

 

Revenues, net

 

     Three Months Ended
June 30,
               
(Dollars in thousands)    2021      2020      $ Change      % Change  

Revenues, net

   $ 197,080      $ 101,856      $ 95,224        93

 

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Revenues, net were $197.1 million for the three months ended June 30, 2021 compared to $101.9 million for the three months ended June 30, 2020, an increase of $95.2 million, or 93%. The increase in revenues, net was primarily attributable to an increase of $100.2 million in car wash revenue and was partially offset by a $5.0 million decrease in oil change revenue as a result of the sale of our quick lube facilities in December 2020. The increase in car wash revenue was attributable to comparable store sales growth and the year-over-year addition of 24 locations.

Store Operating Costs

Cost of Labor and Chemicals

 

     Three Months Ended
June 30,
              
(Dollars in thousands)    2021     2020     $ Change      % Change  

Cost of labor and chemicals

   $ 87,864     $ 34,059     $ 53,805        158

Percentage of revenues, net

     45     33     

Cost of labor and chemicals was $87.9 million for the three months ended June 30, 2021 compared to $34.1 million for the three months ended June 30, 2020, an increase of $53.8 million, or 158%. The increase in the cost of labor and chemicals primarily driven by the recognition of stock-based compensation expense of $31.3 million related to our performance-based vesting stock options that vested on the consummation of our IPO in June 2021, and an increase in labor and benefits of $21.3 million in connection with the increase in wash volume. These increases were partially offset by decreases in labor costs driven by optimizing our wash labor model and the sale of our quick lube locations.

Other Store Operating Expenses

 

     Three Months Ended
June 30,
              
(Dollars in thousands)    2021     2020     $ Change      % Change  

Other store operating expenses

   $ 65,363     $ 49,752     $ 15,611        31

Percentage of revenues, net

     33     49     

Other store operating expenses were $65.4 million for the three months ended June 30, 2021 compared to $49.8 million for the three months ended June 30, 2020, an increase of $15.6 million, or 31%. The increase in other store operating expenses was attributable to comparable store sales growth and the year-over-year addition of 24 locations, and an increase in occupancy costs associated with the net addition of 30 new leases, partially offset by a decrease in other store operating expenses from the sale of our quick lube facilities.

General and Administrative

 

     Three Months Ended
June 30,
              
(Dollars in thousands)    2021     2020     $ Change      % Change  

General and administrative

   $ 188,896     $ 13,634     $ 175,262        1,285

Percentage of revenues, net

     96     13     

General and administrative expenses were $188.9 million for the three months ended June 30, 2021 compared to $13.6 million for the three months ended June 30, 2020, an increase of $175.3 million, or 1,285%. The increase in general and administrative expenses was primarily driven by the recognition of stock-based compensation expense of $170.7 million related to the performance-based vesting stock options that vested on the consummation of our IPO in June 2021, and an increase of approximately $4.6 million in general and

 

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administrative expenses in 2021 after the 2020 decrease in expenses as a result of the COVID-19 pandemic, which was driven by our furlough of corporate employees, temporary reductions in pay, temporary closures of corporate offices, and an overall reduction in other administrative expenses.

(Gain) Loss on Sale of Assets

 

     Three Months Ended
June 30,
              
(Dollars in thousands)        2021             2020         $ Change      % Change  

(Gain) loss on sale of assets

   $ (7,097   $ 167     $ (7,264      (4,350 )% 

Percentage of revenues, net

     (4 )%      0     

(Gain) loss on sale of assets reflected a gain of $7.1 million for the three months ended June 30, 2021 compared to loss of $0.2 million for the three months ended June 30, 2020, an increase of $7.3 million, or 4,350%. The increase in (gain) loss on sale of assets was primarily driven by gains associated with our sale-leaseback transactions.

Other Expense

 

     Three Months Ended
June 30,
              
(Dollars in thousands)    2021     2020     $ Change      % Change  

Other expense

   $ 16,923     $ 16,229     $ 694        4

Percentage of revenues, net

     9     16     

Other expense was $16.9 million for the three months ended June 30, 2021 compared to $16.2 million for the three months ended June 30, 2020, an increase of $0.7 million, or 4%. The increase in other expense was primarily driven by a $3.2 million loss on extinguishment of debt related to our amended and restated senior secured first lien term loan facility (“First Lien Term Loan”) pursuant to the amended and restated first lien credit agreement entered into in May 2019 (“Amended First Lien Credit Agreement”), our senior secured second lien term loan facility (“Second Lien Term Loan”) pursuant to the second lien credit agreement entered into in May 2019 (as amended in March 2020, the “Amended Second Lien Credit Agreement”), and the upsizing of the revolving credit facility (“Revolving Commitment”) under our Amended First Lien Credit Agreement, partially offset by a decrease in interest expense as a result of a decrease in interest rates on our First Lien Term Loan and Second Lien Term Loan, as well as a reduction in our outstanding borrowings under the Revolving Commitment.

Income Tax Benefit

 

     Three Months Ended
June 30,
              
(Dollars in thousands)    2021     2020     $ Change      % Change  

Income tax benefit

   $ (44,569   $ (3,231   $ (41,338      1,279

Percentage of revenues, net

     (23 )%      (3 )%      

Income tax benefit was $44.6 million for the three months ended June 30, 2021 compared to $3.2 million for the three months ended June 30, 2020, an increase of $41.3 million, or 1,279%. The increase in income tax benefit was primarily driven by the increase in the loss before taxes for the three months ended June 30, 2021.

 

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Results of Operations for the Six Months Ended June 30, 2021 and 2020 (Unaudited)

The unaudited results of operations data for the six months ended June 30, 2021 and 2020 have been derived from the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

 

     Six Months Ended June 30,  
     2021     2020  
(Dollars in thousands)    Amount      % of
Revenue
    Amount      % of
Revenue
 

Revenues, net

   $ 372,588        100   $ 257,108        100

Store operating costs:

          

Cost of labor and chemicals

     139,613        37     91,629        36

Other store operating expenses

     126,446        34     108,225        42

General and administrative

     203,857        55     26,593        10

(Gain) loss on sale of assets

     (6,307      (2 )%      510        0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total costs and expenses

     463,609        124     226,957        88
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating (loss) income

     (91,021      (24 )%      30,151        12
  

 

 

    

 

 

   

 

 

    

 

 

 

Other expense:

          

Interest expense, net

     27,699        7     33,424        13

Loss on extinguishment of debt

     3,183        1     1,918        1
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other expense

     30,882        8     35,342        14
  

 

 

    

 

 

   

 

 

    

 

 

 

Loss before taxes

     (121,903      (33 )%      (5,191      (2 )% 

Income tax benefit

     (36,187      (10 )%      (5,297      (2 )% 
  

 

 

    

 

 

   

 

 

    

 

 

 

Net (loss) income

     (85,716      (23 )%      106        0
  

 

 

    

 

 

   

 

 

    

 

 

 

Revenues, net

 

     Six Months Ended
June 30,
               
(Dollars in thousands)    2021      2020      $ Change      % Change  

Revenues, net

   $ 372,588      $ 257,108      $ 115,480        45

Revenues, net were $372.6 million for the six months ended June 30, 2021 compared to $257.1 million for the six months ended June 30, 2020, an increase of $115.5 million, or 45%. The increase in revenues, net was primarily attributable to an increase of $127.5 million in car wash revenue and was partially offset by a $12.0 million decrease in oil change revenue as a result of the sale of our quick lube facilities in December 2020. The increase in car wash revenue was attributable to comparable store sales growth and the year-over-year addition of 24 locations.

Store Operating Costs

Cost of Labor and Chemicals

 

     Six Months Ended
June 30,
              
(Dollars in thousands)    2021     2020     $ Change      % Change  

Cost of labor and chemicals

   $ 139,613     $ 91,629     $ 47,984        52

Percentage of revenues, net

     37     36     

Cost of labor and chemicals was $139.6 million for the six months ended June 30, 2021 compared to $91.6 million for the six months ended June 30, 2020, an increase of $48.0 million, or 52%. The increase in the

 

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cost of labor and chemicals was primarily driven by the recognition of stock-based compensation expense of $31.3 million related to our performance-based vesting stock options that vested on the consummation of our IPO in June 2021, and an increase in labor and benefits of $16.5 million in connection with the increase in wash volume. These increases were partially offset by decreases in labor costs driven by optimizing our wash labor model and our sale of the quick lube locations.

Other Store Operating Expenses

 

     Six Months Ended
June 30,
              
(Dollars in thousands)    2021     2020     $ Change      % Change  

Other store operating expenses

   $ 126,446     $ 108,225     $ 18,221        17

Percentage of revenues, net

     34     42     

Other store operating expenses were $126.4 million for the six months ended June 30, 2021 compared to $108.2 million for the six months ended June 30, 2020, an increase of $18.2 million, or 17%. The increase in other store operating expenses was attributable to comparable store sales growth and the year-over-year addition of 24 locations, and an increase in occupancy costs associated with the net addition of 30 new leases, partially offset by a decrease in other store operating expenses from the sale of our quick lube facilities.

General and Administrative

 

     Six Months Ended
June 30,
              
(Dollars in thousands)    2021     2020     $ Change      % Change  

General and administrative

   $ 203,857     $ 26,593     $ 177,264        667

Percentage of revenues, net

     55     10     

General and administrative expenses were $203.9 million for the six months ended June 30, 2021 compared to $26.6 million for the six months ended June 30, 2020, an increase of $177.3 million, or 667%. The increase in general and administrative expenses was primarily attributable to the recognition of stock-based compensation expense of $170.7 million related to our performance-based vesting stock options that vested on the consummation of our IPO in June 2021, and an increase of approximately $6.6 million in general and administrative expenses in 2021 after the 2020 decrease in connection with the COVID-19 pandemic, which was driven by our furlough of corporate employees, temporary reductions in pay, temporary closures of corporate offices, and an overall reduction in other administrative expenses.

(Gain) Loss on Sale of Assets

 

     Six Months Ended
June 30,
              
(Dollars in thousands)    2021     2020     $ Change      % Change  

(Gain) loss on sale of assets

   $ (6,307   $ 510     $ (6,817      (1,337 )% 

Percentage of revenues, net

     (2 )%      0     

(Gain) loss on sale of assets reflected a gain of $6.3 million for the six months ended June 30, 2021 compared to loss of $0.5 million for the six months ended June 30, 2020, an increase of $6.8 million, or 1,337%. The increase in (gain) loss on sale of assets was primarily driven by gains associated with our sale-leaseback transactions.

 

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Other Expense

 

     Six Months Ended
June 30,
              
(Dollars in thousands)    2021     2020     $ Change      % Change  

Other expense

   $ 30,882     $ 35,342     $ (4,460      (13 )% 

Percentage of revenues, net

     8     14     

Other expense was $30.9 million for the six months ended June 30, 2021 compared to $35.3 million for the six months ended June 30, 2020, a decrease of $4.5 million, or 13%. The decrease in other expense was primarily driven by a $3.2 million loss on extinguishment of debt related to the First Lien Term Loan, the Second Lien Term Loan, and the upsizing of the Revolving Commitment, partially offset by the decrease in interest expense with a decrease in interest rates on our First Lien Term Loan and Second Lien Term Loan, as well as a reduction in our outstanding borrowings under the Revolving Commitment.

Income Tax Benefit

 

     Six Months Ended
June 30,
              
(Dollars in thousands)    2021     2020     $ Change      % Change  

Income tax benefit

   $ (36,187   $ (5,297   $ (30,890      583

Percentage of revenues, net

     (10 )%      (2 )%      

Income tax benefit was $36.2 million for the six months ended June 30, 2021 compared to $5.3 million for the six months ended June 30, 2020, an increase of $30.9 million, or 583%. The increase in income tax benefit was primarily driven by the increase in the loss before taxes in the six months ended June 30, 2021.

Liquidity and Capital Resources

Funding Requirements

Our primary requirements for liquidity and capital are to fund our investments in our core business, pursue greenfield expansion and acquisitions, and to service our indebtedness. Historically, these cash requirements have been met through funds raised by the utilization of our First Lien Term Loan, Second Lien Term Loan, Revolving Commitment, sale-leaseback transactions, and cash provided by operations. As of June 30, 2021, we had cash and cash equivalents of $155.0 million and $150.0 million of available borrowing capacity under our Revolving Commitment.

In June 2021, we entered into an amendment to our Amended First Lien Credit Agreement to, among other things, increase the commitments under the Revolving Commitment from $75.0 million to $150.0 million. In June 2021, we made a voluntary prepayment of all outstanding balances under our Second Lien Term Loan, which included $242.7 million in outstanding principal and $6.1 million in accrued interest expense, and a voluntary prepayment of $190.4 million of outstanding principal under our First Lien Term Loan. These voluntary prepayments were funded with the net proceeds of our June 2021 IPO and the Amended Second Lien Credit Agreement was terminated.

As of June 30, 2021, we were in compliance with the covenants under our Amended First Lien Credit Agreement.

We believe that our sources of liquidity and capital will be sufficient to finance our growth strategy and resulting operations, planned capital expenditures, and the additional expenses we expect to incur as a public company for at least the next 12 months. However, we cannot assure you that cash provided by operating activities or cash and cash equivalents will be sufficient to meet our future needs. If we are unable to generate sufficient cash flows from operations in the future, we may have to obtain additional financing. If we obtain

 

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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 Six Months Ended June 30, 2021 and 2020 (Unaudited)

The following table shows summary cash flow information for the six months ended June 30, 2021 and 2020:

 

     Six Months Ended
June 30,
 
(Dollars in thousands)    2021      2020  

Net cash provided by operating activities

   $ 119,675      $ 53,853  

Net cash used in investing activities

     (66,645      (29,503

Net cash (used in) provided by financing activities

     (12,564      27,035  
  

 

 

    

 

 

 

Net increase in cash and cash equivalents, and restricted cash

   $ 40,466      $ 51,385  
  

 

 

    

 

 

 

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

For the six months ended June 30, 2021, net cash provided by operating activities was $119.7 million and was comprised of a net loss of $(85.7) million, which was increased by $203.4 million as a result of non-cash adjustments comprised primarily of stock-based compensation expense, deferred income taxes, depreciation and amortization expense, non-cash lease expense, a gain on disposal of property and equipment, and a loss on extinguishment of debt. Changes in working capital increased cash provided by operating activities by $2.0 million and were primarily driven by increases in accounts payable, accrued expenses, and a decrease in deferred revenue, partially offset by decreases in the operating lease liability and other noncurrent assets and liabilities, and increases in accounts receivable, net and prepaid expenses and other current assets.

For the six months ended June 30, 2020, net cash provided by operating activities was $53.9 million and was comprised of net income of $0.1 million, increased by $47.2 million as a result of non-cash adjustments comprised primarily of depreciation and amortization expense, non-cash lease expense, and deferred income taxes. Changes in working capital increased cash provided by operating activities by $6.5 million and were primarily driven by an increase in accrued expenses and a decrease in inventory, partially offset by decreases in the operating lease liability and accounts payable.

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

For the six months ended June 30, 2021, net cash used in investing activities was $66.6 million and was comprised of purchases of property and equipment to support our greenfield and other initiatives and the acquisition of car washes, partially offset by the sale of property and equipment including sale-leaseback transactions.

For the six months ended June 30, 2020, net cash used in investing activities was $29.5 million and was comprised of purchases of property and equipment primarily to support our greenfield and other initiatives, partially offset by the sale of property and equipment including sale-leaseback transactions.

 

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

For the six months ended June 30, 2021, net cash used in financing activities was $12.6 million and was primarily comprised of repayments of our First Lien Term Loan and Second Lien Term Loan and payments of issuance costs associated with our IPO, partially offset by proceeds from the consummation of our IPO in June 2021.

For the six months ended June 30, 2020, net cash provided by financing activities was $27.0 million and was primarily comprised of proceeds on borrowings under our Revolving Commitment, First Lien Term Loan, and Second Lien Term Loan, partially offset by repayments of our Revolving Commitment and First Lien Term Loan.

Contractual Obligations and Commitments

There have been no material changes during the three months ended June 30, 2021 to the contractual obligations disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in the Prospectus other than the following:

Long-Term Debt Obligations

In June 2021, we entered into an amendment to our Amended First Lien Credit Agreement to, among other things, increase the commitments under the Revolving Commitment from $75.0 million to $150.0 million. In June 2021, we made a voluntary prepayment of all outstanding balances under our Second Lien Term Loan, which included $242.7 million in outstanding principal and $6.1 million in accrued interest expense, and a voluntary prepayment of $190.4 million of outstanding principal under our First Lien Term Loan. These voluntary prepayments were funded with the net proceeds of our June 2021 IPO. The Second Lien Term Loan has now been terminated.

Operating Lease Commitments

In the six months ended June 30, 2021, we entered into 33 new operating leases and renewed 16 operating leases, which increased our total operating lease commitments by approximately $24.2 million.

Seasonality

Our business model is generally not seasonal in nature. As we have expanded our national footprint to 21 states, the geographic diversity of our locations ensures that we are not subject to the weather patterns of one specific region. The success of the UWC program has further mitigated our seasonality, as members pay on a monthly basis, irrespective of the weather and their usage frequency. As our UWC sales have grown to comprise more than approximately 62% and 62% of our total wash sales in the three and six months ended June 30, 2021, respectively, our financial performance has become more predictable.

Off-Balance Sheet Arrangements

We did not have off-balance sheet arrangements during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

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Critical Accounting Policies and Estimates

Our critical accounting policies are those that materially affect our unaudited condensed consolidated financial statements including those that involve difficult, subjective or complex judgments by management. The preparation of our consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from those estimates. A thorough understanding of these critical accounting policies is essential when reviewing our unaudited condensed consolidated financial statements. We believe that these critical accounting policies are those that are most important to the portrayal of our results of operations or involve the most difficult management decisions related to the use of significant estimates and assumptions as described above.

The significant accounting policies and estimates used in preparation of the unaudited condensed consolidated financial statements are described in our audited consolidated financial statements as of and for the year ended December 31, 2020, and the notes thereto, which are included in the Prospectus. There have been no material changes to our significant accounting policies during the three and six months ended June 30, 2021.

Recent Accounting Pronouncements

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

 

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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 June 30, 2021, we had $615.4 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 June 30, 2021, an increase or decrease of 10% in the effective interest rate on the First Lien Term Loan would cause an increase or decrease in interest expense of approximately $1.9 million over the next 12 months.

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

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 believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. We cannot assure you, however, 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

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2021. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

Due to a transition period established by SEC rules applicable to newly public companies, our management is not required to evaluate the effectiveness of our internal control over financial reporting until after the filing of our Annual Report on Form 10-K for the year ended December 31, 2021. As a result, this Quarterly Report on Form 10-Q does not address whether there have been any changes in our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

You should carefully consider the risks described below, together with all of the other information included in this Quarterly Report on Form 10-Q, 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. Furthermore, the potential impact of the COVID-19 pandemic, including from variants thereof, on our business operations and financial results and on the world economy as a whole may heighten the risks described below.

Risks Related to Our Business

Increased competition in the car wash industry may impact our future growth.

The car wash industry has recently attracted increased levels of investment by private equity firms and other capital providers. The ongoing competition for acquisitions may result in higher purchase prices for desirable car wash acquisitions. Construction by competitors of express car washes near our existing car wash locations may negatively impact our business, comparable sales and our net revenues. While we have active programs to identify both acquisition targets and future locations for greenfield expansion, there can be no assurance that we will continue to be successful in acquiring targets at reasonable purchase prices or constructing new car washes in existing or new markets.

We may be unable to sustain or increase demand for our UWC subscription program, which could adversely affect our business, financial condition and results of operations and rate of growth.

As of June 30, 2021, we had approximately 1.5 million UWC members. This subscription program accounted for approximately 62% of our total wash sales in the three and six months ended June 30, 2021. Our continued business and revenue growth is dependent on our ability to continue to attract and retain 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. However, we may not be successful in continuing to grow the number of UWC members on a net basis from period to period and our membership levels may decline. This decline may be material.

UWC members are able to cancel their membership at any time and may decide to cancel or forego memberships due to any number of reasons, including increased prices for membership in our UWC or for our services, quality issues with our services, harm to our reputation or brand, seasonal usage, or individuals’ personal economic pressures. Increasing governmental regulation of automatically renewing subscription programs may negatively impact our marketing of this program. A decline in the number of UWC members could materially and adversely affect our business, results of operations and financial condition.

 

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If we fail to open and operate new locations in a timely and cost-effective manner or fail to successfully enter new markets, our financial performance could be materially and adversely affected.

Our growth strategy depends on growing our location base, both through greenfield expansion and acquisitions, and expanding our operations in existing and new geographic regions and operating our new locations successfully. We cannot assure you that our contemplated expansion will be successful, or that such expansion will be completed in the time frames or at the costs we estimate.

Our ability to successfully open and operate new locations depends on many factors, including, among others, our ability to:

 

   

identify suitable locations;

 

   

negotiate acceptable purchase price or lease terms, including the ability to renew or extend upon favorable terms;

 

   

address regulatory, competitive, marketing, distribution and other challenges encountered in connection with expansion into new markets;

 

   

hire, train and retain an expanded workforce of managers and other personnel;

 

   

maintain an adequate distribution footprint, information systems and other operational capabilities;

 

   

successfully integrate new locations into our existing management structure and operations, including information system integration;

 

   

source sufficient levels of inventory, supplies and equipment at acceptable costs;

 

   

obtain necessary permits and licenses;

 

   

construct and open our locations on a timely basis;

 

   

generate sufficient levels of cash or obtain financing on acceptable terms to support our expansion;

 

   

achieve and maintain brand awareness in new and existing markets; and

 

   

identify and satisfy the merchandise and other preferences of our consumers.

Our failure to effectively address challenges such as these could materially and adversely affect our ability to successfully open and operate new locations in a timely and cost-effective manner. Further, we will have pre-operating costs and we may have initial losses while new locations commence or ramp operations.

In addition, there can be no assurance that newly opened locations will achieve sales or profitability levels comparable to those of our existing locations in the time periods estimated by us, or at all. In instances where new locations are geographically proximate to existing locations, new locations may also adversely impact the comparable store sales growth of our existing car wash locations. If our locations fail to achieve, or are unable to sustain, acceptable total sales and profitability levels, our business may be materially and adversely affected and we may incur significant costs associated with the early closure of such locations. Our plans to accelerate the growth of our location base may increase this risk.

We may not be able to successfully implement our growth strategies on a timely basis or at all.

Our future success depends, in large part, on our ability to implement our growth strategies, including acquiring new customers, growing our UWC membership base, opening greenfield locations and pursuing opportunistic and disciplined acquisitions. Our ability to implement these growth strategies depends, among other things, on our ability to:

 

   

increase our brand awareness by effectively implementing our digital-first marketing strategy;

 

   

leverage data analytics throughout the organization;

 

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increase customer engagement with our digital platform;

 

   

educate UWC members on value propositions to drive retention and add new members;

 

   

leverage our investments to drive traffic and customer acquisition;

 

   

drive scale efficiencies and generate free cash flow; and

 

   

selectively grow our location base.

We may not be able to successfully implement our growth strategies and may need to change them. If we fail to implement our growth strategies or if we invest resources in a growth strategy that ultimately proves unsuccessful, our business, results of operations and financial condition may be materially and adversely affected.

If we are unable to identify attractive acquisition targets and acquire them at attractive prices, we may be unsuccessful in growing our business.

A significant portion of the growth of our number of locations has been as a result of our acquisition of additional car wash locations and subsequent adaptation of those locations to operate consistently with other Mister Car Wash locations. There can be no assurance, however, that we will find suitable acquisition targets in the future, that we will acquire them at attractive prices or that we will succeed at effectively managing the integration of the acquired location into our existing operations and the “Mister” brand. We could also encounter unforeseen transaction- and integration-related costs or delays or other circumstances such as challenges or delays in adapting these locations to operate similarly to other Mister Car Wash locations or unforeseen or higher-than-expected inherited liabilities. Many of these potential circumstances are outside of our control and any of them could result in increased costs, decreased revenue or the diversion of management time and attention.

In order for us to continue to grow our business through acquisitions we will need to identify appropriate acquisition opportunities and acquire them at attractive prices. We may choose to pay cash, incur debt or issue equity securities to pay for any such acquisition. The incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations. The sale of equity to finance any such acquisition could result in dilution to our stockholders.

We are subject to a number of risks and regulations related to credit card and debit card payments we accept.

We accept payments through credit card and debit card transactions. For credit card and debit card payments, we pay interchange and other fees, which may increase over time. An increase in those fees would require us to either increase the prices we charge for our memberships, which could cause us to lose UWC members or suffer an increase in our operating expenses, either of which could harm our operating results.

If we or any of our processing vendors have problems with our billing software, or the billing software malfunctions, it could have an adverse effect on our member satisfaction and could cause one or more of the major credit card companies to disallow our continued use of their payment products. In addition, if our billing software fails to work properly and, as a result, we do not automatically charge our UWC members’ credit cards or debit cards on a timely basis or at all, we could lose membership revenue, which would materially and adversely affect our operating results.

If we fail to adequately control fraudulent credit card and debit card transactions, we may face civil liability, diminished public perception of our security measures and significantly higher credit card and debit card related costs, each of which could adversely affect our business, financial condition and results of operations. We are subject to a number of federal regulations relating to the use of debit and credit cards, such as the Electronic Funds Act and the Truth in Lending Act of 1968, which provide guidelines and parameters for payment

 

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processing on debit cards and credit cards, respectively, and certain state regulations relating to automatic renewal, including the California Business & Professional Code Section 17601-17606, as amended, which provides requirements we must follow for the automatic renewal of subscription fees such as those charge to our UWC members. We may also face legal liability or reputational harm for any failure to comply, or any allegation that we have failed to comply, with such consumer protection laws relating to consumer credit transactions.

An overall decline in the health of the economy and other factors impacting consumer spending, such as natural disasters and fluctuations in inflation may affect consumer purchases, reduce demand for our services and materially and adversely affect our business, results of operations and financial condition.

Our business depends on consumer demand for our services and, consequently, is sensitive to a number of factors that influence consumer confidence and spending, such as general current and future economic and political conditions, consumer disposable income, energy and fuel prices, shifts in consumer transportation preferences leading to a reduction in car ownership, technological advances in autonomous vehicle technology reducing the number of vehicles on the road, recession and fears of recession, unemployment, minimum wages, availability of consumer credit, consumer debt levels, conditions in the housing market, interest rates, tax rates and policies, inflation, war and fears of war, inclement weather, natural disasters, terrorism, active shooter situations, outbreak of viruses or widespread illness and consumer perceptions of personal well-being and security.

Consumer purchases of car washes decline during periods when economic or market conditions are unstable or weak. Reduced consumer confidence and spending cutbacks may result in reduced demand for our services, which could result in lost sales. Reduced demand also may require increased selling and promotional expenses, impacting our profitability. Changes in areas around our locations that result in reductions in car traffic or otherwise render the locations unsuitable could cause our sales to be less than expected. Prolonged or pervasive economic downturns could slow the pace of new greenfield openings, reduce comparable sales or cause us to close certain locations, which could have a material negative impact on our financial performance.

If we are not able to maintain and enhance our reputation and brand recognition, our business and results of operations may be harmed.

We believe that maintaining and enhancing our reputation and brand recognition are critical to our relationships with existing customers and our ability to attract new customers. The promotion of our brand may require us to make substantial investments and we anticipate that, as our market becomes increasingly competitive, these marketing initiatives may become increasingly difficult and expensive. Our marketing activities may not be successful or yield increased revenue, and to the extent that these activities yield increased revenue, the increased revenue may not offset the expenses we incur and our results of operations could be materially and adversely affected.

In addition, any factor that diminishes our reputation or that of our management, including failing to meet the expectations of our customers, could make it substantially more difficult for us to attract new customers. Also, there has been a marked increase in the use of social media platforms that provide individuals with access to a broad audience of consumers and other interested persons. The availability of information on social media platforms is virtually immediate as is its impact. Many social media platforms immediately publish the content their subscribers and participants can post, often without filters or checks on accuracy of the content posted. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information concerning us may be posted on such platforms at any time. Information posted may be adverse to our interests or may be inaccurate, each of which may harm our performance, prospects or business. The harm may be immediate without affording us an opportunity for redress or correction.

If we do not successfully maintain and enhance our reputation and brand recognition with our customers, our business may not grow and we could lose our relationships with customers, which would materially and adversely affect our business, results of operations and financial condition.

 

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Changes in labor and chemical costs, other operating costs, interest rates and inflation could materially and adversely affect our results of operations.

Increases in employee wages, benefits, and insurance and other operating costs such as commodity costs, legal claims, insurance costs and costs of borrowing could adversely affect operating costs and administrative expenses at our locations. Operating costs are susceptible to increases as a result of factors beyond our control, such as minimum wage legislation, weather conditions, natural disasters, disease outbreaks, global demand inflation, civil unrest, tariffs and government regulations. Any increase in costs for our locations could reduce our sales and profit margins if we do not choose, or are unable, to pass the increased costs to our customers. In addition, increases in interest rates may impact land and construction costs and the cost and availability of borrowed funds and leasing locations, and thereby adversely affect our ability to finance the development of additional locations and maintenance of existing locations. Inflation can also cause increased commodity, labor and benefits costs, which could reduce the profitability of our locations. Any of the foregoing increases could materially and adversely affect our business, results of operations and financial condition.

Our work force may expose us to claims that could materially and adversely affect our business, results of operations and financial condition, and our insurance coverage may not cover all of our potential liability.

Our work force may claim that our actions or workplace conditions violate applicable law. As a result of such claims, we may incur fines and other losses, as well as negative publicity. In addition, some or all of these claims may rise to litigation, which could be costly and time-consuming to our management team, and could have a negative impact on our business. Additionally, actions by our team members such as damage to customers’ cars may subject us to financial claims and harm our reputation. We cannot assure you that we will not experience these problems in the future, that our insurance will cover all claims or that our insurance coverage will continue to be available at economically feasible rates.

Our locations may experience difficulty hiring and retaining qualified personnel, resulting in higher labor costs.

The operation of our locations requires both entry-level and skilled team members, and trained personnel may continue to be in high demand and short supply at competitive compensation levels in some areas, which may result in increased labor costs. From time to time, we may experience difficulty hiring and maintaining such qualified personnel. In addition, the formation of unions may increase the operating expenses of our locations. Any such future difficulties could result in a decline in customer service negatively impacting sales at our locations, which could in turn materially and adversely affect our business, results of operations, business, and financial condition.

Many of our key personnel have worked for us for a significant amount of time or were recruited by us specifically due to their experience. Our success depends in part upon the reputation and influence within the industry of our senior managers. Each of our executive officers and other key employees may terminate his or her relationship with us at any time and the loss of the services of one or a combination of our senior executives or members of our senior management team may significantly delay or prevent the achievement of our business or development objectives and could materially harm our business. Further, contractual obligations related to confidentiality and noncompetition may be ineffective or unenforceable, and departing employees may share our proprietary information with competitors in ways that could adversely impact us.

In addition, certain senior management personnel are substantially vested in their stock option grants or other equity compensation. We granted additional equity awards to management personnel in connection with the offering to provide additional incentives to remain employed by us as team members may be more likely to leave us if a significant portion of their equity compensation is fully vested.

 

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If our car wash equipment is not maintained, our car washes will not be operable.

Our car washes have equipment that requires frequent repair or replacement. Although we undertake to keep our car washing equipment in adequate operating condition, the car wash operating environment results in frequent mechanical problems. If we fail to properly maintain the equipment, a car wash could become inoperable or malfunction resulting in a loss of revenue, damage to vehicles and poorly washed vehicles.

We rely on a limited number of suppliers for certain of our car wash equipment and supplies and may not be able to immediately transition to alternative suppliers.

We currently leverage a diversified supplier base to supply most of the car wash equipment and certain other supplies we use in our operations. While we believe we could secure such equipment and supplies from alternative sources, doing so may be time-consuming or expensive or may cause a temporary disruption in our supply chain. Additionally, we do not have a supplier contract with our main supplier of car wash tunnel equipment and our orders are based on purchase orders. We also do not carry a significant inventory of such equipment. As such, we are subject to the risk that such supplier will not continue to provide us with required car wash tunnel equipment. Shortages or interruptions in the supply of car wash equipment and other supplies could occur for reasons within or beyond the control of us and the supplier. Any shortage or interruption to our supply chain could reduce our sales and profit margins, which in turn may materially and adversely affect our business and results of operations.

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.

We lease the land and buildings where a significant number of our locations are located. The terms of the leases and subleases vary in length, with primary terms (i.e., before consideration of option periods) expiring on various dates. In addition, we may not be able to terminate a particular lease if or when we would like to do so, which could prevent us from closing or relocating certain underperforming locations. Our obligations to pay rent are generally non-cancelable, even if the location operated at the leased or subleased location is closed. Thus, if we decide to close locations, we generally are required to continue paying rent and operating expenses for the balance of the lease term. The performance of any of these obligations may be expensive. We may not assign or sublet the leased locations without consent of the landlord. When we assign or sublease vacated locations, we may remain liable on the lease obligations if the assignee or sub-lessee does not perform. Accordingly, we are subject to the risks associated with leasing locations which can have a material adverse effect on us.

As leases expire, we may be unable to negotiate renewals on commercially acceptable terms or at all, which could cause us to close locations in desirable locations or otherwise negatively affect profits, which in turn could materially and adversely affect our business and results of operations.

We are required to make significant lease payments for our leases, which may strain our cash flow.

We depend on net cash provided by operating activities to pay our rent and other lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash provided by operating activities, and sufficient funds are not otherwise available to us from borrowings under our First Lien Term Loan and Revolving Commitment or from other sources, we may not be able to service our lease expenses, grow our business, respond to competitive challenges or fund our other liquidity and capital needs, which would harm our business.

We may experience significant quarterly and annual fluctuations in our operating results due to a number of factors, which makes our future operating results difficult to predict.

Our quarterly and annual operating results may fluctuate significantly due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Our past results may not be a predictor of our future performance.

 

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Factors that may affect our operating results include:

 

   

the impact of a recession, pandemic or any other adverse global economic conditions on our business;

 

   

the timing of, and the ability to execute on, opening new greenfield locations and acquiring car washes through acquisitions;

 

   

our ability to sustain and grow the number of UWC members;

 

   

changes in our pricing policies or those of our competitors;

 

   

periodic fluctuations in demand for our services;

 

   

volatility in the cost of utilities;

 

   

volatility in the sales of our services;

 

   

the success or failure of our acquisition strategy;

 

   

our ability to develop and implement in a timely manner new products and services and enhancements that meet customer requirements;

 

   

any significant changes in the competitive dynamics of our market, including new entrants or substantial discounting of car wash services;

 

   

our ability to control costs;

 

   

any significant change in our facilities-related costs;

 

   

the timing of hiring personnel;

 

   

general economic conditions; and

 

   

our ability to appropriately resolve any disputes.

We have in the past experienced, and we may experience in the future, significant variations in our level of sales. Such variations in our sales have led and may lead to significant fluctuations in our cash flows, revenue and deferred revenue on a quarterly and annual basis. Failure to achieve our quarterly goals will decrease the value of the Company and accordingly the Company’s securities.

Our comparable store sales may fluctuate significantly.

Our comparable store sales may be adversely affected for many reasons, including new location openings by our competitors and the opening of our own new car wash locations that may cannibalize our existing store sales. Other factors that may affect comparable store sales include cycling against strong sales in the prior year, new car wash locations entering into our comparable store base and price reductions in response to competition.

The ongoing pandemic related to COVID-19 and its variants has materially and adversely affected our business, financial condition and results of operations and may continue to do so.

The public health crisis caused by the pandemic related to COVID-19 and its variants, and the measures taken by governments, businesses, including us and our suppliers, and the public at large to limit COVID-19’s spread had certain negative impacts on our business including:

 

   

we temporarily suspended operations at more than 300 of our locations in March 2020 and April 2020;

 

   

we temporarily suspended interior cleaning services at our Interior Cleaning Locations in March 2020 and fully resumed operations at those locations by August 2020;

 

   

we temporarily suspended a majority of our acquisition activity and paused greenfield initiatives from March 2020 to July 2020;

 

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we requested and received temporary rent deferrals, which have since been repaid; and

 

   

we amended our Second Lien Credit Agreement to cause the interest payment due March 31, 2020 to be paid in-kind by adding the full amount of interest payment to the then outstanding principal amount, rather than paying the interest payment in cash; subsequent interest payments have been paid in cash.

Our net revenues were adversely impacted in the first and second quarters of 2020 as a result of the pandemic and actions taken to control its spread. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion. We continue to implement extensive measures in response to COVID-19 and its variants throughout our business operations, but actions we have taken or may take, or decisions we have made or may make, as a consequence of the pandemic may result in legal claims or ligation against us. There can be no assurances that our business, suppliers or third-party service providers will not be adversely impacted or disrupted in the future by the pandemic related to COVID-19 and its variants. Developments related to the pandemic have also caused volatility in the capital markets, which could adversely affect our ability to access additional capital on commercially reasonable terms or at all.

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

As of December 31, 2020, we had U.S. federal and state net operating loss carryforwards (“NOLs”) of approximately $66 million and $11 million, respectively, available to offset future taxable income. Certain of our state NOLs will begin to expire in 2034. Under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change,” generally defined as a greater than 50% change by value in its equity ownership by certain stockholders over a three year period, is subject to limitations on its ability to utilize NOLs which arose prior to the ownership change to offset future taxable income. Similar rules may apply under state tax laws. If it is determined that we have in the past experienced ownership changes, or if we undergo one or more ownership changes as a result of future transactions in our stock, some of which may be outside our control, then our ability to utilize NOLs could be limited by Section 382 of the Code, and certain of our NOLs may expire unused. In addition, under the Tax Cuts and Jobs Act, as modified by the Coronavirus Aid, Relief, and Economic Security Act, NOLs arising in taxable years beginning after December 31, 2017 may be carried forward indefinitely, but the deductibility of such NOLs in taxable years beginning after December 31, 2020, will be limited to 80% of our taxable income in such year. For these reasons, we may not be able to realize, in whole or in part, a tax benefit from the use of our NOLs.

Adverse developments in applicable tax laws could have a material and adverse effect on our business, financial condition and results of operations. Our effective tax rate could also change materially as a result of various evolving factors, including changes in income tax law resulting from the most recent U.S. presidential and congressional elections or changes in the scope of our operations.

We are subject to income taxation at the federal level and by certain states and municipalities because of the scope of our operations. In determining our income tax liability for these jurisdictions, we must monitor changes to the applicable tax laws and related regulations. While our existing operations have been implemented in a manner we believe is in compliance with current prevailing laws, one or more taxing jurisdictions could seek to impose incremental or new taxes on us. In addition, as a result of the most recent presidential and congressional elections in the United States, there could be significant changes in tax law and regulations that could result in additional federal income taxes being imposed on us. Any adverse developments in these laws or regulations, including legislative changes, judicial holdings or administrative interpretations, could have a material and adverse effect on our business, financial condition and results of operations. Finally, changes in the scope of our operations, including expansion to new geographies, could increase the amount of taxes to which we are subject, and could increase our effective tax rate.

 

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Risks Related to Our Indebtedness and Capital Requirements

Our indebtedness could adversely affect our financial health and competitive position.

As of June 30, 2021, we had $611.5 million of indebtedness outstanding under our Amended