Notes to Condensed
Consolidated Financial Statements
(In thousands,
except share and per share data)
(Unaudited)
(1) Description
of Business and Significant Accounting Policies
Bowlero
Corp., a Delaware corporation, and its subsidiaries (referred to herein as , the “Company, “Bowlero”, “we,”
“us” and “our”) 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 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.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission
(“SEC”). Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared
in accordance with GAAP have been condensed or omitted. In the opinion of management, these financial statements contain all adjustments,
consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows for
the periods indicated. Our quarterly financial data should be read in conjunction with the audited financial statements and notes thereto
for the fiscal year ended July 3, 2022, included in our Annual Report on Form 10-K as filed with the SEC on September 15, 2022.
Reverse
Recapitalization: On December 15, 2021, (the “Closing Date”), the Company consummated
the previously announced Business Combination pursuant to the Business Combination Agreement (“BCA”) dated as of July 1, 2021,
by and among Bowlero Corp. prior to the Closing Date (“Old Bowlero”) and Isos Acquisition Corporation (“Isos”).
Notwithstanding
the legal form of the Business Combination pursuant to the BCA, the Business Combination was accounted for as a reverse recapitalization.
Under this method of accounting, Isos was treated as the acquired company and Old Bowlero was treated as the acquirer for accounting and
financial statement reporting purposes.
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.
Principles
of Consolidation: The consolidated financial statements and related notes include the accounts
of Bowlero Corp. and the subsidiaries it controls. Control is determined based on ownership rights or, when applicable, based on whether
the Company is considered to be the primary beneficiary of a variable interest entity. The Company’s interest in 20% to 50% owned
companies that are not controlled are accounted for using the equity method, unless the Company does not sufficiently influence the management
of the investee. All significant intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates: The preparation of the consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the balance sheets, statement
of operations and accompanying notes. Significant estimates made by management include, but are not limited to, cash flow projections;
the fair value of assets and liabilities in acquisitions; derivatives with hedge accounting; share-based compensation; depreciation and
impairment of long-lived assets; carrying amount and recoverability analyses of property and equipment, assets held for sale, goodwill
and other intangible assets; valuation of deferred tax assets and liabilities and income tax uncertainties; and reserves for litigation,
claims and self-insurance costs. Actual results could differ from those estimates.
Fair-value
Estimates: We have various financial instruments included in our financial
statements. Financial instruments are carried in our financial statements at either cost or fair value. We estimate fair value of assets
and liabilities using the following hierarchy using the highest level possible:
Level
1: Quoted prices in active markets that are accessible at the measurement date for identical assets and liabilities.
9
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Index to Notes
Level
2: Observable prices that are based on inputs not quoted on active markets, but are corroborated by market data.
Level
3: Unobservable inputs are used when little or no market data is available.
Cash
and Cash Equivalents: The Company considers all highly liquid investments
with a maturity date of three months or less when purchased to be cash equivalents. The Company had cash equivalents of $78,547 and $88,067
at October 2, 2022 and July 3, 2022, respectively. The Company accepts a range of debit and credit cards, and these transactions
are generally transmitted to a bank for reimbursement within 24 hours. The payments due from the banks for these debit and credit card
transactions are generally received, or settled, within 24 to 48 hours of the transmission date. The Company considers all debit and credit
card transactions that settle in less than seven days to be cash equivalents. Amounts due from the banks for these transactions classified
as cash equivalents totaled $9,776 and $8,688 at October 2, 2022 and July 3, 2022, respectively.
Marketable
Securities: Our investments in marketable equity securities are measured at fair value
with the related gains and losses, including unrealized, recognized in other expense.
Derivatives:
We are exposed to interest rate risk. To manage
these risks, we entered into interest rate swap derivative transactions associated with a portion of our outstanding debt. The interest
rate swaps were designated for accounting purposes as cash flow hedges of forecasted floating interest payments on variable rate debt.
The Company's interest rate swaps expired on June 30, 2022.
The
reclassifications from accumulated other comprehensive income (“AOCI”) into income during each reporting period were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2022 |
|
September 26, 2021 |
Interest expense reclassified from AOCI into net loss |
$ |
— |
|
|
$ |
2,202 |
|
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.
Net
(Loss) Income Per Share Attributable to Common Stockholders: We compute net
(loss) income 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, but do not participate
in losses, and thus are not included in a two-class method in periods of loss. Since the Company has reported net loss for the current
period, 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 the current period presented. Dilutive securities include convertible preferred stock, earnouts, stock options, and restricted
stock units (“RSUs”). See Note 15 - Net (Loss) Income Per Share.
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 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 our financial statements with those of another public company that is neither an emerging growth
company nor an emerging growth company that has opted out of using the extended transition period difficult or impossible because of the
potential differences in accounting standards used.
10
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Index to Notes
Recently
Issued Accounting Standards: We reviewed the accounting pronouncements that became
effective for our fiscal year 2023 and besides ASU No. 2016-02, Leases (“Topic 842”), we determined that either they were
not applicable, or they did not have a material impact on the consolidated financial statements.
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. The Company will adopt Topic 842 as of July 4, 2022 within our Annual Report on Form 10-K
for the fiscal year ending July 2, 2023. The Company intends to adopt the new standard using a modified retrospective transition approach
and will apply the provisions at the effective date without adjusting the comparative periods. Consequently, financial information will
not be updated and the disclosures required under the new standard will not be provided for dates and periods before the effective date.
The new standard provides a number of optional practice expedients in transition. The Company intends to elect the practical expedients
to not reassess its prior conclusions about lease identification, lease classification, and initial direct costs. Additionally, we do
not intend to elect the practical expedient allowing the use of hindsight or the practical expedient related to land easements. The Company
is still evaluating the practical expedients related to ongoing lease accounting. Although management continues to evaluate the impacts
on the Company’s consolidated financial statements and disclosures, management currently estimates total assets and liabilities
will increase approximately $500,000 to $600,000. This estimate may change as the Company’s implementation progresses, the Company’s
lease portfolio changes, and if discount rates fluctuate prior to adoption. The Company estimates that this standard will result in a
material impact to our balance sheet primarily from the recognition of operating lease right of use assets and liabilities. We do not
believe the adoption of this standard will have a material impact on our statement of operations or cash flows.
(2) Revenue
The
following table presents the Company’s revenue disaggregated by major revenue categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
October 2, 2022 |
|
% of revenues |
|
September 26, 2021 |
|
% of revenues |
Major revenue categories: |
|
|
|
|
|
|
|
Bowling |
$ |
115,327 |
|
|
50.1 |
% |
|
$ |
92,610 |
|
|
51.2 |
% |
Food and beverage |
79,023 |
|
|
34.3 |
% |
|
60,245 |
|
|
33.3 |
% |
Amusement |
30,809 |
|
|
13.4 |
% |
|
23,711 |
|
|
13.1 |
% |
Media |
5,101 |
|
|
2.2 |
% |
|
4,412 |
|
|
2.4 |
% |
Total revenues |
$ |
230,260 |
|
|
100.0 |
% |
|
$ |
180,978 |
|
|
100.0 |
% |
(3) Business
Acquisitions
Acquisitions:
The Company continually evaluates potential acquisitions, which can be either business combinations or
asset purchases, that strategically fit within the Company’s existing portfolio of centers as a key part of the Company’s
overall growth strategy in order to expand our market share in key geographic areas, and to improve our ability to leverage our fixed
costs.
2023
Business Acquisitions: For business combinations, the Company allocates the consideration transferred
to the identifiable assets acquired and liabilities assumed based on their preliminary estimated fair values as of the acquisition date.
We estimate the fair values of the assets acquired and liabilities assumed using valuation techniques, such as the income, cost and market
approaches. During the three months ended October 2, 2022, the Company had two acquisitions in which we acquired three bowling entertainment
centers for a total consideration of $15,918. The Company is still in the process of finalizing its valuation analysis. The remaining
fair value estimates include working capital, intangibles, property and equipment, and capital lease assets and liabilities. For business
combinations, we will continue to refine our estimates throughout the permitted measurement period, which may result in corresponding
offsets to goodwill. We expect to finalize the valuations as soon as possible, but no later than one year after the acquisition dates.
Acquisitions that were considered preliminary at July 3, 2022 were finalized with immaterial adjustments.
11
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Index to Notes
The
following table summarizes the preliminary purchase price allocations for the fair values of the identifiable assets acquired, components
of consideration transferred and the transactional related expenses using the acquisition method of accounting:
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets acquired and liabilities assumed |
|
|
|
|
|
Total |
Current assets |
|
|
|
|
|
$ |
14 |
|
Property and equipment |
|
|
|
|
|
14,055 |
|
Capital lease asset |
|
|
|
|
|
1,860 |
|
Identifiable intangible assets |
|
|
|
|
|
1,020 |
|
Goodwill |
|
|
|
|
|
1,326 |
|
Total assets acquired |
|
|
|
|
|
18,275 |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
(497) |
|
Capital lease liability |
|
|
|
|
|
(1,860) |
|
Total liabilities assumed |
|
|
|
|
|
(2,357) |
|
Total fair value, net of cash acquired of $16 |
|
|
|
|
|
$ |
15,918 |
|
|
|
|
|
|
|
|
Components of consideration transferred |
|
|
|
|
|
|
Cash |
|
|
|
|
|
$ |
15,218 |
|
Holdback |
|
|
|
|
|
700 |
|
|
|
|
|
|
|
|
Total consideration transferred |
|
|
|
|
|
$ |
15,918 |
|
Transaction expenses included in “other operating expense” in the condensed consolidated statement of operations for the period ended October 2, 2022 |
|
|
|
|
|
$ |
149 |
|
(4) Goodwill
and Other Intangible Assets
Goodwill:
The
changes in the carrying amount of goodwill for the period ended October 2, 2022:
|
|
|
|
|
|
Balance as of July 3, 2022 |
$ |
742,669 |
|
Goodwill resulting from acquisitions during the first quarter |
1,326 |
|
Adjustments to preliminary fair values for prior year acquisitions |
(340) |
|
Balance as of October 2, 2022 |
$ |
743,655 |
|
12
Table
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Index to Notes
Intangible
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2022 |
|
July 3, 2022 |
|
Gross carrying amount |
|
Accumulated amortization |
|
Net carrying amount |
|
Gross carrying amount |
|
Accumulated amortization |
|
Net carrying amount |
Finite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
AMF trade name |
$ |
9,900 |
|
|
$ |
(8,758) |
|
|
$ |
1,142 |
|
|
$ |
9,900 |
|
|
$ |
(8,593) |
|
|
$ |
1,307 |
|
Other acquisition trade names |
1,880 |
|
|
(784) |
|
|
1,096 |
|
|
1,761 |
|
|
(651) |
|
|
1,110 |
|
Customer relationships |
21,862 |
|
|
(15,002) |
|
|
6,860 |
|
|
21,112 |
|
|
(13,989) |
|
|
7,123 |
|
Management contracts |
1,800 |
|
|
(1,515) |
|
|
285 |
|
|
1,800 |
|
|
(1,443) |
|
|
357 |
|
Non-compete agreements |
2,601 |
|
|
(1,173) |
|
|
1,428 |
|
|
2,450 |
|
|
(1,067) |
|
|
1,383 |
|
PBA member, sponsor & media relationships |
1,400 |
|
|
(544) |
|
|
856 |
|
|
1,400 |
|
|
(504) |
|
|
896 |
|
Other intangible assets |
921 |
|
|
(185) |
|
|
736 |
|
|
921 |
|
|
(133) |
|
|
788 |
|
|
40,364 |
|
|
(27,961) |
|
|
12,403 |
|
|
39,344 |
|
|
(26,380) |
|
|
12,964 |
|
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
Liquor licenses |
9,716 |
|
|
— |
|
|
9,716 |
|
|
9,629 |
|
|
— |
|
|
9,629 |
|
PBA trade name |
3,100 |
|
|
— |
|
|
3,100 |
|
|
3,100 |
|
|
— |
|
|
3,100 |
|
Bowlero trade name |
66,900 |
|
|
— |
|
|
66,900 |
|
|
66,900 |
|
|
— |
|
|
66,900 |
|
|
79,716 |
|
|
— |
|
|
79,716 |
|
|
79,629 |
|
|
— |
|
|
79,629 |
|
|
$ |
120,080 |
|
|
$ |
(27,961) |
|
|
$ |
92,119 |
|
|
$ |
118,973 |
|
|
$ |
(26,380) |
|
|
$ |
92,593 |
|
The
following table shows amortization expense for finite-lived intangible assets for each reporting period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
October 2, 2022 |
|
September 26, 2021 |
Amortization expense |
$ |
1,582 |
|
|
$ |
1,432 |
|
(5) Property
and Equipment
As
of October 2, 2022 and July 3, 2022, property and equipment consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2022 |
|
July 3, 2022 |
Land |
$ |
78,992 |
|
|
$ |
77,006 |
|
Buildings and improvements |
79,999 |
|
|
69,219 |
|
Leasehold improvements |
357,118 |
|
|
349,534 |
|
Equipment, furniture, and fixtures |
409,071 |
|
|
375,780 |
|
Construction in progress |
24,507 |
|
|
15,638 |
|
|
949,687 |
|
|
887,177 |
|
Accumulated depreciation |
(372,427) |
|
|
(352,456) |
|
Property and equipment, net of accumulated depreciation |
$ |
577,260 |
|
|
$ |
534,721 |
|
The
following table shows depreciation expense related to property and equipment for each reporting period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
October 2, 2022 |
|
September 26, 2021 |
Depreciation expense |
$ |
20,339 |
|
|
$ |
16,892 |
|
Assets held
for sale:
Total
assets held for sale at October 2, 2022 and July 3, 2022 were $8,719 and $8,789, respectively. Assets held for sale are valued
at the lower of its carrying value or its fair value less the costs to sell.
13
Table
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Index to Notes
(6) Leases
The
Company leases various assets under non-cancellable operating and capital leases. These assets include bowling centers, office space,
vehicles, and equipment.
Most
of our leases contain payments for some or all of the following: base rent, contingent rent, common area maintenance, insurance, real-estate
taxes, and other operating expenses. Rental payments are subject to escalation depending on future changes in designated indices or based
on pre-determined amounts agreed upon at lease inception.
Operating
Leases: We recorded accrued rent of $26,511 and $26,417 within other current liabilities and
other long-term liabilities on the condensed consolidated balance sheets as of October 2, 2022 and July 3, 2022, respectively.
Capital
Leases: We had $50,369 and $47,298 in accumulated amortization on property and equipment under
capital leases as of October 2, 2022 and July 3, 2022, respectively
The
following tables summarize the Company’s costs for operating and capital leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
October 2, 2022 |
|
September 26, 2021 |
Operating Leases |
|
|
|
Rent expense |
$ |
14,790 |
|
|
$ |
15,284 |
|
|
|
|
|
Capital Leases |
|
|
|
Interest expense |
$ |
10,361 |
|
|
$ |
9,520 |
|
Amortization expense |
3,095 |
|
|
3,236 |
|
Total capital lease cost |
$ |
13,456 |
|
|
$ |
12,756 |
|
(7) Accrued
Expenses
As
of October 2, 2022 and July 3, 2022, accrued expenses consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2022 |
|
July 3, 2022 |
Customer deposits |
$ |
16,272 |
|
|
$ |
10,728 |
|
Taxes and licenses |
10,843 |
|
|
11,568 |
|
Compensation |
10,559 |
|
|
15,746 |
|
Insurance |
5,368 |
|
|
5,229 |
|
Utilities |
4,956 |
|
|
4,185 |
|
Deferred revenue |
4,347 |
|
|
6,384 |
|
Deferred rent |
2,888 |
|
|
3,252 |
|
Professional fees |
2,541 |
|
|
3,062 |
|
Interest |
514 |
|
|
498 |
|
Other |
3,444 |
|
|
2,202 |
|
Total accrued expenses |
$ |
61,732 |
|
|
$ |
62,854 |
|
14
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Index to Notes
(8) Debt
The
following table summarizes the Company’s debt structure as of October 2, 2022 and July 3, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2022 |
|
July 3, 2022 |
First Lien Credit Facility Term Loan (Maturing July 3, 2024 and bearing variable rate interest; 6.62% and 5.17% at October 2, 2022 and July 3, 2022, respectively) |
$ |
788,218 |
|
|
$ |
790,271 |
|
Revolver (Maturing April 4, 2024 and bearing variable rate interest; 5.63% and 4.13% at October 2, 2022 and July 3, 2022, respectively) |
86,434 |
|
|
86,434 |
|
Other Equipment Loan (Maturing August 19, 2029 and bearing a fixed interest rate; 6.24%) |
15,277 |
|
|
— |
|
|
889,929 |
|
|
876,705 |
|
Less: |
|
|
|
Unamortized financing costs |
(5,852) |
|
|
(6,649) |
|
Current portion of unamortized financing costs |
3,284 |
|
|
3,245 |
|
Current maturities of long-term debt |
(9,118) |
|
|
(8,211) |
|
Total long-term debt |
$ |
878,243 |
|
|
$ |
865,090 |
|
First
Lien Credit Facility Term Loan: The First Lien Credit Facility Term Loan 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.
Obligations
owed under the First Lien Credit Facility Term Loan bear interest at a rate per annum equal to the applicable LIBOR rate, subject to a
floor of 1.00%, plus an applicable margin of 3.50%. Interest on term loans under the First Lien Credit Facility bearing interest based
upon the Base Rate will be due quarterly, and interest on loans bearing interest based upon the LIBOR rate will be due on the last day
of each relevant interest period or, if sooner, on the respective dates that fall every three months after the beginning of such interest
period.
Pursuant
to the First Lien Guarantee and Collateral Agreements, obligations owed under the First Lien Credit Facility are secured by a first priority
security interest on substantially all assets of Bowlero Corp and the guarantor subsidiaries. The First Lien Credit Agreement contains
customary events of default, restrictions on indebtedness, liens, investments, asset dispositions, dividends and affirmative and negative
covenants.
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 (“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 Facility Term Loan
in an aggregate principal amount exceeding $175,000. Since the First Lien Credit Agreement matures on July 3, 2024, the maturity date
for the Revolver is currently April 4, 2024. Interest on borrowings under the 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 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 Revolver
in connection with the Seventh Amendment.
The
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 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 Revolver is at least 35%
utilized (subject to certain exclusions) at the end of such fiscal quarter.
The
Revolver is also subject to customary events of defaults. Payment of borrowings under the Revolver may be accelerated if there is an event
of default, and Bowlero would no longer be permitted to borrow additional funds under the 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.
15
Table
of Contents
Index to Notes
Letters
of Credit: Outstanding standby letters of credit as of October 2,
2022 and July 3, 2022 totaled $9,136, and are guaranteed by JP Morgan Chase Bank, N.A. The available amount of the Revolver is reduced
by the outstanding standby letters of credit.
Other
Equipment Loan: On August 19, 2022, the Company entered into an equipment loan agreement for
a principal amount of $15,350 with JP Morgan Chase Bank, N.A.. The loan is repaid on a monthly basis in fixed payments of $153 plus a
final payment at maturity. The loan obligation is secured by a lien on the equipment.
Covenant
Compliance: The Company was in compliance with all debt covenants as of October 2, 2022.
(9) Income Taxes
The
Company uses the estimated annual effective tax rate method for calculating its tax provision in interim periods, which represents the
Company's best estimate of the effective tax rate expected for the full year. Certain items, including those deemed to be unusual, infrequent
or that cannot be reliably estimated (discrete items), are excluded from the estimated annual effective tax rate, and the related tax
expense or benefit is reported in the same period as the related item. The Company’s effective tax rate for the three months ended
October 2, 2022 was (1.3)%, which differs from the US federal statutory rate of 21% primarily due to certain non-deductible expenses,
changes in the valuation allowance, and state and local taxes. The Company’s effective tax rate for the three months ended September
26, 2021 was (67.0)% and differs from the US federal statutory rate of 21% due to changes in the valuation allowance, state and local
taxes, and the release of a portion of the valuation allowance resulting from the acquisition of Bowl America.
(10) 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.
There
is currently a group of approximately 76 pending claims, filed with the Equal Employment Opportunity Commission (the “EEOC”)
between 2016 and 2019, generally relating to claims of age discrimination. To date, the EEOC issued determinations of probable cause as
to thirteen of the charges, which the Company contests and intends to defend vigorously. The EEOC has also alleged a pattern or practice
of age discrimination, which resulted in a determination of probable cause and, on August 22, 2022, the EEOC submitted a proposal for
the Company to participate in the conciliation process. The EEOC’s proposal includes a demand for monetary and non-monetary remedies.
The Company contests such determination and intends to defend vigorously. The Company cannot estimate the possible range of loss, if any,
associated with these EEOC matters.
(11)
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 Earnout shares 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.
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
16
Table
of Contents
Index to Notes
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. As a result of the cashless
exercise of their unvested private placement warrants, the Sponsor and LionTree were issued 475,440 additional Earnout Shares, which vest
during the period from and after the Closing Date until the fifth anniversary of the Closing Date: (a) 237,721 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) 237,719 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.
All
but 123,254 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.
(12) Fair Value
of Financial Instruments
Debt
The
fair value and carrying value of our debt as of October 2, 2022 and July 3, 2022 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2022 |
|
July 3, 2022 |
Carrying value |
$ |
889,929 |
|
|
$ |
876,705 |
|
Fair value |
859,558 |
|
|
841,637 |
|
The
fair value of our debt is estimated based on trading levels of lenders buying and selling their participation levels of funding (Level
2).
There
were no transfers in or out of any of the levels of the valuation hierarchy during the three months ended October 2, 2022 and the
fiscal year ended July 3, 2022.
Items
Measured at Fair Value on a Recurring Basis
The
Company holds certain assets and liabilities that are required to be measured at fair value on a recurring basis. The following table
is a summary of fair value measurements and hierarchy level as of October 2, 2022 and July 3, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2022 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
Marketable securities |
$ |
2,935 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,935 |
|
Total assets |
$ |
2,935 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,935 |
|
Earnout shares |
$ |
— |
|
|
$ |
— |
|
|
$ |
251,779 |
|
|
$ |
251,779 |
|
Contingent consideration |
— |
|
|
— |
|
|
1,610 |
|
|
1,610 |
|
Total liabilities |
$ |
— |
|
|
$ |
— |
|
|
$ |
253,389 |
|
|
$ |
253,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 3, 2022 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
Earnout shares |
$ |
— |
|
|
$ |
— |
|
|
$ |
210,952 |
|
|
$ |
210,952 |
|
Contingent consideration |
— |
|
|
— |
|
|
1,470 |
|
|
1,470 |
|
Total liabilities |
$ |
— |
|
|
$ |
— |
|
|
$ |
212,422 |
|
|
$ |
212,422 |
|
17
Table
of Contents
Index to Notes
The fair value
of earnout shares was estimated using a Monte Carlo simulation model (level 3 inputs). The key inputs into the Monte Carlo simulation
as of October 2, 2022 were as follows:
|
|
|
|
|
|
|
Earnout |
Expected term in years |
4.2 |
Expected volatility |
60% |
Risk-free interest rate |
4.14% |
Stock price |
$ |
12.31 |
Dividend yield |
— |
The following
table sets forth a summary of changes in the estimated fair value of the Company's Level 3 Earnout liability for the year ended October 2,
2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 3, 2022 |
|
Issuances |
|
Settlements |
|
Changes in fair value |
|
October 2, 2022 |
Earnout liability |
|
$ |
210,952 |
|
|
$ |
67 |
|
|
$ |
— |
|
|
$ |
40,760 |
|
|
$ |
251,779 |
|
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 brokers for an estimate of value 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.
(13) Common
Stock, Preferred Stock and Stockholders’ Equity
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 Series A preferred stock (the “Preferred Stock”). The total
number of shares of capital stock which the Company shall have authority to issue is 2,400,000,000, divided into the following:
Class A:
•Authorized:
2,000,000,000 shares, with a par value of $0.0001 per share as of October 2, 2022 and July 3, 2022.
•Issued
and Outstanding: 109,977,844 shares (inclusive of 3,204,188 shares contingent on certain stock price thresholds but excluding 3,898,770
shares held in treasury) as of October 2, 2022 and 110,395,630 shares (inclusive of 3,209,972 shares contingent on certain stock
price thresholds but excluding 3,430,667 shares held in treasury) as of July 3, 2022.
Class B:
•Authorized:
200,000,000 shares, with a par value of $0.0001 per share as of October 2, 2022 and July 3, 2022.
•Issued
and Outstanding: 55,911,203 shares as of October 2, 2022 and July 3, 2022.
Preferred Stock:
•Authorized:
200,000,000 shares, with a par value of $0.0001 per share as of October 2, 2022 and July 3, 2022.
•Issued
and Outstanding: 200,000 shares as of October 2, 2022 and July 3, 2022.
Series
A Preferred Stock
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.
18
Table
of Contents
Index to Notes
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 October 2, 2022, there have been no dividends declared or paid in cash.
For the period ended October 2, 2022, no accumulated dividends were added to the liquidation preference and deemed to be declared
and paid in-kind. For the period ended October 2, 2022, dividends in the amount of $2,801 were accumulated on the Preferred Stock.
Shares and
Warrant Repurchase Program
On
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. Treasury stock purchases
are stated at cost and presented as a reduction of equity on the condensed consolidated balance sheets. Repurchases of shares and warrants
are made in accordance with applicable securities laws and may be made from time to time in the open market or by negotiated transactions.
The amount and timing of repurchases are based on a variety of factors, including stock price, regulatory limitations, debt agreement
limitations, and other market and economic factors. The share repurchase plan does not require the Company to repurchase any specific
number of shares, and the Company may terminate the repurchase plan at any time.
As
of October 2, 2022, the remaining balance of the repurchase plan was $154,599. For the quarter ended October 2, 2022, 468,103
shares of Class A common stock were repurchased for a total of $5,462, for an average purchase price per share of $11.67.
(14) Share-Based
Compensation
The
Company has three stock 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 designed
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.
As
of October 2, 2022 and July 3, 2022, the total compensation cost not yet recognized is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Award Plan |
|
October 2, 2022 |
|
July 3, 2022 |
Stock options |
2021 Plan |
|
$ |
34,915 |
|
|
$ |
37,273 |
|
Service based RSUs |
2021 Plan |
|
6,074 |
|
|
7,211 |
|
Market and service based RSUs |
2021 Plan |
|
1,321 |
|
|
1,498 |
|
Earnout RSUs |
2021 Plan |
|
845 |
|
|
939 |
|
ESPP |
|
|
116 |
|
|
— |
|
Total unrecognized compensation cost |
|
|
$ |
43,271 |
|
|
$ |
46,921 |
|
Share-based
compensation recognized in the consolidated statement of operations for the three months ended October 2, 2022 and September 26,
2021 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Award Plan |
|
October 2, 2022 |
|
September 26, 2021 |
|
|
|
|
|
|
Time-based options |
2017 Plan |
|
$ |
— |
|
|
$ |
801 |
|
Stock options |
2021 Plan |
|
2,358 |
|
|
— |
|
Service based RSUs |
2021 Plan |
|
982 |
|
|
— |
|
Market and service based RSUs |
2021 Plan |
|
141 |
|
|
— |
|
Earnout RSUs |
2021 Plan |
|
45 |
|
|
— |
|
|
|
|
|
|
|
ESPP |
|
|
122 |
|
|
— |
|
Total share-based compensation expense |
|
|
$ |
3,648 |
|
|
$ |
801 |
|
The Company did
not have any recognized income tax benefits, net of valuation allowances, related to our share-based compensation plans.
(15) Net (Loss)
Income Per Share
Net
(loss) income per share calculations for all periods prior to the Closing Date have been retrospectively adjusted for the equivalent number
of shares outstanding immediately after the Closing Date to effect the reverse recapitalization.
19
Table
of Contents
Index to Notes
The computation
of basic and diluted net (loss) income per share of Class A common stock and Class B common stock is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
October 2, 2022 |
|
September 26, 2021 |
|
Class A |
|
Class B |
|
Total |
|
Class A |
|
Class B |
|
Total |
Numerator |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income allocated to common stockholders |
$ |
(23,860) |
|
|
$ |
(12,475) |
|
|
$ |
(36,335) |
|
|
$ |
13,313 |
|
|
$ |
— |
|
|
$ |
13,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
106,943,394 |
|
|
55,911,203 |
|
|
162,854,597 |
|
|
146,848,328 |
|
|
— |
|
|
146,848,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (income) per share, basic |
$ |
(0.22) |
|
|
$ |
(0.22) |
|
|
$ |
(0.22) |
|
|
$ |
0.09 |
|
|
$ |
— |
|
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
October 2, 2022 |
|
September 26, 2021 |
|
Class A |
|
Class B |
|
Total |
|
Class A |
|
Class B |
|
Total |
Numerator |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income allocated to stockholders |
$ |
(23,860) |
|
|
$ |
(12,475) |
|
|
$ |
(36,335) |
|
|
$ |
13,313 |
|
|
$ |
— |
|
|
$ |
13,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
106,943,394 |
|
|
55,911,203 |
|
|
162,854,597 |
|
|
146,848,328 |
|
|
— |
|
|
146,848,328 |
|
Impact of incremental shares |
* |
|
* |
|
* |
|
5,038,712 |
|
|
— |
|
|
5,038,712 |
|
Total |
106,943,394 |
|
|
55,911,203 |
|
|
162,854,597 |
|
|
151,887,040 |
|
|
— |
|
|
151,887,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share, diluted |
$ |
(0.22) |
|
|
$ |
(0.22) |
|
|
$ |
(0.22) |
|
|
$ |
0.09 |
|
|
$ |
— |
|
|
$ |
0.09 |
|
*The impact of
25,124,943 potentially dilutive convertible preferred stock, service based RSUs, stock options, and purchases of shares under our ESPP
were excluded from the diluted per share calculations because they would have been antidilutive.
20
Table
of Contents
Index to Notes
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations
This
discussion should be read in conjunction with Bowlero Corp.’s unaudited condensed consolidated financial statements and the related
notes in Item 1 and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K
as filed with the Securities and Exchange Commission (“SEC”) on September 15, 2022. This discussion contains forward-looking
statements and involves numerous risks and uncertainties, including, but not limited to, those described under the heading “Risk
Factors” in our Annual Report on Form 10-K as filed with the SEC on September 15, 2022. Actual results may differ materially from
those contained in any forward-looking statements. All period references are to our fiscal periods unless otherwise indicated. Unless
the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” to “we,” “us,” “our,” the “Company,” and “Bowlero” are
intended to mean the business and operations of Bowlero Corp. and its consolidated subsidiaries. All financial information in this section
is presented in thousands, unless otherwise noted, except share and per share amounts.
Special Note
Regarding Forward-Looking Statements
This
Quarterly Report on Form 10-Q contains forward-looking statements regarding, among other things, the plans, strategies and prospects,
both business and financial of Bowlero. These statements are based on the beliefs and assumptions of our management. Although we believe
that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure
you that it will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks,
uncertainties and assumptions. Generally, statements that are not historical facts, including statements concerning possible or assumed
future actions, business strategies, events or results of operations, are forward-looking statements. The words “anticipates,”
“believe,” “continue,” “could,” “estimate,” “expect,” “intends,”
“may,” “might,” “plan,” “possible,” “potential,” “predicts,” “project,”
“should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words
does not mean that a statement is not forward-looking. Forward-looking statements in this Quarterly Report on Form 10-Q include, but are
not limited to, statements about our business strategy, financial projections, anticipated growth and market opportunities.
These
forward-looking statements are based on information available as of the date of this Quarterly Report on Form 10-Q, and current expectations,
forecasts and assumptions, and involve a number of risks and uncertainties. Accordingly, forward-looking statements should not be relied
upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements
to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise,
except as may be required under applicable securities laws.
In
addition, statements that we “believe,” and similar statements reflect only our beliefs and opinions on the relevant subject.
These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe
such information forms a reasonable basis for such statements, such information may be limited or incomplete, and these statements should
not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information.
These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
As
a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from
those expressed or implied by these forward-looking statements. Some factors that could cause our actual results to differ include:
•our
ability to grow and manage growth profitably;
•the
possibility that we may be adversely impacted by other economic, business, and/or competitive factors;
•the
risk that the market for our entertainment offerings may not develop on the timeframe or in the manner that we currently anticipate;
•general
geopolitical and economic conditions and uncertainties affecting markets in which we operate and economic volatility that could adversely
impact our business;
•our
ability to attract new customers and retain existing customers;
•changes
in consumer preferences and buying patterns;
•the
impact of inflation on our costs, margins and our pricing;
•inability
to compete successfully against current and future competitors in the highly competitive out-of-home and home-based entertainment markets;
•inability
to operate venues, or obtain and maintain licenses and permits necessary for such operation, in compliance with laws, regulations and
other requirements;
21
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Index to Notes
•damage
to brand or reputation;
•our
ability to successfully defend litigation brought against us;
•our
ability to adequately obtain, maintain, protect and enforce our intellectual property and proprietary rights and claims of intellectual
property and proprietary right infringement, misappropriation or other violation by competitors and third parties;
•failure
to hire and retain qualified employees and personnel;
•fluctuations
in our operating results;
•security
breaches, cyber-attacks and other interruptions to our and our third-party service providers’ technological and physical infrastructures;
•catastrophic
events, including war, terrorism and other international conflicts, adverse weather conditions, public health issues or natural catastrophes
and accidents;
•risk
of increased regulation of our operations;
•our
future capital needs; and
•other
risks and uncertainties indicated in this Quarterly Report on Form 10-Q, including those under “Risk
Factors” in other filings that have been made or will be made by us with the SEC.
Overview
Bowlero
Corp. is the world’s largest operator of bowling entertainment centers. The Company operates traditional bowling centers and more
upscale entertainment concepts with lounge seating, arcades, enhanced food and beverage offerings, and more robust customer service for
individuals and group events, as well as hosting and overseeing professional and non-professional bowling tournaments and related broadcasting.
The
Company remains focused on creating long-term shareholder value through continued organic growth, the conversion and upgrading of centers
to more upscale entertainment concepts offering a broader range of offerings, the opening of new centers and acquisitions. A core tenet
of our long-term strategy to increase profitability is to grow the size and scale of the Company in order to improve our leverage of Selling,
General and Administrative expenses (“SG&A”). For the first quarter of fiscal 2023 as compared to the first quarter of
fiscal 2022, the Company’s total revenue (inclusive of acquisitions and new centers) increased by 27% and the Company’s total
revenue on a same-store basis increased by 20%.
Same-store
revenues includes revenue from centers that are open in periods presented (open in both the current period and the prior period being
reported) and excludes revenues from centers that are not open in both periods presented, such as recently acquired centers or centers
closed for upgrades, renovations or other such reasons, as well as media revenues. We continue to see positive momentum for future demand
and we have recovered to better than pre-pandemic performance. While we generated a strong financial performance prior to the COVID-19
pandemic and during the previous five quarters, the impact of the COVID-19 pandemic, various COVID-19 virus variants, the governmental
actions imposed in response to the pandemic, and the resulting consequences on our consumer’s risk tolerance toward health and safety
matters remains uncertain.
Recent Developments
Bowlero’s
results for the quarter ended October 2, 2022 exhibited continued strong revenue growth after the significant disruption caused by the
COVID-19 pandemic, the strength of our business model, the increase in confidence of our customers and the resilience in the bowling market.
Additionally, the further improvements in our quarterly results demonstrate our continued ability to execute our growth strategy and business
model. To highlight the Company’s recent activity during the quarter ended October 2, 2022:
•We
made two acquisitions in which we acquired three bowling entertainment centers during the quarter ended October 2, 2022, adding a total
of 30 net new centers since the start of fiscal 2022, that we believe will aid the Company in several key geographic markets and aid in
leveraging our fixed costs. We have signed five agreements to acquire six additional centers as of October 2, 2022, which are expected
to close in fiscal year 2023.
•We
signed two agreements for build-outs during the quarter ended October 2, 2022 and have a total of five signed agreements for build-outs
in prime markets.
We
continue to address the impacts of the COVID-19 pandemic, including the governmental actions imposed in response to it. The rise of other
variants of COVID-19 and public health officials’ response to potential resurgences in the virus could impact our future operations.
Although we believe our recent results, actions and goals exhibit our strength in
22
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Index to Notes
the bowling market
and our position for the future growth, we may incur future unplanned expenses related to training, hiring and retaining associates, and
navigating the disruption in the food and beverage supply chains, whether due to the lingering effects of the COVID-19 pandemic or otherwise.
For more details, see the risk factors included under “Risk Factors
— Risks Related to Bowlero’s Business and Industry” in
our previously filed Annual Report on Form 10-K for the fiscal year ended July 3, 2022.
Trends
There
are a number of trends that we expect to materially affect our future profitability, including changing economic conditions with the resulting
impact on our sales, profitability, and capital spending, changes in our debt levels and applicable interest rates, and increasing prices
of labor, raw materials and other food and beverage costs. Additionally, sales and results of operations could be impacted by acquisitions
and restructuring projects. Restructuring can include various projects, including closure of centers not performing well, cost reductions
through staffing reductions, and optimizing and allocating resources to improve profitability.
Presentation
of Results of Operations
The
Company reports on a fiscal year, with each quarter generally comprised of one 5-week period and two 4-week periods.
Results of Operations
Three Months
Ended October 2, 2022 Compared to the Three Months Ended September 26, 2021
Analysis
of Consolidated Statement of Operations. The following table displays certain
items from our consolidated statements of operations for the quarters presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
(in thousands) |
|
October 2, 2022 |
|
%(1) |
|
September 26, 2021 |
|
%(1) |
|
Change |
|
% Change |
Revenues |
|
$ |
230,260 |
|
|
100.0 |
% |
|
$ |
180,978 |
|
|
100.0 |
% |
|
$ |
49,282 |
|
|
27.2 |
% |
Costs of revenues |
|
165,202 |
|
|
71.7 |
% |
|
126,868 |
|
|
70.1 |
% |
|
38,334 |
|
|
30.2 |
% |
Gross profit |
|
65,058 |
|
|
28.3 |
% |
|
54,110 |
|
|
29.9 |
% |
|
10,948 |
|
|
20.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (income) expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
32,494 |
|
|
14.1 |
% |
|
21,415 |
|
|
11.8 |
% |
|
11,079 |
|
|
51.7 |
% |
Asset impairment |
|
84 |
|
|
— |
% |
|
— |
|
|
— |
% |
|
84 |
|
|
|
Gain on sale or disposal of assets |
|
(155) |
|
|
(0.1) |
% |
|
(30) |
|
|
— |
% |
|
(125) |
|
|
416.7 |
% |
Other operating expense |
|
1,362 |
|
|
0.6 |
% |
|
477 |
|
|
0.3 |
% |
|
885 |
|
|
185.5 |
% |
Total operating expense |
|
33,785 |
|
|
14.7 |
% |
|
21,862 |
|
|
12.1 |
% |
|
11,923 |
|
|
54.5 |
% |
Operating profit |
|
31,273 |
|
|
13.6 |
% |
|
32,248 |
|
|
17.8 |
% |
|
(975) |
|
|
(3.0) |
% |
Other expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
23,570 |
|
|
10.2 |
% |
|
22,928 |
|
|
12.7 |
% |
|
642 |
|
|
2.8 |
% |
Change in fair value of earnout liability |
|
40,760 |
|
|
17.7 |
% |
|
— |
|
|
— |
% |
|
40,760 |
|
|
|
Other expense |
|
48 |
|
|
— |
% |
|
— |
|
|
— |
% |
|
48 |
|
|
|
Total other expense |
|
64,378 |
|
|
28.0 |
% |
|
22,928 |
|
|
12.7 |
% |
|
41,450 |
|
|
180.8 |
% |
(Loss) income before income tax expense (benefit) |
|
(33,105) |
|
|
(14.4) |
% |
|
9,320 |
|
|
5.1 |
% |
|
(42,425) |
|
|
(455.2) |
% |
Income tax expense (benefit) |
|
429 |
|
|
0.2 |
% |
|
(6,244) |
|
|
(3.5) |
% |
|
6,673 |
|
|
(106.9) |
% |
Net (loss) income |
|
$ |
(33,534) |
|
|
(14.6) |
% |
|
$ |
15,564 |
|
|
8.6 |
% |
|
(49,098) |
|
|
(315.5) |
% |
___________
(1) Percent calculated
as a percentage of revenues and may not total due to rounding.
23
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Index to Notes
Revenues:
For the quarter ended October 2, 2022, revenues totaled $230,260 and represented an increase
of $49,282, or 27%, over the same period of last fiscal year. The overall increase in revenues is due to our ability to execute our growth
strategy and business model with the impact of 26 new centers and continued organic growth with event revenue, our broader and enhanced
range of offerings, as well as the impact of positive market conditions. The following table summarizes the increase in the Company’s
revenue on a same-store-basis for the quarter ended October 2, 2022 as compared to the corresponding period last fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
(in thousands) |
October 2, 2022 |
|
September 26, 2021 |
|
Change |
|
% Change |
Center revenues on a same-store basis |
$ |
208,409 |
|
|
$ |
173,775 |
|
|
$ |
34,634 |
|
|
19.9 |
% |
Revenues for media, new and closed centers |
21,851 |
|
|
7,203 |
|
14,648 |
|
203.4 |
% |
Total revenues |
$ |
230,260 |
|
|
$ |
180,978 |
|
|
$ |
49,282 |
|
|
27.2 |
% |
Same-store
revenues includes revenue from centers that are open in periods presented (open in both the current period and the prior period being
reported) and excludes revenues from centers that are not open in periods presented such as acquired new centers or centers closed for
upgrades, renovations or other such reasons, as well as media revenues. The increase in same-store revenues during the quarter ended October
2, 2022 reflects, among other factors, continued favorable demand for our products and services.
Cost
of Revenues: The Company’s cost of revenues includes costs that are
not variable or less variable with changes in revenues, such as depreciation, amortization, rent and property taxes, as well as more variable
costs that include labor, food and beverage costs, prize funds, supplies, production expenses and amusement costs. The increase in cost
of revenues of $38,334, or 30%, is mainly due to the increase in revenues, as well as higher costs due to inflation. Increases in costs
include higher costs with labor, utilities, food and beverage, as well as increases in depreciation, insurance and other operational costs
such as security and supplies. Labor costs during the prior year were lower because of a lack of staffing during the reopening after the
pandemic. Depreciation costs increased because of added depreciation from acquisitions of businesses, asset acquisitions and capital expenditures.
Cost of revenues as a percent of revenues increased from 70% during the first quarter of fiscal 2022 to almost 72% during the first quarter
of fiscal 2023, mainly due to the certain costs, including labor, food, insurance and security costs, increasing at a faster rate than
revenues because of a range of factors, such as supply chain issues, inflationary pressures and heightened level of security at a number
of our centers. The Company has recently increased prices in an effort to address the impact of higher costs and to improve margins.
Selling,
general and administrative expenses (“SG&A”): SG&A expenses
include employee related costs with payroll and benefits, as well as depreciation and amortization (excluding those related to our center
operations), media and promotional expenses. SG&A expenses increased $11,079 or 52% to $32,494, mainly due to the increase in revenues
and operating activities as compared to the same period last fiscal year, including increases of $4,690 in compensation and benefits,
$2,863 in share-based compensation, $1,030 in insurance, $725 in professional fees and $246 in depreciation. The increase in compensation
costs mainly reflects rebuilding staff after the interruption caused by the pandemic, increases in pay rates and higher staffing to support
the increase in business and as a public reporting company. The increase in share-based compensation costs reflects new equity awards
to key members of management as an incentive to motivate and retain associates. The increases in insurance and professional fees include
higher costs associated with the growth in our business, costs associated with being a public reporting company and higher costs due to
inflation. Total SG&A expenses as a percent of net sales for the first quarter of fiscal 2023 was approximately 14% as compared to
12% during the corresponding period last fiscal year. The increase in SG&A costs as a percentage of revenues is mainly due to the
certain costs, including compensation-related costs and insurance, increasing at a faster rate than revenues.
Other
operating expense: Other operating expenses include various cost, including
professional fees related to transactions, such as acquisitions of centers. The increase in other operating expenses is mainly due to
an increase in the volume of transactions as compared to the same period of last fiscal year.
Interest
expense, net: Interest expense primarily relates to interest on debt and capital
leases. Interest expense increased $642, or 3%, to $23,570. The higher interest expense is primarily the result of higher interest rates
and our increased debt and capital lease obligations during fiscal 2023.
Change
in fair value of earnouts: Changes in the fair value of the earnout liabilities are recognized
in the statement of operations. Decreases in the liability will have a favorable impact on the statement of operations and increases in
the liability will have an unfavorable impact. The estimated fair value of the earnout liability is determined using a Monte-Carlo simulation
model. Inputs that have a significant effect on the valuation include the expected volatility, stock price, expected term, risk-free interest
rate and performance hurdles. The unfavorable impact on the statement of operations during the quarter ended October 2, 2022 is mainly
due to the increase in the fair value of the earnouts, which mainly reflects the increase in the Company’s stock price in the current
quarter.
24
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Index to Notes
Income
Taxes: Income tax expense (benefit) and deferred tax assets and liabilities
reflect management’s assessment of the Company’s tax position. The effective tax rate of (1.3)% for the quarter ended October
2, 2022 was primarily attributed to state income tax expense and certain non-deductible expenses offset in part by changes in the valuation
allowance. The effective tax rate of (67.0)% for the quarter ended September 26, 2021 was due to changes in the valuation allowance and
the release of a portion of the valuation allowance resulting from the acquisition of Bowl America offset in part by state and local income
taxes.
Non-GAAP measure
Adjusted
Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) is a non-GAAP financial measure that is
not in accordance with, or an alternative to, measures prepared in accordance with GAAP. The Company believes certain financial measures
which meet the definition of non-GAAP financial measures provide important supplemental information. The Company considers Adjusted EBITDA
as an important financial measure because it provides a financial measure of the quality of the Company’s earnings. Other companies
may calculate Adjusted EBITDA differently than we do, which might limit its usefulness as a comparative measure. Adjusted EBITDA is used
by management in addition to and in conjunction with the results presented in accordance with GAAP. Additionally, we believe trailing
twelve month Adjusted EBITDA provides the current run-rate for trending purposes, rather than annualizing the respective quarters, as
the Company’s business is seasonal, with the second and third fiscal quarters being higher than the first and last quarters. We
have presented Adjusted EBITDA solely as a supplemental disclosure because we believe it allows for a more complete analysis of results
of operations and assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis
by excluding items that we do not believe are indicative of our core operating performance, such as Interest, Income Taxes, Depreciation
and Amortization, Impairment Charges, Share-based Compensation, EBITDA from Closed Centers, Foreign Currency Exchange (Gain) Loss, Asset
Disposition (Gain) Loss, Transactional and other advisory costs, Charges attributed to new initiatives, Extraordinary unusual non-recurring
gains or losses and Changes in the value of earnouts and warrants. Adjusted EBITDA has limitations as an analytical tool, and you should
not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that
Adjusted EBITDA and trailing twelve month Adjusted EBITDA do not reflect:
•every
expenditure, future requirements for capital expenditures or contractual commitments;
•changes
in our working capital needs;
•the
interest expense, or the amounts necessary to service interest or principal payments, on our outstanding debt;
•income
tax expense (benefit), and because the payment of taxes is part of our operations, tax expense is a necessary element of our costs and
ability to operate;
•non-cash
equity compensation, which will remain a key element of our overall equity based compensation package; and
•the
impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations.
Refer
to notes below for additional details concerning the respective items for Adjusted EBITDA.
25
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Index to Notes
The
following graph details the Company’s trailing twelve month revenues, net (loss) income, and Adjusted EBITDA on a quarterly basis
over the previous quarters. Adjusted EBITDA represents Net income (loss) before Interest, Income Taxes, Depreciation and Amortization,
Impairment Charges, Share-based Compensation, EBITDA from Closed Centers, Foreign Currency Exchange (Gain) Loss, Asset Disposition (Gain)
Loss, Transactional and other advisory costs, Charges attributed to new initiatives, Extraordinary unusual non-recurring gains or losses
and Changes in the value of earnouts and warrants.
![bowl-20221002_g2.jpg](https://content.edgar-online.com/edgar_conv_img/2022/11/16/0001213900-22-073249_image_004.jpg)
26
Table
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Index to Notes
The
following table details trailing twelve month revenues, net (loss) income, and Adjusted EBITDA on a quarterly basis, as well as quarterly
revenues and net (loss) income and a non-GAAP reconciliation of quarterly Adjusted EBITDA to net (loss) income, the closest applicable
GAAP financial measures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
December 27, 2020 |
|
March 28, 2021 |
|
June 27, 2021 |
|
September 26, 2021 |
|
December 26, 2021 |
|
March 27, 2022 |
|
July 3, 2022 |
|
October 2, 2022 |
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
73,988 |
|
|
$ |
112,212 |
|
|
$ |
159,103 |
|
|
$ |
180,978 |
|
|
$ |
205,190 |
|
|
$ |
257,820 |
|
|
$ |
267,717 |
|
|
$ |
230,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(49,137) |
|
|
$ |
(23,091) |
|
|
$ |
(13,461) |
|
|
$ |
15,564 |
|
|
$ |
(34,454) |
|
|
$ |
(17,987) |
|
|
$ |
6,943 |
|
|
$ |
(33,534) |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
22,253 |
|
|
22,303 |
|
|
23,128 |
|
|
22,928 |
|
|
23,880 |
|
|
22,293 |
|
|
25,359 |
|
|
23,570 |
|
Income tax expense (benefit) |
|
106 |
|
|
103 |
|
|
(1,368) |
|
|
(6,244) |
|
|
362 |
|
|
(207) |
|
|
5,399 |
|
|
429 |
|
Depreciation, amortization and impairment charges |
|
22,538 |
|
|
22,990 |
|
|
23,872 |
|
|
22,841 |
|
|
25,660 |
|
|
29,986 |
|
|
30,018 |
|
|
26,351 |
|
Share-based compensation |
|
696 |
|
|
826 |
|
|
793 |
|
|
801 |
|
|
42,555 |
|
|
3,020 |
|
|
3,860 |
|
|
3,648 |
|
Closed center EBITDA (1) |
|
904 |
|
|
806 |
|
|
1,750 |
|
|
420 |
|
|
398 |
|
|
611 |
|
|
51 |
|
|
379 |
|
Foreign currency exchange (gain) loss |
|
(195) |
|
|
104 |
|
|
(99) |
|
|
35 |
|
|
86 |
|
|
(90) |
|
|
(26) |
|
|
(71) |
|
Asset disposition (gain) loss |
|
(142) |
|
|
64 |
|
|
31 |
|
|
(30) |
|
|
(123) |
|
|
(1,601) |
|
|
(2,355) |
|
|
(155) |
|
Transactional and other advisory costs (2) |
|
731 |
|
|
1,852 |
|
|
6,644 |
|
|
2,829 |
|
|
29,149 |
|
|
4,757 |
|
|
1,405 |
|
|
2,226 |
|
Charges attributed to new initiatives (3) |
|
116 |
|
|
136 |
|
|
147 |
|
|
141 |
|
|
65 |
|
|
43 |
|
|
113 |
|
|
45 |
|
Extraordinary unusual non-recurring (gains) losses (4) |
|
(1,647) |
|
|
1,294 |
|
|
859 |
|
|
(441) |
|
|
1,662 |
|
|
929 |
|
|
2,981 |
|
|
1,661 |
|
Changes in the value of earnouts and warrants (5) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(22,472) |
|
|
66,617 |
|
|
8,644 |
|
|
40,760 |
|
Adjusted EBITDA |
|
$ |
(3,777) |
|
|
$ |
27,387 |
|
|
$ |
42,296 |
|
|
$ |
58,844 |
|
|
$ |
66,768 |
|
|
$ |
108,371 |
|
|
$ |
82,392 |
|
|
$ |
65,309 |
|
Trailing twelve month Net loss |
|
|
|
|
|
|
|
$ |
(70,125) |
|
|
$ |
(55,442) |
|
|
$ |
(50,338) |
|
|
$ |
(29,934) |
|
|
$ |
(79,032) |
|
Trailing twelve month Adjusted EBITDA |
|
|
|
|
|
|
|
124,750 |
|
|
195,295 |
|
|
276,279 |
|
|
316,375 |
|
|
322,840 |
|
Trailing twelve month Revenues |
|
|
|
|
|
|
|
526,281 |
|
|
657,483 |
|
|
803,091 |
|
|
911,705 |
|
|
960,987 |
|
Notes to Adjusted
EBITDA:
(1)The
closed center adjustment is to remove EBITDA for closed centers. Closed centers are those centers that are closed for a variety of reasons,
including permanent closure, newly acquired or built centers prior to opening, centers closed for renovation or rebranding and conversion.
Closed centers do not include centers closed in compliance with local, state and federal government restrictions due to COVID-19. If a
center is not open on the last day of the reporting period, it will be considered closed for that reporting period. If the center is closed
on the first day of the reporting period for permanent closure, the center will be considered closed for that reporting period.
(2)The
adjustment for transaction costs and other advisory costs is to remove charges incurred in connection with any transaction, including
mergers, acquisitions, refinancing, amendment or modification to indebtedness, dispositions and costs in connection with an initial public
offering, in each case, regardless of whether consummated.
(3)The
adjustment for charges attributed to new initiatives is to remove actual charges attributed to new initiatives, including charges with
the undertaking and/or implementation of new initiatives, business optimization activities, cost savings initiatives, cost rationalization
programs, operating expense reductions and/or synergies and/or similar initiatives and/or programs including any restructuring charge
(including any charges relating to any tax restructuring), any charge relating to the closure or consolidation of any office or facility,
any systems
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implementation charge, any severance
charge, any one time compensation charge, any charge relating to entry into a new market, any charge relating to any strategic initiative
or contract and any lease run-off charge.
(4)The
adjustment for extraordinary unusual non-recurring gains or losses is to remove extraordinary gains and losses, which include any gain
or charge from any extraordinary item as determined in good faith by the Company and/or any non-recurring or unusual item as determined
in good faith by the Company and/or any charge associated with and/or payment of any legal settlement, fine, judgment or order.
(5)The
adjustment for changes in the value of earnouts and warrants is to remove of the impact of the revaluation of the earnouts. As a result
of the Business Combination, the Company recorded liabilities for earnouts and warrants. Changes in the fair value of the earnout and
warrant liabilities are recognized in the statement of operations. Decreases in the liability will have a favorable impact on the statement
of operations and increases in the liability will have an unfavorable impact. The adjustment also includes realized costs associated with
the settlement of warrants during past reporting periods.
Liquidity and
Capital Resources
We
manage our liquidity through assessing available cash-on-hand, our ability to generate cash and our ability to borrow or otherwise raise
capital to fund operating, investing and financing activities. The Company remains in a positive financial position with available cash
balances. We also obtained rent deferrals or abatements on a substantial number of our leases due to the effects of the COVID-19 pandemic.
A
core tenet of our long-term strategy is to grow the size and scale of the Company in order to improve our operating profit margins through
leveraging our fixed costs. As such, one of the Company’s known cash requirements is for capital expenditures related to the construction
of new centers and upgrading and converting existing centers. We believe our financial position, generation of cash, available cash on
hand, existing credit facility, and potential access to additional financing from sale-lease-back transactions or other sources will provide
sufficient capital resources to fund our operational requirements, capital expenditures, and material short and long-term commitments
for the foreseeable future. However, there are a number of factors that may hinder our ability to access these capital resources, including
but not limited to the impact of COVID-19 on our business, our degree of leverage, and potential borrowing restrictions imposed by our
lenders. See “Risk Factors”
included in our previously filed Annual Report on Form 10-K for the fiscal year ended July 3, 2022 for further information.
At
October 2, 2022, we had approximately $110,361 of available cash and cash equivalents.
Quarter Ended
October 2, 2022 Compared To the Quarter Ended September 26, 2021
The
following compares the primary categories of the consolidated statements of cash flows for the period ended October 2, 2022 and September 26,
2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
$ Change |
|
% Change |
(in thousands) |
|
October 2, 2022 |
|
September 26, 2021 |
|
|
Net cash provided by operating activities |
|
$ |
35,573 |
|
|
$ |
31,540 |
|
|
$ |
4,033 |
|
|
12.8 |
% |
Net cash used in investing activities |
|
(62,492) |
|
|
(95,724) |
|
|
33,232 |
|
|
(34.7) |
% |
Net cash provided by (used in) financing activities |
|
5,167 |
|
|
(908) |
|
|
6,075 |
|
|
(669.1) |
% |
Effect of exchange rate changes on cash |
|
(123) |
|
|
61 |
|
|
(184) |
|
|
(301.6) |
% |
Net change in cash and cash equivalents |
|
$ |
(21,875) |
|
|
$ |
(65,031) |
|
|
$ |
43,156 |
|
|
(66.4) |
% |
During
the quarter ended October 2, 2022, net cash provided from operations totaled $35,573, as compared to $31,540 during the same period of
the prior fiscal year. The increase in cash provided by operating activities reflects continued higher revenues and profitability. We
benefited during the quarter ended October 2, 2022 from continued strong consumer demand and revenues from recently acquired centers.
Investing
activities utilized $62,492, reflecting our acquisitions of businesses and capital expenditures, as well as center conversions and related
capital expenditures. The higher level of cash used in investing activities during the comparable period of last fiscal year mainly reflects
the acquisition of Bowl America, which had a larger purchase price as compared to the bowling centers acquired during the current period.
We expect to continue to invest in accretive acquisitions in future periods as well as center upgrades and conversions.
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Financing
activities generated $5,167 in fiscal 2022 reflecting proceeds from long-term debt of $15,350, partially offset by $7,558 for the repurchase
of treasury stock, $2,126 for scheduled long-term debt payments and $499 in payments for tax withholdings on share-based awards.
Our
contractual obligations primarily include, but are not limited to, debt service, self-insurance liabilities, and leasing arrangements.
We believe our sources of liquidity, namely available cash on hand, positive operating cash flows, and access to capital markets will
continue to be adequate to meet our contractual obligations, as well as fund working capital, planned capital expenditures, center acquisitions,
and execute purchases under our share repurchase program.
Off-Balance
Sheet Arrangements
As
of October 2, 2022, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Critical Accounting
Estimates
The
preparation of our financial statements are in conformity with GAAP, which requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expenses, and disclosures of contingent assets and liabilities. These estimates and
assumptions affect amounts of assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date
of the consolidated financial statements. Our current estimates are subject to change if different assumptions as to the outcome of future
events were made. We evaluate our estimates and judgments on an ongoing basis, and we adjust our assumptions and judgments when facts
and circumstances dictate. Since future events and their effects cannot be determined with absolute certainty, actual results may differ
from the estimates we used in preparing the accompanying consolidated financial statements. Critical accounting estimates are defined
as those that require management's most difficult, subjective or complex judgments, and which may result in materially different results
under different assumptions and conditions. Our critical accounting estimates are discussed in Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” of our fiscal year 2022 Form 10-K under “Critical
Accounting Estimates.” There have been no significant changes in our critical accounting estimates during the three months ended
October 2, 2022.
Recently Issued
Accounting Standards
For
a description of recently issued Financial Accounting Standards that we adopted during the quarter ended October 2, 2022 and, that are
applicable to us and likely to have material effect on our consolidated financial statements, but have not yet been adopted, see Note
1 - Description of Business and Significant Accounting Policies
of the notes to Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Emerging Growth
Company Accounting Election
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, 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.
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 registration statement under the Securities Act 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 an election to opt out is irrevocable. We have 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, we,
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 our financial statements with those of another public company that is neither an emerging growth company nor
an emerging growth company that has opted out of using the extended transition period difficult or impossible because of the potential
differences in accounting standards used.
We
will remain an emerging growth company until the earlier of: (1) the last day of the fiscal year (a) following the fifth anniversary of
Isos’ IPO (March 5, 2026), (b) in which we have total annual gross revenue of at least $1,235,000 or (c) in which we are deemed
to be a large accelerated filer, which means the market value of our common equity that is held by non-affiliates exceeds $700,000 as
of the end of the prior fiscal year’s second fiscal quarter; and (2) the date on which
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we have issued
more than $1,000,000 in non-convertible debt securities during the prior three-year period. References herein to “emerging growth
company” have the meaning associated with it in the JOBS Act.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk
We
are exposed to market risk from changes in, among other things, the ongoing effect of the COVID-19 pandemic, interest rates, credit risk,
labor costs, health insurance claims and foreign currency exchange rates, which could impact its results of operations and financial condition.
We attempt to address our exposure to these risks through our normal operating and financing activities.
Interest
Rate Risk
Under
our term and revolving credit facilities, we are exposed to a certain level of interest rate risk. Interest on the principal amount of
our borrowings under our revolving credit facility loan accrues at the Adjusted Term Secured Overnight Financing Rate or the Alternate
Base Rate, as further described in the credit agreement governing our term and revolving credit facilities. An increase or decrease of
1.0% in the effective interest rate would cause an increase or decrease
to interest expense of approximately
$8,800 over a twelve month period on our outstanding debt.
Credit Risk
Financial
instruments that potentially subject us to significant concentrations of credit risk consist of cash and temporary investments. We are
exposed to credit losses in the event of non-performance by counter parties to our financial instruments. We place cash and temporary
investments with various high-quality financial institutions. Although we do not obtain collateral or other security to secure these obligations,
we periodically monitor the third-party depository institutions that hold our cash and cash equivalents. Our emphasis is primarily on
safety and liquidity of principal and secondarily on maximizing yield on those funds.
Commodity Price
Risk
We
are exposed to market price fluctuation in food, beverage, supplies and other costs such as energy. Given the historical volatility of
certain of our food product prices, including proteins, produce, dairy products, and cooking oil, these fluctuations can materially impact
our food costs. While our purchasing commitments partially mitigate the risk of such fluctuations, there is no assurance that supply and
demand factors such as disease or inclement weather will not cause the prices of the commodities used in our food operations to fluctuate.
Additionally, the cost of purchased materials may be influenced by tariffs and other trade regulations which are outside of our control.
To the extent that we do not pass along cost increases to our customers, our results of operations may be adversely affected.
Inflation
We
experience inflation and deflation related to our purchase of certain products that we need to operate our business. This price volatility
could potentially have a material impact on our financial condition and/or our results of operations. In order to mitigate price volatility,
we monitor price fluctuations and may adjust our prices accordingly, however, our ability to recover higher costs through increased pricing
may be limited by the competitive environment in which we operate.
Item 4. Controls
and Procedures
Evaluation of
Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure
that information required to be disclosed in our reports filed pursuant to the Exchange Act is properly and timely reported and communicated
to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
In
designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that
any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints
and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
An
effective internal control system, no matter how well designed, has inherent limitations, including the possibility of human error and
circumvention or overriding of controls and therefore can provide only reasonable assurance with respect to reliable financial reporting.
Furthermore, effectiveness of an internal control system in future periods cannot be guaranteed because the design of any system of internal
controls is based in part upon assumptions about the likelihood of
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future events.
There can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions. Over
time certain controls may become inadequate because of changes in business conditions, or the degree of compliance with policies and procedures
may deteriorate. As such, misstatements due to error or fraud may occur and not be detected. We have evaluated the effectiveness of our
disclosure controls and procedures as of October 2, 2022 with the participation, and under the supervision, of our management, including
our Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of October 2, 2022, our disclosure controls and procedures were not effective because of the material weaknesses
described below in Changes in Internal Control Over Financial Reporting.
Notwithstanding
these material weaknesses, the Company has concluded that the condensed consolidated financial statements included in this Quarterly Report
are fairly stated in all material respects in accordance with GAAP.
Changes in Internal
Control Over Financial Reporting
During
the most recently completed quarter, there have been no changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as noted in this paragraph
regarding material weaknesses. We did not design and maintain effective controls over certain financial reporting processes, including
acquisition accounting, accounting for fixed assets, and certain financial reporting disclosures. Additionally, we did not design and
maintain effective controls over system access controls to establish segregation of duties for those with roles and responsibilities for
the general ledger. We continue to develop and implement a plan to remediate the material weaknesses described above, which will include
additional training of existing staff, hiring additional staff with technical accounting skills and engaging third-party experts to assist
in accounting for fixed assets, acquisitions and technical areas, as well as the development of more formal internal control processes
and improving information technology controls over system access.