Driven Brands Holdings Inc

Note 6—Assets Held For Sale and Impairments

U.S. Car Wash

During 2023, management performed a strategic review of the U.S. car wash operations, which included, but was not limited to, an evaluation of the following: store performance, the competitive landscape, revenue and expense optimization opportunities, and capital requirements. As a result of this strategic review, management approved the closure of 29 stores, halted the opening of new company-operated stores, and began marketing property and equipment for sale that will not be utilized by the Company. These actions resulted in the transfer of assets from property and equipment to assets held for sale and impairment charges of $111 million relating to property and equipment, assets held for sale, and right-of-use assets during the three and nine months ended September 30, 2023.

As a result of the evaluation performed during 2023, as well as other qualitative and quantitative factors, including a decline in the stock price during the third quarter of 2023, management determined a triggering event had occurred requiring a step one quantitative analysis of the Company’s goodwill and indefinite lived intangible assets. Based on the results of our interim impairment analysis, we concluded the carrying value of the U.S. Car Wash reporting unit exceeded its fair value, and we recorded a full goodwill impairment charge of $851 million during the three and nine months ended September 30, 2023. The fair value of the remaining reporting units exceeded their carrying amounts, indicating no goodwill impairment. The fair values of each reporting unit were determined using a combination of the income approach and market approach valuation methodologies.

The changes in assets held for sale were as follows:

During the nine months ended September 28, 2024, management continued to enhance properties included within held for sale resulting in an increase to assets held for sale of $79 million. Management evaluated the fair value for all assets included within assets held for sale, which resulted in an impairment of $11 million and $41 million for the three and nine months ended September 28, 2024, respectively. In addition, during the nine months ended September 28, 2024, the Company sold 48 properties resulting in a net gain of $1 million and $12 million for the three and nine months ended September 28, 2024, respectively. The Company will continue to evaluate the fair value of assets held for sale, which may result in additional impairments.

Note 7 —Long-Term Debt

The Company’s long-term debt obligations consist of the following:

(a) Consists primarily of finance lease obligations.

Series 2019-3 Variable Funding Securitization Senior Notes

In December 2019, Driven Brands Funding, LLC (the “Issuer”) issued Series 2019-3 Variable Funding Senior Notes, Class A-1 (the “2019 VFN”) in the revolving amount of $115 million.The commitment under the 2019 VFN was set to expire in July 2022, with the option ofthree one-year extensions. In July 2023, the Company exercised the second ofthree one-year extension options. As of July 1, 2023, borrowings incur interest at the Base Rate plus an applicable margin or Secured Overnight Financing Rate (“SOFR”) plus an applicable term adjustment. In July 2024, the 2019 VFN was refinanced with the 2024 VFN described below.

2022-1 Securitization Senior Notes

In conjunction with the issuance of the 2022-1 Securitization Senior Notes, the Issuer and Driven Brands Canada Funding Corporation (together “the Co-Issuers”) also issued Series 2022-1 Class A-1 Notes in the amount of $135 million, which can be accessed at the Co-Issuers’ option if certain conditions are met.

2024-1 Securitization Senior Notes

In July 2024, the Co-Issuers issued $275 million of 2024-1 Class A-2 Securitization Senior Notes (the “2024-1 Senior Notes”) bearing a fixed interest rate of 6.372% per annum. The 2024-1 Senior Notes have a final legal maturity date in October 2054 and an anticipated repayment date in October 2031. The 2024-1 Senior Notes are secured by substantially all assets of the Co-Issuers and are guaranteed by the Co-Issuers and each of their respective subsidiaries. Proceeds from the 2024-1 Senior Notes were primarily used to repay the Company’s 2018-1 Class A-2 Securitization Senior Notes (the “2018-1 Senior Notes”). The Company incurred costs with third parties related to the issuance of the 2024-1 Senior Notes of $2 million included within interest expense, net on the unaudited consolidated statement of operations.

Series 2024-1 Variable Funding Securitization Senior Notes

In July 2024, the Co-Issuers issued Series 2024-1 Variable Funding Senior Notes, Class A-1 (the “2024 VFN”) in the revolving amount of $400 million. The 2024 VFN have a final legal maturity date in October 2054. The commitment under the 2024 VFN is set to expire in October 2029, with the option oftwo one-year extensions. The 2024 VFN are secured by substantially all assets of the Co-Issuers and are guaranteed by the Co-Issuers and each of their respective subsidiaries. Borrowings incur interest at the Base Rate plus an applicable margin or SOFR plus an applicable margin. As of September 28, 2024, there were no amounts outstanding under the 2024 VFN and $26 million of outstanding letters of credit which reduced the borrowing availability under the 2024 VFN.

Driven Holdings Revolving Credit Facility

In May 2021, Driven Holdings, LLC, (the “Borrower”) a Delaware limited liability company and indirect wholly-owned subsidiary of Driven Brands Holdings Inc., entered into a credit agreement to secure a revolving line of credit with a group of financial institutions (the “Revolving Credit Facility”), which provides for an aggregate amount of up to $300 million, and has a maturity date in May 2026 (the “Credit Agreement”). In June 2023, the Credit Agreement was amended pursuant to which as of July 2023, borrowings will incur interest at the Base Rate plus an applicable margin or SOFR plus an applicable term adjustment. The Revolving Credit Facility also includes periodic commitment fees based on the available unused balance and a quarterly administrative fee.

There was $223 million outstanding on the Revolving Credit Facility as of September 28, 2024 with $46 million of borrowings and $71 million of repayments made during the nine months ended September 28, 2024.

The Company’s debt agreements are subject to certain quantitative and qualitative covenants. As of September 28, 2024, the Company and its subsidiaries were in material compliance with such covenants.

Note 8 —Leases

During the nine months ended September 28, 2024, the Company sold 12 maintenance properties in various locations throughout the U.S. for a total of $17 million. During the nine months ended September 30, 2023, the Company sold 10 maintenance and 38 car wash properties in various locations throughout the U.S. for a total of $171 million. Concurrently with the closing of these sales, the Company entered into various operating lease agreements pursuant to which the Company leased back the properties. These lease agreements each have an initial term of 16 to 20 years. The Company does not include option periods in its determination of the lease term unless renewals are deemed reasonably certain to be exercised. The Company recorded an operating lease right-of-use asset and operating lease liability of $13 million and $13 million, respectively, as of September 28, 2024, and $132 million and $132 million, respectively, as of September 30, 2023 related to these lease arrangements. The Company recorded gains of $2 million and $5 million for the three and nine months ended September 28, 2024, respectively, and a loss of less than $1 million and a gain of $25 million for the three and nine months ended September 30, 2023, respectively.

Supplemental cash flow information related to the Company’s lease arrangements for the nine months ended September 28, 2024 and September 30, 2023, respectively, was as follows:

Note 9 —Share-based Compensation

The Company granted new awards during the three months ended September 28, 2024, consisting of 596,700 restricted stock units (“RSUs”) and 139,684 performance stock units (“PSUs”). The Company granted new awards during the nine months ended September 28, 2024 including 1,548,230 RSUs and 1,215,468 PSUs.

Awards are eligible to vest provided that the employee remains in continuous service on each vesting date. The RSUs vest ratably each year on the anniversary date generally over atwo-orthree-year period. The PSUs vest after athree-year performance period. The number of PSUs that vest is contingent on the Company achieving certain performance goals, one being a performance condition and the other being a market condition. The number of PSU shares that vest may range from 0% to 200% of the original grant, based upon the level of performance. Certain awards are considered probable of meeting vesting requirements, and therefore, the Company has started recognizing expense. For both RSUs and PSUs, if the grantee’s continuous service terminates for any reason, the grantee shall forfeit all rights, title, and interest in any unvested units as of the termination date.

The fair value of the total RSUs, performance-based PSUs, and market-based PSUs granted during the three months ended September 28, 2024 were $8 million, $1 million, and $1 million, respectively. The fair value of the total RSUs, performance-based PSUs, and market-based PSUs granted during the nine months ended September 28, 2024 were $21 million, $10 million, and $9 million, respectively. The Company based the fair value of the RSUs and performance-based PSUs on the Company’s stock price on the grant date.

The range of assumptions used for issued PSUs with a market condition valued using the Monte Carlo model were as follows:

The Company recorded $13 million and $36 million of share-based compensation expense during the three and nine months ended September 28, 2024, respectively, and $3 million and $10 million during the three and nine months ended September 30, 2023, respectively, within selling, general, and administrative expenses on the unaudited consolidated statements of operations. The increase in share-based compensation expense primarily relates to the modification of pre-IPO awards in the fourth quarter of 2023.

Note 10—(Loss) Earnings Per Share

The Company calculates basic and diluted (loss) earnings per share using the two-class method. The following table sets forth the computation of basic and diluted earnings per share attributable to common shareholders:

Basic (loss) earnings per share is computed by dividing net (loss) income by the weighted-average number of common shares outstanding for the period. In addition, the Company’s participating securities are related to certain restricted stock awards issued to Section 16 officers which include non-forfeitable dividend rights.

The Company had performance awards that are contingent on performance conditions which have not yet been met and therefore were excluded from the computation of weighted average shares of 1,887,842 shares for the three and nine months ended September 28, 2024 and 4,661,630 shares for the three and nine months ended September 30, 2023.

For the three months ended September 28, 2024 and the three and nine months ended September 30, 2023, we had net losses from operations. As a result, no potentially dilutive securities were included in the denominator for computing diluted loss per share as their inclusion would be antidilutive.

The following securities were not included in the computation of diluted shares outstanding because the effect would be antidilutive:

Note 11—Income Taxes

The Company’s tax provision is comprised of the most recent estimated annual effective tax rate applied to year-to-date ordinary income before taxes. The tax impacts of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are recorded discretely in the interim period in which they occur.

Income tax expense was $10 million for the three months ended September 28, 2024 compared to an income tax benefit of $152 million for the three months ended September 30, 2023. The effective income tax rate for the three months ended September 28, 2024 was (190.8%) primarily driven by the recognition of valuation allowances on income tax carryforwards in certain domestic jurisdictions that are not more likely than not to be realized, non-deductible share-based compensation, and state taxes related to pre-tax income compared to 16.0% for the three months ended September 30, 2023.

Income tax expense was $34 million for the nine months ended September 28, 2024 compared to an income tax benefit of $121 million for the nine months ended September 30, 2023. The effective tax rate for the nine months ended September 28, 2024 was 63.5% primarily driven by the recognition of valuation allowances on income tax carryforwards in certain domestic jurisdictions that are not more likely than not to be realized, non-deductible share-based compensation, and state taxes related to pre-tax income compared to 14.1% for the nine months ended September 30, 2023.

Note 12—Commitments and Contingencies

We are subject to various lawsuits, administrative proceedings, audits, and claims. Some of these lawsuits purport to be class actions and/or seek substantial damages. We are required to record an accrual for litigation loss contingencies that are both probable and reasonably estimable. Management regularly assesses our insurance deductibles, analyzes litigation information with our attorneys, and evaluates our loss experience in connection with pending legal proceedings. We record our best estimate of a loss when the loss is considered probable and the amount of such loss can be reasonably estimated. When a loss is probable and there is a range of estimated loss with no best estimate within the range, we record the minimum estimated liability related to the lawsuit or claim. As additional information becomes available, we reassess the potential liability and revise our accruals, if necessary. Legal fees and expenses associated with the defense of all of our litigation are expensed as such fees and expenses are incurred. Because of uncertainties related to the resolution of lawsuits and claims, the ultimate outcome may differ materially from our estimates.

Genesee County Employees’ Retirement System v. Driven Brands Holdings Inc., et al. – On December 22, 2023, Genesee County Employees’ Retirement System filed a putative class action lawsuit in the U.S. District Court for the Western District of North Carolina (the “Court”) against the Company as well as a current and a former Company executive (the “Individual Defendants”) alleging violations of Section 10(b) and Rule 10b-5 of the Exchange Act by the Company, as well as violations of Section 20(a) of the Exchange Act by the Individual Defendants. Genesee County Employees’ Retirement System, Oakland County Employees’ Retirement System, and Oakland County Voluntary Employees’ Beneficiary Association (collectively the “Michigan Funds”) moved for appointment as lead plaintiffs. The Michigan Funds purport to represent a class of stockholders who purchased Company shares between October 27, 2021 and August 1, 2023. On May 31, 2024, the Court appointed the Michigan Funds as lead plaintiffs. On August 13, 2024, the Michigan Funds filed an amended complaint and on October 14, 2024, the Company filed a motion to dismiss the amended complaint. The Company disputes the allegations of wrongdoing and intends to vigorously defend against the action. No assessment as to the likelihood or range of any potential adverse outcome has been made as of the date of this filing.

Other than the matter described above, as of September 28, 2024, there are no current proceedings or litigation matters involving the Company or its property that we believe would have a material adverse effect on our consolidated financial position or cash flows, although they could have a material adverse effect on our operating results for a particular reporting period.