Notes
to Condensed Consolidated Financial Statements
(In
thousands, except share and per share data)
(Unaudited)
(1)Description
of Business
Bowlero
Corp., a Delaware corporation, and its subsidiaries (Bowlero Corp. and subsidiaries are referred to collectively as “we,”
“our,” the “Company,” “Bowlero Corp.” or “Bowlero”) are the world’s largest operator
of bowling entertainment centers.
The
Company operates bowling centers under different brand names. The AMF branded centers are traditional bowling centers and the Bowlmor
and Bowlero branded centers offer a more upscale entertainment concept with lounge seating, enhanced food and beverage offerings, and
more robust customer service for individuals and group events. Additionally, within the brands, there exists a spectrum where some AMF
branded centers are more upscale and some Bowlero branded centers are more traditional. All of our centers, regardless of branding, are
managed in a fully integrated and consistent basis since all of our centers are in the same business of operating bowling entertainment.
The
following summarizes the Company’s centers by country and major brand as of March 27, 2022 and June 27, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
March
27,
2022 |
|
June
27,
2021 |
| AMF
& other |
147 |
|
|
136 |
|
| Bowlmor |
2 |
|
|
14 |
|
| Bowlero |
160 |
|
|
133 |
|
| Total
centers in the United States |
309 |
|
|
283 |
|
| Mexico
(AMF) |
6 |
|
|
6 |
|
| Canada
(AMF and Bowlero) |
2 |
|
|
2 |
|
| Total |
317 |
|
|
291 |
|
Impact
of COVID-19
In
mid-March of 2020, the Company temporarily suspended all operations in compliance with local, state, and federal governmental restrictions
to prevent the spread of the novel coronavirus and variants collectively known as COVID-19. Starting in April 2020, the Company began
reopening centers and restoring operations. During the nine months ended March 27, 2022, all of our centers were open and remain
open except two
of our centers re-opened on September 13, 2021 and have remained open, and two
centers in Canada closed on January 5, 2022 and reopened on January 31, 2022. Some centers have not operated at full capacity
due to, among other factors, social distancing requirements, limited hours of operation, limitations on available offerings, and other
operational restrictions. The temporary suspension of our operations and subsequent operational restrictions have had an adverse impact
on the Company’s profitability and cash flows, for which the Company has taken and continues to take actions to address.
Basis
of Presentation
Reverse
Recapitalization: On
December 15, 2021, (the “Closing Date”), the Company consummated the previously announced business combination (the “Business
Combination”) pursuant to the business combination agreement (the “BCA”) dated as of July 1, 2021, by and among
the Old Bowlero and Isos Acquisition Corporation (“Isos”). Old Bowlero refers to Bowlero Corp. prior to the Closing Date.
Notwithstanding
the legal form of the Business Combination pursuant to the BCA, the Business Combination is accounted for as a reverse recapitalization.
Under this method of accounting, Isos is treated as the acquired company and Old Bowlero is treated as the acquirer for accounting and
financial statement reporting purposes.
Old
Bowlero has been determined to be the accounting acquirer based on evaluation of the following facts and circumstances:
•Old
Bowlero’s existing stockholders have the greatest voting interest in the Company;
•Old
Bowlero’s existing stockholders have the ability to control decisions regarding election and removal of directors and officers of
the Company;
•Old
Bowlero comprises the ongoing operations of the Company;
•Old
Bowlero’s relevant measures, such as assets, revenues, cash flows and earnings, are higher than Isos’; and
•Old
Bowlero’s existing senior management is the senior management of the Company.
As
a result of Old Bowlero being the accounting acquirer, the financial reports filed with the Securities and Exchange Commission (“SEC”)
by the Company subsequent to the Business Combination are prepared as if Old Bowlero is the predecessor and legal successor to the Company.
The historical operations of Old Bowlero are deemed to be those of the Company. Thus, the financial statements included in this report
reflect (i) the historical operating results of Old Bowlero prior to the Business Combination, (ii) the combined results of the Old Bowlero
and Isos following the Business Combination on December 15, 2021, (iii) the assets and liabilities of Old Bowlero at their historical
cost and (iv) the Company’s post-merger equity structure for all periods presented. The recapitalization of the number of shares
of common stock and preferred stock attributable to the purchase of Bowlero Corp. in connection with the Business Combination is reflected
retroactively to the earliest period presented and is utilized for calculating earnings per share in all prior periods presented. No step-up
basis of intangible assets or goodwill was recorded in the Business Combination transaction consistent with the treatment of the transaction
as a reverse recapitalization of Isos.
In
connection with the Business Combination, Isos changed its name to Bowlero Corp. The Company’s Class A common stock is now listed
on the New York Stock Exchange ("NYSE") under the symbol BOWL and warrants to purchase the Class A common stock are listed on the NYSE
under the symbol BOWL.WS in lieu of the Isos ordinary shares and Isos’s warrants, respectively. Isos’ units automatically
separated into the Isos ordinary shares and Isos’ warrants and ceased trading separately on the NYSE following the Closing Date.
Prior to the Business Combination, Isos neither engaged in any operations nor generated any revenue. Until the Business Combination, based
on Isos’ business activities, it was a shell company as defined under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”).
The
consolidated assets, liabilities and results of operations prior to the reverse recapitalization are those of the Company, thus the shares
and corresponding capital amounts and losses per share, prior to the reverse recapitalization, have been retroactively restated based
on shares reflecting the exchange ratio of 24.841
established in the BCA.
Unaudited
Interim Financial Statements: The
accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States ("GAAP") and applicable rules and regulations of the SEC regarding interim financial reporting. Certain
information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to such rules
and regulations. Therefore, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated
financial statements and related notes of Bowlero Corp. as of June 27, 2021 and June 28, 2020 included in the Company’s
final prospectus filed pursuant to Rule 424(b)(2) under the Securities Act of 1933, as amended (the "Securities Act"), with the SEC, on
February 1, 2022.
The
unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial
statements, and in management’s opinion, include all adjustments, which consist of only normal recurring adjustments necessary for
the fair statement of the Company’s condensed consolidated balance sheet as of March 27, 2022 and the related condensed statements
of operations, comprehensive income (loss), temporary equity and stockholders' equity (deficit), and cash flows for the three and nine
months ended March 27, 2022 and March 28, 2021. The results for the three and nine months ended March 27, 2022 are not
necessarily indicative of the results expected for the current fiscal year or any other future periods.
The
accompanying unaudited condensed consolidated financial statements include the accounts and operations of the Company. All intercompany
accounts and transactions have been eliminated.
Fiscal
Year: The
Company reports on a fiscal year ending on the Sunday closest to June 30th
with each quarter generally comprising thirteen weeks. Fiscal year 2022 is fifty-three weeks ending on July 3, 2022, and the 53rd week
falls within the fourth quarter. Fiscal year 2021 contained fifty-two weeks and ended on June 27, 2021.
(2)Significant
Accounting Policies
For
a detailed discussion about the Company’s significant accounting policies and for further information on accounting updates adopted
in the prior fiscal year, see Note 2 to the audited consolidated financial statements. During the nine months ended March 27, 2022,
there were no significant revisions to the Company’s significant accounting policies, other than those indicated herein.
Use
of Estimates:
The COVID-19 pandemic continues disrupting, among other things, supply chains and impacting production and sales across a wide range of
industries. The full economic impact of this pandemic has not been determined, including the impact on the Company’s employees,
suppliers, customers and credit markets. Due to the evolving and uncertain nature of COVID-19 pandemic, it is reasonably possible that
it could materially impact the Company’s estimates, particularly those that require consideration of forecasted financial information,
in the near to medium term. The ultimate impact will depend on numerous evolving factors that the Company may not be able to accurately
predict, including the duration and extent of the pandemic, the impact of federal, state, local and foreign governmental actions, and
consumer behavior in response to the pandemic and other economic and operational conditions.
Stock-Based
Compensation:
Stock based compensation is recorded based on the grant-date fair value. Bowlero Corp. recognizes stock-based compensation on a straight-line
basis or based on a graded vesting schedule over the requisite service period for time-based awards and recognizes the cost for performance-based
awards upon meeting performance targets. The Company does not recognize the effect of forfeitures until they occur. All compensation expense
for an award is recognized by the time it becomes fully vested. Stock based compensation is recorded in cost of revenues and selling,
general and administrative expenses in the condensed consolidated statement of operations based on the employees’ respective functions.
The Company records deferred tax assets for awards that result in deductions on the Company’s income tax returns, based on the amount
of compensation cost recognized and the Company’s statutory tax rate in the jurisdiction in which it will receive a deduction.
We
use the Black-Scholes-Merton option pricing model to calculate the fair value of stock options. This option valuation model requires the
use of subjective assumptions, including the estimated fair value of the underlying common stock, the expected stock price volatility,
and the expected term of the option.
•Fair
value of common stock
- During the periods in which the Company was privately held, there was no public market for our stock. The fair value of the Company’s
equity was approved by the Company’s Board of Directors using a third-party valuation specialist and factors it believed were material
to the valuation process, including but not limited to, the price at which recent equity was issued by the Company to independent third
parties, actual and projected financial results, risks, prospects, economic and market conditions, and estimates of weighted average cost
of capital. The Company believed the combination of these factors provided an appropriate estimate of the expected fair value of the Company
and reflects the best estimate of the fair value of the Company’s common stock at each grant date. As a publicly held company, we
now determine the fair value of the Company’s common stock based on the closing market price on the date of grant.
•Expected
Term - We
estimate the expected term of our time-based awards to be the weighted average mid-point between the vesting date and the end of the contractual
term. We use this method to estimate the expected term since we do not have sufficient historical exercise data.
•Expected
volatility
– Given the limited market trading history as a publicly held company, and no public market for the Company’s shares prior
to the Closing Date, the expected volatility rate is based on an average historical stock price volatility of comparable publicly-traded
companies in the industry group.
•Risk-free
interest rate — The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected
term of the option.
•Expected
dividend yield — The
Company has not paid and does not expect to pay dividends. Consequently, the Company uses an expected dividend yield of zero.
Redeemable
Convertible Preferred Stock:
As part of the Reverse Recapitalization, the Company issued redeemable convertible preferred stock (“Preferred Stock”) that
is classified in temporary equity as certain redemption provisions are not solely within the control of the Company. The pre-merger preferred
stock was classified as temporary equity and settled at the merger date. Please refer to Note
17 - Common
Stock. Preferred Stock and Stockholders’ Equity
for more
details.
Net
Loss Per Share Attributable to Common Stockholders:
We compute net loss per share of Class A common stock and Class B common stock under the two-class method. Holders of Class A common stock
and Class B common stock have equal rights to the earnings of the Company. Our participating securities include the redeemable convertible
preferred stock that have a non-forfeitable right to dividends in the event that a dividend is paid on common stock. Since the Company
has reported net losses for all periods presented, all potentially dilutive securities have been excluded from the calculation of the
diluted net loss per share attributable to common stockholders as their effect is antidilutive and accordingly, basic and diluted net
loss per share attributable to common stockholders is the same for all periods presented. Dilutive securities include convertible preferred
stock, warrants, earnouts, stock options, and restricted stock units ("RSUs"). See Note
20
- Net
Loss Per Share.
Earnouts:
Following the Closing Date, Isos and Bowlero equity holders at the effective time of the Business Combination have the contingent right
to receive, in the aggregate, up to 22,361,278
shares of Class A common stock if, from the Closing Date until the fifth anniversary thereof, the reported closing trading price of the
Class A common stock exceeds certain thresholds. As of the Closing Date, since earnouts are subject to change in control provisions, all
but 152,370
of the earnout shares are reported as a liability in the condensed consolidated balance sheets. Changes in the value of earnouts are recorded
as a non-operating item in the condensed consolidated statements of operations. Those earnout shares not classified as a liability are
classified as equity compensation to employees. The fair value of the earnout shares was estimated by utilizing a Monte-Carlo simulation
model. Inputs that have a significant effect on the earnout shares valuation include the expected volatility, stock price, expected term,
risk-free interest rate and the earnout hurdles. The Company evaluated its earnouts under Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") 815-40, Derivatives
and Hedging—Contracts in Entity’s Own Equity,
and concluded that they do not meet the criteria to be classified in stockholders’ equity. Since these earnouts meet the definition
of a derivative under ASC 815, the Company recorded these earnouts as long-term liabilities on the balance sheet at fair value upon the
Closing Date, with subsequent changes in their respective fair values recognized in the condensed consolidated statements of operations
and comprehensive income (loss) at each reporting date. See Note
14 - Earnouts
and Note
16 - Fair
Value of Financial Instruments
for further information.
Warrants:
Warrants outstanding
consist of public warrants and private warrants, including warrants issued by Isos which continue to exist following the Closing Date
and warrants issued by the Company on the Closing Date. The outstanding warrants are accounted for as freestanding financial instruments,
and are classified as liabilities on the Company’s condensed consolidated balance sheets. The estimated fair value of the warrants
is described in Note
16 - Fair
Value of Financial Instruments.
Changes in the value of the warrants are recorded as a non-operating item in the condensed statements of operations. The Company evaluated
its warrants under ASC 815-40, Derivatives
and Hedging—Contracts in Entity’s Own Equity,
and concluded that they do not meet the criteria to be classified in stockholders’ equity. Since these warrants meet the definition
of a derivative under ASC 815, the Company recorded these warrants as long-term liabilities on the balance sheet at fair value upon the
Closing Date, with subsequent changes in their respective fair values recognized in the condensed consolidated statements of operations
and comprehensive loss at each reporting date.
Emerging
Growth Company Status:
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart
our Business Startups Act of 2012, (the "JOBS Act"), and it may take advantage of certain exemptions from various reporting requirements
that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required
to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding
executive compensation in its periodic reports and proxy statements.
Further,
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting
standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not
have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards.
The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply
to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended
transition period which means that when a standard is issued or revised and it has different application dates for public or private companies,
the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised
standard. This may make comparison of the Company’s financial statements with another public company which is neither an emerging
growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because
of the potential differences in accounting standards used.
Recently
issued Accounting Standards:
In
February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, Leases ("Topic 842"). Following ASU 2016-02, the FASB
issued subsequent guidance and amendments including ASU 2017-13, 2018-01, 2018-11, 2018-20, 2019-01, and 2020-05 (collectively, including
ASU 2016-02, “Topic 842”). Topic 842 will replace the
guidance in
Topic 840. The main objectives are to increase transparency and comparability among organizations by recognizing right-of-use assets and
lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The right-of-use asset reflects the
lessee’s right to direct the use of and obtain substantially all the economic benefits from that asset over the lease term, and
it will be based on the lease liability subject to certain adjustments such as accrued rent, lease incentives, lease intangibles, initial
direct costs and prepaid rent. The lease liability reflects the obligation to make payments for the right to use that asset. Operating
leases will retain a straight-line lease expense, and finance leases will retain their front-loaded expense pattern, similar to current
capital leases.
As
a result of ASU 2020-05, Topic 842 will be effective for fiscal years beginning after December 15, 2021 and interim periods within
fiscal years beginning after December 15, 2022. Early application continues to be permitted, which means that an entity may choose
to implement Topic 842 before the deferred effective date. The Company has not adopted Topic 842, which is effective for the Company in
fiscal year 2023. We are currently evaluating our lease population, current processes, internal controls, and timeline required for adoption.
Additionally, we are still evaluating the practical expedients and the methods of adoption that we will use when adopting the new standard.
The Company estimates that this standard will result in a material impact to our balance sheet from the recognition of right of use assets
and liabilities, but not to our statement of operations or cash flows.
(3)Revenue
The
following table presents the Company’s revenue disaggregated by major revenue categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended |
|
Nine
Months Ended |
|
March
27,
2022 |
|
% |
|
March
28,
2021 |
|
% |
|
March
27,
2022 |
|
% |
|
March
28,
2021 |
|
% |
| Major
revenue categories: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Bowling |
$ |
130,394 |
|
|
51 |
% |
|
$ |
56,826 |
|
|
51 |
% |
|
$ |
326,536 |
|
|
51 |
% |
|
$ |
124,351 |
|
|
53 |
% |
| Food
and beverage |
88,187 |
|
|
34 |
% |
|
36,866 |
|
|
33 |
% |
|
221,206 |
|
|
34 |
% |
|
75,653 |
|
|
32 |
% |
| Amusement |
33,781 |
|
|
13 |
% |
|
14,146 |
|
|
13 |
% |
|
83,967 |
|
|
13 |
% |
|
25,699 |
|
|
11 |
% |
| Media |
5,458 |
|
|
2 |
% |
|
4,374 |
|
|
4 |
% |
|
12,279 |
|
|
2 |
% |
|
10,428 |
|
|
4 |
% |
| Total
revenues |
$ |
257,820 |
|
|
100 |
% |
|
$ |
112,212 |
|
|
100 |
% |
|
$ |
643,988 |
|
|
100 |
% |
|
$ |
236,131 |
|
|
100 |
% |
Bowling
revenue —
The Company recognizes revenue for providing bowling services to customers in exchange for consideration that is recognized as revenue
on the day that the services are performed. Any prepayments for bowling revenue are recognized as deferred revenue and recognized when
earned.
Food
and beverage revenue
— Sales of food and beverages at our bowling centers are recognized at a point-in-time.
Amusement
revenue —
Amusement revenue includes amounts earned through arcades and other games. Similar to bowling, food and beverage revenue, almost all of
our revenue is earned at a point-in-time. We record deferred revenue for events where we collect cash in advance of the Company’s
satisfaction of its performance obligation, which would occur on the date of the event. These deferred amounts are not material to our
financial statements and the amounts are typically all earned in the subsequent period. The Company provides customers game-play tokens
and game cards, which are subject to breakage and redemptions.
Media
revenue —
The Company earns media revenue from sanctioning official Professional Bowlers Association ("PBA") tournaments and licensing media content
to our customers, which include television networks and multi-year contracts. The Company considers each tournament a separate performance
obligation because each tournament’s pricing is negotiated separately and represents stand-alone selling price based on the terms
of the contract and the relative nature of the services provided. Media revenue is generated through producing and licensing distribution
rights to customers, which is recognized at the point-in-time the Company produces and delivers programming for a respective tournament.
Tournament revenue includes sponsorships, entry and host fees. Fees received for sponsorships and tournaments are recognized as deferred
revenue until the respective tournament occurs, at which point, the Company recognizes those fees as revenue.
(4)Leases
The
Company leases various assets under non-cancellable operating and capital leases. These assets include bowling centers, office space,
vehicles, and equipment.
Operating
leases: For
our operating leases, we recognize rent expense straight-line over the lease term, including rent-free periods. We recorded accrued rent
of $26,200
and $26,853
within other long-term liabilities on the consolidated balance sheets as of March 27, 2022 and June 27, 2021, respectively.
In
addition to previously received rent concessions in response to the economic effects of the COVID-19 pandemic, in March 2022, the Company
received a rent concession related to an operating lease in the form of a rent abatement retroactive to April 1, 2020 for amounts which
had been previously recognized as rent expense. We elected to not account for this concession as a modification in accordance with the
relief provided by the FASB staff. As a result, we recognized rent abatements of $7,470
($5,603
allocated to cost of revenues and $1,867
allocated to selling, general and administrative expenses) as a reduction of rent expense during the three and nine months ended March 27,
2022.
Capital
leases: For
our capital leases, we record interest expense on the obligation and amortize the asset over the lease term. We record a capital lease
liability equal to the present value of the minimum lease payments over the lease term discounted using the incremental borrowing rate
for that lease. We calculate the current portion of our capital lease obligation as the total payments that are due in the next 12 months
that are attributed to principal payments in the capital lease obligation amortization schedule. We had $43,922
in accumulated amortization on property and equipment under capital leases as of March 27, 2022, and $34,609
as of June 27, 2021.
The
following table summarizes the Company’s costs for operating and capital leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended |
|
Nine
Months Ended |
|
March
27,
2022 |
|
March
28,
2021 |
|
March
27,
2022 |
|
March
28,
2021 |
| Operating
Leases |
|
|
|
|
|
|
|
| Rent
expense |
$ |
8,041 |
|
|
$ |
13,969 |
|
|
$ |
39,979 |
|
|
$ |
42,669 |
|
|
|
|
|
|
|
|
|
| Capital
Leases |
|
|
|
|
|
|
|
| Interest
expense |
9,255 |
|
|
8,722 |
|
|
28,080 |
|
|
26,050 |
|
| Amortization
expense |
3,003 |
|
|
3,049 |
|
|
9,313 |
|
|
9,300 |
|
| Total
Capital Lease Cost |
$ |
12,258 |
|
|
$ |
11,771 |
|
|
$ |
37,393 |
|
|
$ |
35,350 |
|
The
future minimum rent payments under our operating and capital leases as of March 27, 2022 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases |
|
Capital
Leases |
|
|
|
|
|
Remainder of
2022 |
$ |
16,003 |
|
|
$ |
11,159 |
|
| 2023 |
46,450 |
|
|
40,879 |
|
| 2024 |
45,559 |
|
|
41,954 |
|
| 2025 |
47,031 |
|
|
42,146 |
|
| 2026 |
45,090 |
|
|
37,353 |
|
| Thereafter |
566,291 |
|
|
1,030,886 |
|
| Total
Rental Payments: |
$ |
766,424 |
|
|
$ |
1,204,377 |
|
|
|
|
|
| Less
imputed interest expense for capital leases: |
|
|
809,526 |
|
| Present
value: |
|
|
$ |
394,851 |
|
(5)Merger
and Acquisitions
Merger:
For accounting
purposes, the Business Combination was treated as the equivalent of Bowlero Corp. issuing stock for the net assets of Isos, accompanied
by a recapitalization. The
following summarizes the elements of the Business Combination to the consolidated statement of cash flows, including the transaction funding,
sources and uses of cash, and merger-related earnouts and warrants:
|
|
|
|
|
|
|
Recapitalization
|
| Cash-Isos
Acquisition Corporation Trust |
$ |
254,851 |
|
| Less:
Isos transaction costs paid from Trust |
(23,869) |
|
| Less:
Redemptions of existing shareholders of Isos |
(136,569) |
|
| Net
proceeds from SPAC shareholders |
94,413 |
|
|
|
| Cash-PIPE |
150,604 |
|
| Cash-PIPE
preferred |
95,000 |
|
| Cash-Forward |
100,000 |
|
| Total
Cash received |
440,017 |
|
| Less:
Bowlero transaction costs |
(20,670) |
|
| Total
Cash received, net of Bowlero transaction costs |
419,347 |
|
|
|
| Earnout
liability |
(181,113) |
|
| Warrant
liability |
(22,426) |
|
| New
equity, net |
215,808 |
|
|
|
| Less:
Consideration payment to Bowlero shareholders |
(226,000) |
|
| Less:
Payoff of preferred stock and accumulated dividends |
(145,298) |
|
| Less:
Payments for stock options |
(15,467) |
|
| Net
distributions to existing shareholders |
(386,765) |
|
| Net
contribution from Business Combination and preferred financing |
$ |
(170,957) |
|
After
making adjustments to the issuance of the Business Combination consideration shares, the redemption of the Isos ordinary shares, the consummation
of the PIPE Offerings and the Forward Purchase Contract, the roll-over of vested options and the withholding of 1,068,884
shares for tax obligations from certain current and former employees and the conversion of common shares to preferred shares, there were
165,378,145
shares of the Common Stock issued and outstanding as of the Closing Date, of which 107,066,302
shares were Class A common stock and 58,311,203
shares were Class B common stock. There were 17,225,692
warrants outstanding as of the Closing Date.
The
Company expensed $2,956
in transaction costs for amounts allocated to that portion of the earnouts related to Bowlero rather than as an offset to equity.
Acquisitions:
The Company
made a number of acquisitions of bowling centers during the nine months ended March 27, 2022 in order to expand our market share
in key geographic areas, and to improve our ability to leverage our fixed costs.
The
Company estimates the fair value of the tangible and intangible assets acquired and liabilities assumed as of the acquisition date for
business combinations. For business combinations, we will continue to evaluate and refine the estimates used to record the fair value
of the assets acquired and liabilities assumed throughout the permitted measurement period, which may result in corresponding offsets
to goodwill in future periods. We expect to finalize the valuations as soon as possible, but no later than one year from the acquisition
dates. The remaining fair value estimates to finalize include intangibles, and property and equipment.
The
goodwill acquired in the business combinations during fiscal year 2022 represents:
•the
value of an assembled workforce
•future
earnings and cash flow potential of these businesses, and
•the
complementary strategic fit and resulting synergies these businesses bring to existing operations
The
goodwill recognized is deductible for tax purposes.
Business
combinations:
The Company’s preliminary accounting for the allocations of the purchase price for five business combinations at the dates of the
respective acquisitions is based upon its understanding of the fair value of the acquired assets and assumed liabilities. The Company
obtains this information during due diligence and through other sources. The
following table summarizes the purchase price allocation for the fair values of the identifiable assets acquired, components of consideration
transferred and the transactional related expenses.
|
|
|
|
|
|
|
|
|
| Identifiable
assets acquired and liabilities assumed |
|
Business
Combination Totals |
| Current
assets |
|
$ |
2,510 |
|
| Property
and equipment |
|
29,027 |
|
| Identifiable
intangible assets |
|
3,080 |
|
| Goodwill |
|
12,763 |
|
| Total
assets acquired |
|
$ |
47,380 |
|
|
|
|
| Current
liabilities |
|
(415) |
|
| Total
assumed liabilities |
|
(415) |
|
|
Total
consideration transferred, net of cash acquired of $25 |
|
$ |
46,965 |
|
|
|
|
| Components
of consideration transferred |
|
|
| Cash |
|
$ |
44,027 |
|
| Holdback |
|
1,468 |
|
| Contingent
consideration |
|
1,470 |
|
| Total |
|
$ |
46,965 |
|
|
Transaction
expenses included in “other operating expense” in the condensed consolidated statement of operations for the nine months ended
March 27, 2022 |
|
$ |
759 |
|
Asset
acquisition:
For asset acquisitions, we apply the cost accumulation model in accordance with the applicable accounting standards. The cost accumulation
model requires us to measure all the acquired assets and assumed liabilities at their fair value and then adjust them based on the total
consideration transferred. The
following table summarizes the allocation of the fair value amounts under a cost accumulation approach:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Identifiable
assets acquired and liabilities assumed |
|
Bowl
America
|
|
Other
Asset Acquisition |
|
Total
|
| Current
assets |
|
$ |
2,949 |
|
|
$ |
5 |
|
|
$ |
2,954 |
|
| Property
and equipment |
|
40,121 |
|
|
8,564 |
|
|
48,685 |
|
| Identifiable
intangible assets |
|
1,099 |
|
|
1,136 |
|
|
2,235 |
|
| Assets
held for sale |
|
10,985 |
|
|
— |
|
|
10,985 |
|
| Current
liabilities |
|
(1,426) |
|
|
(81) |
|
|
(1,507) |
|
| Deferred
tax liability |
|
(9,107) |
|
|
— |
|
|
(9,107) |
|
| Total
consideration transferred |
|
$ |
44,621 |
|
|
$ |
9,624 |
|
|
$ |
54,245 |
|
The
following summarizes the key valuation approaches and assumptions utilized in calculating fair values for Business Combinations and Asset
Acquisitions:
Property
and equipment
— Buildings and site improvements are valued using the cost approach and land is valued using the sales comparison approach. The
fair value of tangible personal property was determined primarily using the cost approach. The current use of certain nonfinancial assets
acquired differed from their highest and best use, due to
local
market conditions, the value of the land exceeding the combined fair values of the land and building, and zoning and commercial viability
of the surrounding area. The valuation inputs used to determine the fair value of the land and building are based on level 3 inputs, including
discount rates, sales projections, and future cash flows.
Assets
held for sale —
We utilize a valuation specialist to determine the assets held for sale estimated fair value less costs to sell. These inputs are classified
as level 2 fair value measurements.
Intangible
assets —
We acquired intangible assets including trade names, non-competition agreements, customer relationships and liquor licenses.
•Trade
names: Trade
names are recognized during Business Combinations and Asset Acquisitions using the relief-from-royalty method, which is considered a Level
3 fair value measurement due to the use of unobservable inputs. Significant assumptions used in the calculation include: revenue projections,
a royalty rate based on qualitative factors and the market-derived royalty rates, discount rate based on the Company’s weighted
average cost of capital ("WACC") adjusted for risks commonly inherent in trade names.
•Non-Competition:
Non-compete
agreements are recognized during Business Combinations and Asset Acquisitions. The Company records the fair value of non-competition agreements
using the differential discounted cash flow method income approach, a Level 3 fair value measurement due to the use of unobservable inputs.
Significant assumptions used in the fair value calculations for non-competition agreements include: potential competitor impact on revenue
and expense projections, discount rate based on the Company’s WACC adjusted for risks commonly inherent in intangible assets, specifically
non-compete agreements.
•Customer
relationships:
The Company records customer relationships for Business Combinations and Asset Acquisitions based on the fair value of contractual customer
relationships with bowling leagues using the excess earnings income approach and discounted cash flow method, which are considered Level
3 fair value measurements due to the use of unobservable inputs. Significant assumptions used in the fair value calculations for relationships
include: revenue and expense projections, customer retention rate for leagues, discount rate based on the Company’s WACC adjusted
for risks inherent in intangible assets, specifically customer relationships and the remaining useful life.
•Liquor
licenses:
The Company records the fair value of brokered liquor licenses acquired in Business Combinations and Asset Acquisitions using the market
approach. Significant assumptions used in the calculation include approximation based on recent sales of liquor licenses in the respective
jurisdictions and assignment of an indefinite useful life as licenses do not expire and can be sold to third parties.
Contingent
Consideration —
A business combination during fiscal year 2022 included $1,470
of non-cash contingent consideration. The contingency depends on approvals by the local township that requires us to transfer real property
in the event of certain decisions being made. The range of contingent consideration is $0
- $1,470.
We recorded the amount based on:
(i)The
probability of the contingency being met
(ii)A
comparable sales approach to determine the value of the non-cash consideration.
These
inputs are classified as level 3 on the fair value hierarchy.
Deferred
Tax Liability
– Since the Bowl America acquisition was a non-taxable stock acquisition, the Company recorded deferred tax liabilities for the
difference between the tax carryover basis and the book value of the opening balances, which were recorded and allocated based on fair
values to the respective assets acquired.
(6)Goodwill
and Other Intangible Assets
Goodwill:
The
changes in the carrying amount of goodwill for the nine months ended March 27, 2022:
|
|
|
|
|
|
| Balance
as of June 27, 2021 |
$ |
726,156 |
|
| Goodwill
resulting from acquisitions |
12,631 |
|
| Balance
as of March 27, 2022 |
$ |
738,787 |
|
Intangible
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
27, 2022 |
|
June
27, 2021 |
|
Weighted
average life
(in years) |
|
Gross
carrying amount |
|
Accumulated
amortization |
|
Net
carrying amount |
|
Weighted
average life
(in years) |
|
Gross
carrying amount |
|
Accumulated
amortization |
|
Net
carrying amount |
| Finite-lived
intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| AMF
trade name |
2 |
|
$ |
9,900 |
|
|
$ |
(8,415) |
|
|
$ |
1,485 |
|
|
1 |
|
$ |
9,900 |
|
|
$ |
(7,920) |
|
|
$ |
1,980 |
|
| Bowlmor
trade name |
0 |
|
6,500 |
|
|
(6,500) |
|
|
— |
|
|
6 |
|
6,500 |
|
|
(2,600) |
|
|
3,900 |
|
| Other
acquisition trade names |
5 |
|
1,610 |
|
|
(507) |
|
|
1,103 |
|
|
7 |
|
1,010 |
|
|
(173) |
|
|
837 |
|
| Customer
relationships |
2 |
|
20,652 |
|
|
(13,017) |
|
|
7,635 |
|
|
3 |
|
18,370 |
|
|
(10,471) |
|
|
7,899 |
|
| Management
contracts |
2 |
|
1,800 |
|
|
(1,366) |
|
|
434 |
|
|
2 |
|
1,800 |
|
|
(1,150) |
|
|
650 |
|
| Non-compete
agreements |
4 |
|
1,921 |
|
|
(769) |
|
|
1,152 |
|
|
4 |
|
1,200 |
|
|
(514) |
|
|
686 |
|
| PBA
member, sponsor & media relationships |
8 |
|
1,400 |
|
|
(456) |
|
|
944 |
|
|
8 |
|
1,400 |
|
|
(322) |
|
|
1,078 |
|
| Other
intangible assets |
4 |
|
921 |
|
|
(217) |
|
|
704 |
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
$ |
44,704 |
|
|
$ |
(31,247) |
|
|
$ |
13,457 |
|
|
|
|
$ |
40,180 |
|
|
$ |
(23,150) |
|
|
$ |
17,030 |
|
| Indefinite-lived
intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Liquor
licenses |
|
|
9,735 |
|
|
— |
|
|
9,735 |
|
|
|
|
9,027 |
|
|
— |
|
|
9,027 |
|
| PBA
trade name |
|
|
3,100 |
|
|
— |
|
|
3,100 |
|
|
|
|
3,100 |
|
|
— |
|
|
3,100 |
|
| Bowlero
trade name |
|
|
66,900 |
|
|
— |
|
|
66,900 |
|
|
|
|
66,900 |
|
|
— |
|
|
66,900 |
|
|
|
|
79,735 |
|
|
— |
|
|
79,735 |
|
|
|
|
79,027 |
|
|
— |
|
|
79,027 |
|
|
|
|
$ |
124,439 |
|
|
$ |
(31,247) |
|
|
$ |
93,192 |
|
|
|
|
$ |
119,207 |
|
|
$ |
(23,150) |
|
|
$ |
96,057 |
|
The
Company reviewed the estimated useful life of its Bowlmor tradename as part of the Company’s plans to rebrand its Bowlmor centers
to Bowlero centers. Based on that review, the Company determined that the intangible asset associated with the Company’s Bowlmor
tradename has a useful life shorter than initially estimated. During the fiscal quarter ended December 26, 2021, the Company adjusted
the remaining useful life of the Bowlmor tradename from 5.75
years to 6
months. The change in useful life was made as a prospective adjustment and resulted in an increase in amortization expense of $1,706
and $3,412
for the three and nine months ended March 27, 2022, respectively.
(7)Property
and Equipment
As
of March 27, 2022 and June 27, 2021, property and equipment consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
March
27,
2022 |
|
June
27,
2021 |
| Land
|
$ |
71,723 |
|
|
$ |
19,879 |
|
| Buildings
and improvements |
53,974 |
|
|
16,155 |
|
| Leasehold
improvements |
342,524 |
|
|
313,441 |
|
| Equipment,
furniture, and fixtures |
359,782 |
|
|
315,719 |
|
| Construction
in progress |
15,707 |
|
|
27,028 |
|
|
$ |
843,710 |
|
|
$ |
692,222 |
|
| Accumulated
depreciation |
(331,367) |
|
|
(276,561) |
|
| Property
and equipment, net of accumulated depreciation |
$ |
512,343 |
|
|
$ |
415,661 |
|
The
following table shows depreciation expense related to property and equipment for the three and nine months ended March 27, 2022,
and March 28, 2021, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended |
|
Nine
Months Ended |
|
March
27,
2022 |
|
March
28,
2021 |
|
March
27,
2022 |
|
March
28,
2021 |
| Depreciation
expense |
$ |
20,578 |
|
|
$ |
17,036 |
|
|
$ |
55,525 |
|
|
$ |
50,408 |
|
Assets
held for sale:
Total
assets held for sale at March 27, 2022 and June 27, 2021 of $14,506
and $686,
includes liquor licenses of $315
and $175,
respectively. During the nine months ended March 27, 2022, we acquired approximately $13,455
in real property, which we plan to sell within the next 12 months.
(8)Internal
Use Software
The
following table presents a roll-forward of capitalized internal use software for the nine months ended March 27, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Capitalized
internal use software |
|
Balance
at June 27, 2021 |
|
Additions
|
|
Balance
at March 27, 2022 |
| Internal
use software, gross |
|
$ |
20,420 |
|
|
$ |
3,534 |
|
|
$ |
23,954 |
|
| Accumulated
amortization |
|
(11,358) |
|
|
(2,345) |
|
|
(13,703) |
|
| Internal
use software, net |
|
$ |
9,062 |
|
|
$ |
1,189 |
|
|
$ |
10,251 |
|
The
following table presents amortization expense for the three and nine months ended March 27, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended |
|
Nine
Months Ended |
|
March
27,
2022 |
|
March
28,
2021 |
|
March
27,
2022 |
|
March
28,
2021 |
| Amortization
expense |
$ |
1,016 |
|
|
$ |
625 |
|
|
$ |
2,345 |
|
|
$ |
1,712 |
|
(9)Accrued
Expenses
As
of March 27, 2022 and June 27, 2021, accrued expenses consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
March
27,
2022 |
|
June
27,
2021 |
| Customer
deposits |
$ |
24,258 |
|
|
$ |
7,114 |
|
| Compensation |
12,347 |
|
|
13,577 |
|
| Taxes
and licenses |
10,465 |
|
|
9,646 |
|
| Insurance |
6,238 |
|
|
8,285 |
|
| Deferred
revenue |
4,814 |
|
|
5,885 |
|
| Deferred
rent |
3,950 |
|
|
4,384 |
|
| Utilities |
3,844 |
|
|
3,399 |
|
| Interest |
3,839 |
|
|
4,693 |
|
| Professional
fees |
1,752 |
|
|
4,473 |
|
| Other |
8,606 |
|
|
2,194 |
|
| Total
accrued expenses |
$ |
80,113 |
|
|
$ |
63,650 |
|
(10)Debt
The
following table summarizes the Company’s debt structure as of March 27, 2022 and June 27, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
March
27,
2022 |
|
June
27,
2021 |
| First
Lien Credit Facility Revolver |
$ |
— |
|
|
$ |
39,853 |
|
|
First
Lien Credit Facility Term Loan (Maturing July 3, 2024 and bearing variable rate interest; 4.50%nd
4.55%
at March 27, 2022 and June 27, 2021, respectively, excluding impact of hedging) |
794,376 |
|
|
800,534 |
|
| Incremental
Liquidity Facility |
— |
|
|
45,000 |
|
| New
Revolver (Maturing April 4, 2024) |
86,434 |
|
|
— |
|
|
$ |
880,810 |
|
|
$ |
885,387 |
|
| Less: |
|
|
|
| Unamortized
financing costs |
(7,496) |
|
|
(9,800) |
|
| Current
portion of unamortized financing costs |
3,267 |
|
|
3,152 |
|
| Current
maturities of long-term debt |
(8,211) |
|
|
(8,211) |
|
| Total
long-term debt |
$ |
868,370 |
|
|
$ |
870,528 |
|
New
Revolver: On
December 15, 2021, the Company entered into a Sixth Amendment ("Sixth Amendment") to the First Lien Credit Agreement, by and among
Bowlero, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders.
Pursuant
to the Sixth Amendment, the revolving credit facility under the First Lien Credit Agreement was refinanced and replaced by a $140,000
senior secured revolving credit facility (“New Revolver”), which has a maturity date of the earlier of December 15, 2026 or
the date that is 90
days prior to the scheduled maturity date of any term loans outstanding under the First Lien Credit Agreement in an aggregate
principal amount exceeding $175,000.
Since the term loan under the First Lien Credit Agreement matures on July 3, 2024, the maturity date for the New Revolver is currently
April 4, 2024. Interest on borrowings under the New Revolver is initially based on either the Adjusted Term Secured Overnight Financing
Rate (“SOFR”) or the Alternate Base Rate, as further described in the First Lien Credit Agreement.
In
addition, on December 17, 2021, Bowlero entered into a Seventh Amendment (“Seventh Amendment”) to the First Lien Credit
Agreement pursuant to which the total revolving commitments under the New Revolver were increased by $25,000
to an aggregate amount of $165,000.
No changes, other than increasing the aggregate principal amount of revolving commitments thereunder, were made to the terms of the New
Revolver in connection with the Seventh Amendment.
The
New Revolver is subject to, among other provisions, covenants regarding indebtedness, liens, negative pledges, restricted payments, certain
prepayments of indebtedness, cross-default with other agreements relating to indebtedness, investments, fundamental changes, disposition
of assets, sale and lease-back transactions, transactions with affiliates, amendments of or waivers with respect to restricted debt and
permitted activities of Bowlero. In addition, the New Revolver is subject to a financial covenant requiring that the First Lien Leverage
Ratio (as defined in the First Lien Credit Agreement) not exceed 6.00:1.00
as of the end of any fiscal quarter if the New Revolver is at least 35%
utilized (subject to certain exclusions) at the end of such fiscal quarter. The financial covenant requirement for the Company is in effect
for the March 27, 2022 reporting period since the Company terminated the previous financial covenant waiver on March 3, 2022.
The
New Revolver is also subject to customary events of defaults. Payment of borrowings under the New Revolver may be accelerated if there
is an event of default, and Bowlero would no longer be permitted to borrow additional funds under the New Revolver while a default or
event of default were outstanding. No changes were made to the terms of the term loan under the First Lien Credit Agreement in connection
with the Sixth Amendment or the Seventh Amendment.
First
Lien Credit Facility Term Loan:
The term loan under the First Lien Credit Agreement is repaid on a quarterly basis on the last business day of the last month of each
calendar quarter in principal payments of $2,053
with the remaining balance maturing and fully payable on July 3, 2024.
Incremental
Liquidity Facility:
On December 15, 2021, the principal, accrued and unpaid interest and fees outstanding under the Incremental Liquidity Facility were repaid
in full and all commitments to extend credit thereunder were terminated and any security interests and guarantees in connection therewith
were terminated and/or released.
First
Lien Credit Facility Revolver:
On December 15, 2021, the principal, accrued and unpaid interest and fees outstanding under the First Lien Credit Agreement revolver were
repaid in full and all commitments to extend credit thereunder were terminated and any security interests and guarantees in connection
therewith were terminated and/or released.
Letters
of Credit:
Outstanding standby letters of credit as of March 27, 2022 total $9,136
and are guaranteed by JP Morgan Chase Bank, N.A. The available amount of the New Revolver is reduced by the outstanding standby letters
of credit.
The
Company was in compliance with all debt covenants as of March 27, 2022.
(11)Income
Taxes
The
Company’s effective tax rate for the nine months ended March 27, 2022 is 14%.
The difference between the US federal statutory rate of 21% and the year-to-date effective tax rate is mainly due to the current year
changes in the valuation allowance partially offset by state income taxes. The effective tax rate for the nine months ended March 28,
2021 is 0%
and differs from the US federal statutory rate of 21% primarily due to income tax expense being offset by changes in the valuation allowance.
(12)Commitments
and Contingencies
Litigation
and Claims:
The Company is currently, and from time to time may be, subject to claims and actions arising in the ordinary course of its business,
including general liability, fidelity, workers’ compensation, employment claims, and Americans with Disabilities Act ("ADA") claims.
The Company has insurance to cover general liability and workers’ compensation claims and reserves for claims and actions in the
ordinary course. The insurance is subject to a self-insured retention. In some actions, plaintiffs request punitive or other damages that
may not be covered by insurance.
In
management’s opinion, there are no claims or actions either individually or in the aggregate that are expected to have a material
adverse impact on the Company’s financial position or results of operations.
(13)Warrants
The
following table summarizes the warrants outstanding as of March 27, 2022:
|
|
|
|
|
|
|
|
|
| Class
of Warrants |
|
Number
Outstanding |
| Public
warrants |
|
9,137,627 |
| Private
placement warrants |
|
3,778,445 |
| Unvested
private placement warrants |
|
1,619,348 |
| |
|
14,535,420 |
Public
Warrants: As
of March 27, 2022, there were 14,535,420
warrants outstanding of which 9,137,627
were public warrants. The warrants entitle the holders to acquire Class A common stock.
Each
whole warrant entitles the registered holder to purchase one share of Class A common stock at a price of $11.50
per share. Pursuant to the warrant agreement, a holder may exercise its warrants only for a whole number of shares of Class A common stock.
This means only a whole warrant may be exercised at a given time by a warrant holder. No fractional warrants will be issued upon separation
of the units and only whole warrants will trade. The warrants will expire five
years after the Closing Date or earlier upon redemption or liquidation.
Redemption
of Warrants
Once
the warrants become exercisable, Bowlero may call the public warrants for redemption for cash:
•in
whole and not in part;
•at
a price of $0.01
per warrant;
•upon
not less than 30
days’ prior written notice of redemption (the “30-day
redemption period”) to each warrant holder; and
•if,
and only if, the reported closing price of Class A common stock equals or exceeds $18.00
per share (as adjusted for stock sub-divisions, stock capitalizations, reorganizations, recapitalizations and the like) for any 20
trading days within a 30-trading
day period ending three business days before Bowlero sends the notice of redemption to the warrant holders.
Once
the warrants become exercisable, Bowlero may redeem the outstanding public and private placement warrants for Class A common stock:
•in
whole and not in part;
•
at $0.10
per warrant upon a minimum of 30
days’ prior written notice of redemption; provided that holders will be able to exercise their warrants on a cashless basis prior
to redemption and receive that number of shares determined based on the redemption date and the “fair market value” (as defined
below) of the Class A common stock;
•
if, and only if, the closing price of the Class A common stock equals or exceeds $10.00
per public share (as adjusted per share subdivisions, share dividends, reorganizations, recapitalizations and the like) on the trading
day before the Company sends the notice of redemption to the warrant holders; and
•if
the Reference Value is less than $18.00
per share (as adjusted for share splits, share dividends, rights issuances, subdivisions, reorganizations, recapitalizations and the like),
the private placement warrants must also be concurrently called for redemption on the same terms as the outstanding public warrants, as
described above.
The
“fair market value” of the Class A common stock shall mean the volume-weighted average price of the Class A common stock for
the ten trading days immediately following on the third trading day prior to the date on which the notice of redemption is sent to the
holders of warrants.
Private
Placement Warrants:
The 3,778,445
private placement warrants (including the Class A common stock issuable upon exercise of the private warrants) are not redeemable by Bowlero
for cash (other than pursuant to the $0.10
per warrant redemption provision described above) so long as they are held by Isos Acquisition Sponsor LLC (“Sponsor”), members
of the Sponsor, LionTree Partners LLC (“LionTree”) or their permitted transferees except as part of a redemption of all outstanding
warrants that permits holders of warrants to exercise such warrants at a make-whole price. The initial purchasers of these warrants, or
their permitted transferees, have the option to exercise the warrants on a cashless basis.
Unvested
Private Placement Warrants.
On the Closing Date, 1,189,037
warrants held by the Sponsor and 430,311
warrants held by LionTree became unvested. 50%
of the unvested warrants will revest only to the extent the closing price of Class A common stock exceeds $15.00
per share and 50%
will revest if the price exceeds $17.50
per share, and as further provided in the Sponsor Support Agreement prior to the fifth anniversary of the Closing Date (with any warrants
unvested as of such date being forfeited and cancelled).
Except
as described in this section, the private placement warrants have terms and provisions that are identical to those of the public warrants,
including that they may be redeemed for shares of Class A common stock. If the private placement warrants are held by holders other than
the Sponsor, LionTree or their permitted transferees, the private placement warrants will be redeemable by Bowlero and exercisable by
the holders on the same basis as the public warrants.
Share
and Warrant Repurchase Plan:
As of February 7, 2022, the Company announced that its Board of Directors authorized a share and warrant repurchase program providing
for repurchases of up to $200,000
of the Company’s outstanding Class A common stock and warrants through February 3, 2024. Please refer to Note
19-Share
and Warrant Repurchase Program
for more details.
Redemption
of Public and Private Placement Warrants:
On April 14, 2022, the Company announced the redemption of all of its outstanding publicly traded and privately held warrants to purchase
shares of its Class A common stock. The Company will redeem all of the outstanding warrants as of 5:00 pm New York City time on May 16,
2022 (the "Redemption Date") for a redemption price of $0.10
per warrant (the "Redemption Price"). The rights of the warrant holders to exercise their warrants will terminate immediately prior to
5:00 p.m. New York City time on the Redemption Date.
During
the redemption period, holders of the warrants may elect to exercise their warrants on a “cashless basis” by receiving a number
of shares of Class A common stock based on the volume weighted average price of the Class A common stock for the ten trading days immediately
following on the third trading day prior to the date on which notice of redemption was delivered to holders (the "Redemption Fair Market
Value"). On April 27, 2022, the Company announced the Redemption Fair Market Value in connection with the upcoming redemption. The Redemption
Fair Market Value is $12.0985.
As a result, holders who exercise their warrants on a “cashless” basis before 5:00 p.m. New York City time on the Redemption
Date will be entitled to receive 0.2936
shares of Class A common stock per warrant exercised.
(14)Earnouts
Old
Bowlero’s stockholders and option holders received additional shares of Bowlero common stock (the "Earnout Shares"). Earnout Shares
vest during the period from and after the Closing Date until the fifth anniversary of the Closing Date (the "Earnout Period"). The following
tranches of Earnout Shares were issued to Old Bowlero stockholders:
(a)10,375,000
Earnout Shares, if the closing share price of Bowlero’s Class A common stock, par value $0.0001
per share (Class A common stock) equals or exceeds $15.00
per share for any 10
trading days within any consecutive 20-trading
day period that occurs after the Closing Date and
(b)10,375,000
Earnout Shares, if the closing share price of Class A common stock equals or exceeds $17.50
per share for any 10
trading days within any consecutive 20-trading
day period.
During
the Earnout Period, if Bowlero experiences an Acceleration Event, which as detailed in the BCA includes a change of control, liquidation
or dissolution of the Company, bankruptcy or the assignment for the benefit of creditors the appointment of a custodian, receiver or trustee
for all or substantially all the assets or properties of the Company, then any Earnout Shares that have not been previously issued by
Bowlero (whether or not previously earned) to the Bowlero stockholders or holders of Options or issued but not vested will be deemed earned
and issued or vested by Bowlero as of immediately prior to the Acceleration Event, unless, in the case of an Acceleration Event, the value
of the consideration to be received by the holders of Bowlero common stock in such change of control transaction is less than the applicable
stock price thresholds described above. If the consideration received in such Acceleration Event is not solely cash, Bowlero’s Board
of Directors will determine the treatment of the Earnout Shares.
Prior
to the contingency being met, all but 152,370
Earnout Shares are classified as a liability and changes in the fair value of the Earnout Shares in future periods will be recognized
in the statement of operations. Those Earnout Shares not classified as a liability are classified as equity compensation to employees
and recognized as compensation expense on a straight-line basis over the expected term or upon the contingency being met.
As
part of the Sponsor Support Agreement, the Sponsor and LionTree were issued 1,611,278
Earnout Shares which vest during the period from and after the Closing Date until the fifth anniversary of the Closing Date: (a) 805,639
Earnout Shares if the closing share price of Bowlero’s Class A common stock equals or exceeds $15.00
per share for any 10
trading days within any consecutive 20-trading
day period that occurs after the Closing Date and (b) 805,639
Earnout Shares, if the closing share price of Class A common stock equals or exceeds $17.50
per share for any 10
trading days within any consecutive 20-trading
day period.
(15)Derivatives
The
Company uses interest rate swaps and cap agreements to convert a portion of its variable interest rate exposure to fixed rates to protect
the Company from future interest rate increases. The
Company’s interest rate swap and cap agreements consist of the following:
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|
March
27,
2022 |
|
June
27,
2021 |
|
Notional
Amounts |
|
Expiration |
|
Notional
Amounts |
|
Expiration |
| Interest
rate swaps |
$ |
552,500 |
|
|
June
30, 2022 |
|
$ |
552,500 |
|
|
June
30, 2022 |
| Interest
rate caps |
97,500 |
|
|
March
31, 2022 |
|
97,500 |
|
|
March
31, 2022 |
| Total
notional amounts |
$ |
650,000 |
|
|
|
|
$ |
650,000 |
|
|
|
Under
the swap agreements, the Company pays a fixed rate of interest of 2.561%
and receives an average variable rate of the one-month LIBOR adjusted monthly. Under the interest rate cap agreements, the Company pays
a fixed rate fee of 0.179%
on the notional amount and has a strike rate of 3.00%.
The
fair values of the swap and cap agreements as of March 27, 2022 and June 27, 2021 were liabilities of $2,141
and $8,869,
respectively, and are included in other current liabilities in the consolidated balance sheets.
The
reclassifications from accumulated other comprehensive income ("AOCI") into income during the three and nine months ended March 27,
2022 and March 28, 2021 were as follows:
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|
|
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|
|
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|
|
|
Three
Months Ended |
|
Nine
Months Ended |
|
March
27,
2022 |
|
March
28,
2021 |
|
March
27,
2022 |
|
March
28,
2021 |
| Interest
expense reclassified from AOCI into net loss |
$ |
2,205 |
|
|
$ |
2,266 |
|
|
$ |
6,610 |
|
|
$ |
6,798 |
|
The
fair value of the Swap and Cap Agreements excludes accrued interest and takes into consideration current interest rates and current likelihood
of the swap counterparties’ compliance with its contractual obligations. There are no income taxes related to the amounts recorded
to AOCI due to tax credits and the full valuation allowance on deferred taxes.
(16)Fair
Value of Financial Instruments
Debt
The
fair value and carrying value of our debt as of March 27, 2022 and June 27, 2021 are as follows:
|
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|
|
|
|
|
|
|
|
|
|
March
27,
2022 |
|
June
27,
2021 |
| Carrying
value |
$ |
880,810 |
|
|
$ |
885,387 |
|
| Fair
value |
874,034 |
|
|
887,102 |
|
The
fair value of our debt is estimated based on information provided by JP Morgan Chase Bank, N.A. and is based on trading levels of lenders
buying and selling their participation levels of funding (Level 2).
Items
Measured at Fair Value on a Recurring Basis
As
of March 27, 2022 and June 27, 2021, the Company held certain liabilities that were required to be measured at fair value on
a recurring basis. The following tables are summaries of fair value measurements and hierarchy level as of:
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|
March
27, 2022 |
|
Level
1 |
|
Level
2 |
|
Level
3 |
|
Total |
| Public
warrants |
$ |
24,123 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
24,123 |
|
| Private
placement warrants |
— |
|
|
— |
|
|
9,975 |
|
|
9,975 |
|
| Unvested
warrants |
— |
|
|
— |
|
|
3,854 |
|
|
3,854 |
|
| Earnout
shares |
— |
|
|
— |
|
|
204,416 |
|
|
204,416 |
|
| Contingent
consideration |
— |
|
|
— |
|
|
1,470 |
|
|
1,470 |
|
| Derivatives |
— |
|
|
2,141 |
|
|
— |
|
|
2,141 |
|
| Total
liabilities |
$ |
24,123 |
|
|
$ |
2,141 |
|
|
$ |
219,715 |
|
|
$ |
245,979 |
|
The
fair value of the warrant liability is classified as Level 1 and Level 3, depending on the class of warrant. The fair values of private
warrants, unvested warrants, and earn-out shares were established using a Monte Carlo simulation Model (level 3 inputs). The
key inputs into the Monte Carlo simulation as of March 27, 2022 were as follows:
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|
|
|
|
|
|
|
|
| Input |
|
Warrant
Liability |
|
Earnout
|
| Expected
term in years |
|
4.72 |
|
4.72 |
| Expected
volatility |
|
28 |
% |
|
55 |
% |
| Risk-free
interest rate |
|
2.54 |
% |
|
2.54 |
% |
| Stock
price |
|
$ |
10.86 |
|
$ |
10.86 |
| Dividend
yield |
|
— |
|
— |
The
following table sets forth a summary of changes in the estimated fair value of the Company’s Level 3 Earnout liability and Warrant
Liability for the nine months ended March 27, 2022:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
27,
2021 |
|
Issuances |
|
Settlements |
|
Changes
in fair value |
|
March
27,
2022 |
| Earnouts |
$ |
— |
|
|
$ |
181,180 |
|
|
$ |
— |
|
|
$ |
23,236 |
|
|
$ |
204,416 |
|
| Warrant
liability |
— |
|
|
22,426 |
|
|
5,222 |
|
|
20,748 |
|
|
37,952 |
|
| Totals: |
$ |
— |
|
|
$ |
203,606 |
|
|
$ |
5,222 |
|
|
$ |
43,984 |
|
|
$ |
242,368 |
|
There
were no transfers in or out of any of the levels of the valuation hierarchy during the fiscal year ended June 27, 2021 or through
the period ended March 27, 2022.
Derivatives
- The Company’s
interest rate swap and cap agreements are valued using observable inputs; therefore, the resulting obligation is classified within Level
2 of the fair value hierarchy at March 27, 2022 and June 27, 2021.
Redeemable
Common Stock – Old Bowlero
The
redeemable common stock of Old Bowlero was not listed on an established public trading market, therefore, market prices were not available.
The Company utilized an independent valuation specialist to determine the fair market value of our redeemable common stock based upon
our estimated enterprise value using the income approach, which includes the use Level 3 inputs. As a result, the redeemable common stock
is classified within Level 3 of the fair value hierarchy. Key assumptions used in estimating the fair value of our redeemable common stock
included projected revenue growth and costs and expenses, which were based on internal projections, historical performance, and the business
environment, as well as the selection of an appropriate discount rate based on weighted-average cost of capital and company-specific risk
premium. See Note
17 - Common
Stock. Preferred Stock and Stockholders’ Equity,
for further information.
Items
Measured at Fair Value on a Non-Recurring Basis
The
Company’s significant assets measured at fair value on a non-recurring basis subsequent to their initial recognition include assets
held for sale. We utilize third party broker estimate of value amounts to record the assets held for sale at their fair value less costs
to sell. These inputs are classified as level 2 fair value measurements.
Other
Financial Instruments
Other
financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable and accrued expenses. The financial
statement carrying amounts of these items approximate the fair value due to their short duration.
(17)Common
Stock, Preferred Stock and Stockholders’ Equity
Common
Stock
The
Company is authorized to issue three classes of stock to be designated, respectively, Class A common stock, Class B common stock (together
with Class A common stock, the “Common Stock”) and Preferred Stock. The total number of shares of capital stock which the
Corporation shall have authority to issue is 2,400,000,000,
divided into the following:
Class
A:
•Authorized:
2,000,000,000,
with a par value of $0.0001
per share
•Issued
and Outstanding: 107,025,528
(inclusive of 2,746,748
shares contingent on certain stock price thresholds but excluding 109,754
shares held in treasury) as of March 27, 2022
Class
B:
•Authorized:
200,000,000,
with a par value of $0.0001
per share
•Issued
and Outstanding: 58,311,203
as of March 27, 2022
Preferred
Stock:
•Authorized:
200,000,000,
with a par value of $0.0001
per share
•Issued
and Outstanding: 200,000
of Series A Preferred Stock as of March 27, 2022
The
rights of the holders of Class A common stock and Class B common stock are identical, except with respect to conversion and voting. Shares
of Class B common stock are convertible into an equivalent number of shares (one-for-one)
of Class A common stock automatically upon transfer, or upon the earliest to occur of (i) the 15th anniversary of the Closing Date, with
respect to Thomas F. Shannon’s (ii) the death or disability, (iii) ceasing to beneficially own at least 10% of the outstanding shares
of Class A common stock and Class B common stock or (iv) his employment as our CEO, being terminated for cause. Holders of Class B common
stock may convert their shares into shares of Class A common stock at any time at their option. Holders of Class A common stock are entitled
to one
vote per share and holders of Class B common stock are entitled to ten
votes per share. Any dividends paid to the holders of Class A common stock and Class B common stock will be paid on a pro rata basis.
On a liquidation event, any distribution to common stockholders is made on a pro rata basis to the holders of the Class A common stock
and Class B common stock.
Redeemable
Common Stock - Old Bowlero
Old
Bowlero had issued 51,397,025
shares (“Old Bowlero Redeemable Common Stock”) to its Chairman and CEO on July 3, 2017. These shares were subject to
a repurchase option in the event of the Chairman’s death or disability. The amount presented in temporary equity as of June 27,
2021 represents the estimated fair value of those shares. Old Bowlero’s obligation to repurchase these shares would terminate upon
the occurrence of a Change of Control or upon the consummation of a Public Offering. The increase in the repurchase obligation was recorded
via adjustments to additional paid-in capital.
As
of the Closing Date, we exchanged 51,397,025
shares of Old Bowlero Redeemable Common Stock for 51,397,025
shares of Class B Common stock of the Company. As of March 27, 2022, there was no
Old Bowlero Redeemable Common Stock remaining.
Series
A Preferred Stock – Old Bowlero
Old
Bowlero had authorized 200,000
shares of Old Bowlero Series A Preferred Stock (“Old Bowlero Preferred Stock”) at a $0.0001
par value per share of which 106,378
shares were issued and outstanding as of June 27, 2021. There were no voting rights associated with the Old Bowlero Preferred Stock.
Dividends accumulated on a daily basis commencing from the July 3, 2017 issue date. The dividend rate was 8%
for the first 3
years. Effective November 15, 2019, the rate following the first three
years was amended from 10%
to 6%.
The Old Bowlero Preferred Stock was redeemable at the option of Old Bowlero at any time on or after July 3, 2020. The Old Bowlero Preferred
Stock was classified as temporary equity because the shares had certain redemption features that were not solely in the control of the
reporting entity.
As
of the Closing Date, we redeemed the Old Bowlero Preferred Stock with a cash payment of $145,298.
As of March 27, 2022, there was no
Old Bowlero Preferred Stock outstanding.
Series
A Preferred Stock
As
of March 27, 2022, the Company had issued and outstanding 200,000
shares of Preferred Stock. Holders of Preferred Stock have voting rights in certain matters that require vote or consent of holders representing
a majority of the outstanding shares of the Preferred Stock. There are no other voting rights associated with the Preferred Stock as long
as management holds over 50%
of the equity voting power.
Dividends
accumulate on a cumulative basis on a 360-day year commencing from the issue date. The dividend rate is fixed at 5.5%
per annum on a liquidation preference of $1,000
per share. Payment dates are June 30 and December 31 of each year with a record date of June 15 for the June 30 payment date and December
15 for the December 31 payment date. Declared dividends will be paid in cash if the Company declares the dividend to be paid in cash.
If the Company does not pay all or any portion of the dividends that have accumulated as of any payment date, then the dollar amount of
the dividends not paid in cash will be added to the liquidation preference and deemed to be declared and paid in-kind. As of March 27,
2022, there have been no dividends declared or paid in cash. On December 31, 2021, accumulated dividends in the amount of $489
were added to the liquidation preference and deemed to be declared and paid in-kind. For the nine months ended March 27, 2022, dividends
in the amount of $3,154
have accumulated on the Preferred Stock.
The
Preferred Stock is redeemable if a Fundamental Change occurs and each holder will have the right to require the Company to repurchase
such holders’ shares of Preferred Stock or any portion thereof for a cash purchase price. A Fundamental Change includes events such
as a person or a group becoming direct or indirect owners of shares of the
Company’s
Common Stock representing more than 50%
of the voting power, consummation of a transaction with which all the Common Stock is exchanged for, converted into, acquired for, or
constitutes solely the right to receive cash or other property, Company’s stockholders approve any plan or proposal for the liquidation
or dissolution of the Company, or the Company’s Common Stock ceases to be listed on any of the NYSE or The Nasdaq Global Market
or The Nasdaq Global Select Market (or any of their respective successors).
The
Preferred Stock has conversion options providing (1) the holder the right to submit all, or any whole number of shares that is less than
all, of their shares of Preferred Stock pursuant to an Option Conversion and (2) the Company has the right to exercise at its election
a Mandatory Conversion settled in Common Stock with the exception of the payment of cash in lieu of any fractional shares following the
second anniversary of the initial issue date, if the closing price of the stock exceeds 130%
of the conversion price then in effect for at least 20
trading days (whether or not consecutive) during any 30
consecutive trading day period. Additionally, the Company may, from time to time, repurchase Preferred Stock in the open market purchases
or in negotiated transactions without delivering prior notice to holders of Preferred Stock.
The
Company has classified the Preferred Stock as temporary equity as the shares have certain redemption features that are not solely in the
control of the Company. The Preferred Stock is not currently redeemable because the deemed liquidation provision is considered a substantive
condition that is contingent on the event and it is not currently probable that it will become redeemable.
(18)Stock
Based Compensation
The
Company has three stock incentive plans: the 2017 Stock Incentive Plan (“2017 Plan”), the Bowlero Corp. 2021 Omnibus Incentive
Plan (“2021 Plan”) and the Bowlero Corp. Employee Stock Purchase Plan (“ESPP”). These stock incentive plans are
to attract and retain key personnel by providing them the opportunity to acquire equity interest in the Company and align the interest
of key personnel with those of the Company’s stockholders. There has been no activity or costs incurred for the ESPP.
2017
Plan: The
2017 Plan was approved on September 29, 2017 and is a broad-based plan that provides for the grant of non-qualified stock options
to our executives and certain other employees for up to a maximum of 16,316,506
shares (retroactively stated for application of the recapitalization). The 2017 Plan was subsequently amended on January 7, 2020
to 50,581,181
shares (retroactively stated for application of the recapitalization). As of December 15, 2021, no additional options are available to
be granted under the 2017 Plan. The 2017 Plan was administered by the Board of Directors, which approved grants to individuals, number
of options, terms, conditions, performance measures, and other provisions of the award. Awards were generally granted based on the individual’s
performance. Stock options granted under the 2017 Plan had a maximum contractual term of twelve
years from the date of grant, an exercise price not less than the fair value of the stock on the grant date and generally
vested over four
years in equal quarterly installments for the time-based options and upon occurrence of a liquidity event for the performance-based
options.
The
Company recorded compensation cost for all performance-based and unvested time-based options of $24,516
and $138,
respectively, due to the Business Combination on December 15, 2021, since the terms of these options were such that the options vested
upon the occurrence of a liquidity event. The Business Combination was a liquidity event that triggered the vesting of these options.
For the nine months ended March 28, 2021, we recorded compensation cost of $2,351
in selling, general and administrative expenses and $20
in cost of revenues within the condensed consolidated statements of operations.
A
summary of stock options outstanding under the 2017 Plan at March 27, 2022, and changes during the nine months then ended is presented
below. The aggregate intrinsic value, which is the amount by which the market value of the underlying stock exceeded the exercise price
of outstanding options, is before applicable income taxes and represents the amount option holders realized (in the case of exercised
options) or would realize if all in-the-money options had been exercised on the last business day of the period. The total intrinsic value
of options exercised during the three and nine months ended March 27, 2022 was $69,985,
and the total intrinsic value of options repurchased during the three and nine months ended March 27, 2022 was $4,362.
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