Item 7A. 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 a LIBOR-based rate plus a margin. We previously hedged our variable interest rate exposure to a fixed rate for approximately $650,000 of our debt with interest rate swaps and caps, which expired on June 30, 2022. For the portion of debt that is not fixed with the hedging, our results will be adversely affected by any increase in interest rates.
Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist of cash and temporary investments, and interest rate swaps and caps. 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 8. Financial Statements and Supplementary Data
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Bowlero Corp.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Bowlero Corp. and subsidiaries (the Company) as of July 3, 2022 and June 27, 2021, the related consolidated statements of operations, comprehensive loss, temporary equity and stockholders’ deficit, and cash flows for each of the fiscal years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of July 3, 2022 and June 27, 2021, and the results of its operations and its cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2002.
Richmond, Virginia
September 15, 2022
Bowlero Corp.
Consolidated Balance Sheets
July 3, 2022 and June 27, 2021
(Amounts in thousands)
| | | | | | | | | | | |
| July 3, 2022 | | June 27, 2021 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 132,236 | | | $ | 187,093 | |
Accounts and notes receivable, net of allowance for doubtful accounts of $504 and $204, respectively | 5,227 | | | 3,300 | |
| Inventories, net | 10,310 | | | 8,310 | |
| Prepaid expenses and other current assets | 12,732 | | | 8,056 | |
| Assets held-for-sale | 8,789 | | | 686 | |
| Total current assets | 169,294 | | | 207,445 | |
| | | |
| Property and equipment, net | 534,721 | | | 415,661 | |
| Internal use software, net | 11,423 | | | 9,062 | |
| Property and equipment under capital leases, net | 262,703 | | | 284,077 | |
| Intangible assets, net | 92,593 | | | 96,057 | |
| Goodwill | 742,669 | | | 726,156 | |
| Other assets | 41,022 | | | 43,780 | |
| Total assets | $ | 1,854,425 | | | $ | 1,782,238 | |
| | | |
| Liabilities, Temporary Equity and Stockholders’ Deficit | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 38,217 | | | $ | 29,489 | |
| Accrued expenses | 62,854 | | | 63,650 | |
| Current maturities of long-term debt | 4,966 | | | 5,058 | |
| Other current liabilities | 13,123 | | | 9,176 | |
| Total current liabilities | 119,160 | | | 107,373 | |
| | | |
| Long-term debt, net | 865,090 | | | 870,528 | |
| Long-term obligations under capital leases | 397,603 | | | 374,598 | |
| Earnout liability | 210,952 | | | — | |
| Other long-term liabilities | 54,418 | | | 87,749 | |
| Deferred income tax liabilities | 14,882 | | | 11,867 | |
| Total liabilities | 1,662,105 | | | 1,452,115 | |
| | | |
Commitments and Contingencies (Note 11) | | | |
| | | |
| Temporary Equity | | | |
| Series A preferred stock - Old Bowlero | — | | | 141,162 | |
| Series A preferred stock | 206,002 | | | — | |
| Redeemable Class A common stock - Old Bowlero | — | | | 464,827 | |
| | | |
Bowlero Corp.
Consolidated Balance Sheets
July 3, 2022 and June 27, 2021
(Amounts in thousands)
| | | | | | | | | | | |
| July 3, 2022 | | June 27, 2021 |
| Stockholders’ Deficit | | | |
| Class A common stock | $ | 11 | | | $ | 10 | |
| Class B common stock | 6 | | | — | |
| Additional paid-in capital | 335,015 | | | — | |
| Treasury stock, at cost | (34,557) | | | — | |
| Accumulated deficit | (312,851) | | | (266,472) | |
| Accumulated other comprehensive loss | (1,306) | | | (9,404) | |
| Total stockholders’ deficit | (13,682) | | | (275,866) | |
| Total liabilities, temporary equity and stockholders’ deficit | $ | 1,854,425 | | | $ | 1,782,238 | |
See accompanying notes to consolidated financial statements.
Bowlero Corp.
Consolidated Statements of Operations
Fiscal Years Ended July 3, 2022 and June 27, 2021
(Amounts in thousands, except share and per share amounts)
| | | | | | | | | | | |
| Fiscal Year Ended |
| July 3,
2022 | | June 27,
2021 |
| Revenues | $ | 911,705 | | | $ | 395,234 | |
| Costs of revenues | 609,971 | | | 374,255 | |
| Gross profit | 301,734 | | | 20,979 | |
| | | |
| Operating (income) expenses: | | | |
| Selling, general and administrative expenses | 180,702 | | | 78,335 | |
| Asset impairment | 1,548 | | | 386 | |
| Gain on sale or disposal of assets | (4,109) | | | (46) | |
| Other operating expense | 6,968 | | | 1,131 | |
| Business interruption insurance recoveries | — | | | (20,188) | |
| Total operating expense | 185,109 | | | 59,618 | |
| | | |
| Operating profit (loss) | 116,625 | | | (38,639) | |
| | | |
| Other expenses: | | | |
| Interest expense, net | 94,460 | | | 88,857 | |
| Change in fair value of earnout liability | 25,800 | | | — | |
| Change in fair value of warrant liability | 26,840 | | | — | |
| Other expense | 149 | | | — | |
| Total other expense | 147,249 | | | 88,857 | |
| | | |
| Loss before income tax benefit | (30,624) | | | (127,496) | |
| | | |
| Income tax benefit | (690) | | | (1,035) | |
| Net loss | (29,934) | | | (126,461) | |
| | | |
| Series A preferred stock dividends | (10,233) | | | (8,015) | |
| Net loss attributable to common stockholders | $ | (40,167) | | | $ | (134,476) | |
| | | |
| Net loss per share attributable to Class A and B common stockholders, basic and diluted | $ | (0.26) | | | $ | (0.92) | |
| Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted | 155,837,154 | | | 146,848,329 | |
See accompanying notes to consolidated financial statements.
Bowlero Corp.
Consolidated Statements of Comprehensive Loss
Fiscal Years Ended July 3, 2022 and June 27, 2021
(Amounts in thousands)
| | | | | | | | | | | | | | |
| Fiscal Year Ended |
| July 3,
2022 | | June 27,
2021 | |
| Net loss | $ | (29,934) | | | $ | (126,461) | | |
| Other comprehensive income (loss), net of income tax: | | | | |
| Unrealized gain (loss) on derivatives | 60 | | | (371) | | |
| Reclassification to earnings | 8,809 | | | 9,002 | | |
| Foreign currency translation adjustment | (771) | | | 977 | | |
| Other comprehensive income | 8,098 | | | 9,608 | | |
| Total comprehensive loss | $ | (21,836) | | | $ | (116,853) | | |
See accompanying notes to consolidated financial statements.
Bowlero Corp.
Consolidated Statements of Changes in Temporary Equity and Stockholders’ Deficit
Fiscal Years Ended July 3, 2022 and June 27, 2021
(Amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable Class A common stock | | Series A preferred stock | | | Class A
common Stock | | Class B
common Stock | | Treasury stock | | Additional
Paid-in
capital | | Accumulated
deficit | | Accumulated
other
comprehensive
loss | | Total
stockholders’
equity (deficit) |
| Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | |
| Balance, June 28, 2020 | 2,069,000 | | | $ | 160,601 | | | 106,378 | | | $ | 133,147 | | | | 3,842,428 | | | $ | 1 | | | — | | | $ | — | | | — | | | $ | — | | | $ | 271,776 | | | $ | (102,701) | | | $ | (19,012) | | | $ | 150,064 | |
| Retroactive application of recapitalization | 49,328,025 | | | — | | | 2,536,209 | | | — | | | | 91,608,875 | | | 9 | | | — | | | — | | | — | | | — | | | — | | | (9) | | | — | | | — | |
| Adjusted balance, beginning of period | 51,397,025 | | | $ | 160,601 | | | 2,642,587 | | | $ | 133,147 | | | | 95,451,303 | | | $ | 10 | | | — | | | $ | — | | | — | | | $ | — | | | $ | 271,776 | | | $ | (102,710) | | | $ | (19,012) | | | $ | 150,064 | |
| Net loss | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (126,461) | | | — | | | (126,461) | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 977 | | | 977 | |
| Unrealized loss on derivatives | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (371) | | | (371) | |
| Reclassification to earnings | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 9,002 | | | 9,002 | |
| Accrued dividends on pre-merger Series A preferred stock | — | | | — | | | — | | | 8,015 | | | | — | | | — | | | — | | | — | | | — | | | — | | | (8,015) | | | — | | | — | | | (8,015) | |
| Change in fair value of redeemable Class A common stock of Old Bowlero | — | | | 304,226 | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | (304,226) | | | — | | | — | | | (304,226) | |
| Stock based compensation | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | 3,164 | | | — | | | — | | | 3,164 | |
| Reclass of negative APIC to accumulated deficit | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | 37,301 | | | (37,301) | | | — | | | — | |
| Balance, June 27, 2021 | 51,397,025 | | | $ | 464,827 | | | 2,642,587 | | | $ | 141,162 | | | | 95,451,303 | | | $ | 10 | | | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | $ | (266,472) | | | $ | (9,404) | | | $ | (275,866) | |
| Net loss | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (29,934) | | | — | | | (29,934) | |
| Foreign currency translation adjustment | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (771) | | | (771) | |
| Unrealized gain on derivatives | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 60 | | | 60 | |
| Reclassification to earnings | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 8,809 | | | 8,809 | |
| Reclass of negative APIC to accumulated deficit | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | 16,445 | | | (16,445) | | | — | | | — | |
| Accrued dividends on pre-merger Series A preferred stock | — | | | — | | | — | | | 4,136 | | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,136) | | | — | | | — | | | (4,136) | |
| Change in fair value of redeemable Class A common stock of Old Bowlero | — | | | 38,864 | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | (38,864) | | | — | | | — | | | (38,864) | |
| Stock based compensation | — | | | — | | | — | | | — | | | | 93,662 | | | — | | | — | | | — | | | — | | | — | | | 6,804 | | | — | | | — | | | 6,804 | |
| Merger induced stock based compensation | — | | | — | | | — | | | — | | | | 2,529,360 | | | — | | | 5,839,993 | | | 1 | | | — | | | — | | | 42,555 | | | — | | | — | | | 42,556 | |
| Issuance of common stock and preferred stock in connection with Merger Capitalization, net of Bowlero equity issuance costs and fair value of liability-classified warrants and earnout | — | | | — | | | 95,000 | | | 95,000 | | | | 42,185,233 | | | 4 | | | 1,074,185 | | | — | | | — | | | — | | | 120,805 | | | — | | | — | | | 120,809 | |
| Settlement of pre-merger Series A preferred stock | — | | | — | | | (2,642,587) | | | (145,298) | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Conversion of Class A common stock of Old Bowlero to Series A preferred stock | — | | | — | | | 105,000 | | | 105,000 | | | | (10,499,900) | | | (1) | | | — | | | — | | | — | | | — | | | (104,999) | | | — | | | — | | | (105,000) | |
| Consideration to existing shareholders of Old Bowlero | — | | | — | | | — | | | — | | | | (22,599,800) | | | (2) | | | — | | | — | | | — | | | — | | | (225,998) | | | — | | | — | | | (226,000) | |
| Consideration paid to Old Bowlero optionholders | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | (15,467) | | | — | | | — | | | (15,467) | |
| Exchange of redeemable Class A common stock of Old Bowlero for Class B common stock | (51,397,025) | | | (503,691) | | | — | | | — | | | | — | | | — | | | 51,397,025 | | | 5 | | | — | | | — | | | 503,686 | | | — | | | — | | | 503,691 | |
| Accrual of paid-in-kind dividends on Series A preferred stock | — | | | — | | | — | | | 6,002 | | | | — | | | — | | | — | | | — | | | — | | | — | | | (6,002) | | | — | | | — | | | (6,002) | |
| Repurchase of Class A common stock into Treasury stock | — | | | — | | | — | | | — | | | | (3,430,667) | | | — | | | — | | | — | | | 3,430,667 | | | (34,557) | | | — | | | — | | | — | | | (34,557) | |
| Class A common stock issued in conjunction with exercise of warrants | — | | | — | | | — | | | — | | | | 4,266,439 | | | — | | | — | | | — | | | — | | | — | | | 40,186 | | | — | | | — | | | 40,186 | |
| Conversion of Class B common stock into Class A common stock | — | | | — | | | — | | | — | | | | 2,400,000 | | | — | | | (2,400,000) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Balance, July 3, 2022 | — | | | $ | — | | | 200,000 | | | $ | 206,002 | | | | 110,395,630 | | | $ | 11 | | | 55,911,203 | | | $ | 6 | | | 3,430,667 | | | $ | (34,557) | | | $ | 335,015 | | | $ | (312,851) | | | $ | (1,306) | | | $ | (13,682) | |
See accompanying notes to consolidated financial statements.
Bowlero Corp.
Consolidated Statements of Cash Flows
Fiscal Years Ended July 3, 2022 and June 27, 2021
(Amounts in thousands)
| | | | | | | | | | | |
| Fiscal Year Ended |
| July 3, 2022 | | June 27, 2021 |
| Operating activities | | | |
| Net loss | $ | (29,934) | | | $ | (126,461) | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
| Asset impairment | 1,548 | | | 386 | |
| Depreciation and amortization | 106,957 | | | 91,851 | |
| Gain on sale or disposal of assets, net | (4,109) | | | (46) | |
| Income from joint venture | (388) | | | (223) | |
| Loss on refinance of debt | 953 | | | — | |
| Loss on settlement of warrants | 149 | | | — | |
| Amortization of deferred financing costs | 3,502 | | | 3,431 | |
| Amortization of deferred rent incentive | (281) | | | (1,766) | |
| Non-cash interest expense on capital lease obligation | 5,098 | | | 6,986 | |
| Amortization of deferred sale lease-back gain | (1,015) | | | (1,204) | |
| Deferred income taxes | (6,879) | | | (1,418) | |
| Stock based compensation | 50,236 | | | 3,164 | |
| Distributions from joint venture | 401 | | | 210 | |
| Change in fair value of earnout liability | 25,800 | | | — | |
| Change in fair value of warrant liability | 26,840 | | | — | |
| Changes in assets and liabilities, net of business acquisitions: | | | |
| Accounts receivable and notes receivable, net | (1,928) | | | 458 | |
| Inventories | (1,925) | | | (137) | |
| Prepaids, other current assets and other assets | (6,301) | | | (2,184) | |
| Accounts payable and accrued expenses | (409) | | | 40,073 | |
| Other current liabilities | 6,677 | | | 725 | |
| Other long-term liabilities | 2,678 | | | 44,387 | |
| Net cash provided by operating activities | 177,670 | | | 58,232 | |
| | | |
| Investing activities | | | |
| Purchases of property and equipment | (162,371) | | | (43,137) | |
| Proceeds from sale of property and equipment | 17,105 | | | 1,273 | |
| Purchases of intangible assets | (2,427) | | | (60) | |
| Proceeds from sale of intangibles | — | | | 140 | |
| Acquisitions, net of cash acquired | (72,652) | | | (4,892) | |
| Net cash used in investing activities | (220,345) | | | (46,676) | |
| | | |
Bowlero Corp.
Consolidated Statements of Cash Flows
Fiscal Years Ended July 3, 2022 and June 27, 2021
(Amounts in thousands)
| | | | | | | | | | | |
| Fiscal Year Ended |
| July 3, 2022 | | June 27, 2021 |
| Financing activities | | | |
| Repurchase of Series A preferred stock - Old Bowlero | $ | (145,298) | | | $ | — | |
| Proceeds from issuance of Series A preferred stock | 95,000 | | | — | |
| Proceeds from issuance of Class A common stock to Isos investors | 94,413 | | | — | |
| Transaction costs related to Merger recapitalization | (20,670) | | | — | |
| Proceeds from PIPE Investment | 150,604 | | | — | |
| Proceeds from Forward Investment | 100,000 | | | — | |
| Payment to existing shareholders of Old Bowlero | (226,000) | | | — | |
| Consideration paid to existing option holders of Old Bowlero | (15,467) | | | — | |
| Repurchase of treasury stock | (31,463) | | | — | |
| Repurchase of warrants | (5,375) | | | — | |
| Payment of long-term debt | (10,263) | | | (8,211) | |
| Payment of First Lien Credit Facility Revolver | (39,853) | | | — | |
| Proceeds from Incremental Liquidity Facility | — | | | 45,000 | |
| Payment of Incremental Liquidity Facility | (45,000) | | | — | |
| Payments of deferred financing costs | (977) | | | (1,984) | |
| Payments for tax withholdings on share-based awards | (503) | | | — | |
| Proceeds from New Revolver | 86,434 | | | — | |
| Construction allowance receipts | 2,282 | | | — | |
| Net cash (used in) provided by financing activities | (12,136) | | | 34,805 | |
| | | |
| Effect of exchange rates on cash | (46) | | | 27 | |
| | | |
| Net (decrease) increase in cash and equivalents | (54,857) | | | 46,388 | |
| Cash and cash equivalents at beginning of year | 187,093 | | | 140,705 | |
| Cash and cash equivalents at end of year | $ | 132,236 | | | $ | 187,093 | |
See accompanying notes to consolidated financial statements.
BOWLERO CORP.
Notes to Consolidated Financial Statements
(Amounts in thousands, except share amounts or otherwise noted)
(1) Description of Business
Bowlero Corp., a Delaware corporation, and its subsidiaries “(collectively, the Company)” 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. The Bowlmor centers were rebranded to Bowlero and offered a more upscale entertainment concept. 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 the fiscal years ended July 3, 2022 and June 27, 2021:
| | | | | | | | | | | |
| July 3,
2022 | | June 27,
2021 |
| Bowlero | 161 | | | 133 | |
| AMF & other | 147 | | | 136 | |
| Bowlmor | 2 | | | 14 | |
| Total centers in the United States | 310 | | | 283 | |
| Mexico (AMF) | 5 | | | 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. As of the beginning of fiscal 2022, all of our centers were open except for two of our centers that re-opened on September 13, 2021. Due to governmental restrictions, the company had two centers in Canada that closed on January 5, 2022 and reopened on January 31, 2022. Since March of 2020, 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, in response to which the Company has taken and continues to take actions to address.
Segment Information
The Company has one reporting segment, which consists of operating a bowling entertainment business. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker (“CODM”) in making decisions regarding resource allocation and assessing performance. Management continually assesses the Company’s operating structure, and this structure could be modified further based on future circumstances and business conditions. Our CODM assesses performance based on consolidated as well as bowling center-level revenue and operating profit.
The Company attributes revenue to individual countries based on the Company’s bowling center locations. The Company’s bowling centers are located in the United States, Mexico, and Canada. The Company’s revenues generated outside of the United States for fiscal years 2022 and 2021 were not material. The Company’s long-lived assets located in Mexico and Canada are not material.
(2) Significant Accounting Policies
Basis of Presentation
Reverse Recapitalization: On December 15, 2021, (the “Closing Date”), the Company consummated the previously announced Business Combination pursuant to the Business Combination Agreement (“BCA”) t 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 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 became listed on the NYSE under the symbol BOWL and warrants to purchase the Class A common stock became 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 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.
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.
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 contained fifty-three weeks and ended on July 3, 2022, and the 53rd week fell within the fourth quarter. Fiscal year 2021 contained fifty-two weeks each and ended on June 27, 2021.
Reclassification: Certain prior year amounts have been reclassified for consistency with the current year presentation. Internal use software as of June 27, 2021 has been reclassified on the consolidated balance sheet and in Note
5 - Property and Equipment to conform to current period presentation. Investment in joint venture as of June 27, 2021 has been reclassified to other assets on the consolidated balance sheet. In our Consolidated Statement of Operations, we began combining income from joint venture, management fee income and other operating expense, into one line item as other operating expense to simplify our reporting presentation. The reclassification had no impact on total operating costs, earnings from operations, net earnings, earnings per share or total equity. Use of Estimates: The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“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; stock 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. Significant assumptions also include the Company’s position that the COVID-19 pandemic is temporary. 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 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.
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 $88,067 and $86,003 at July 3, 2022 and June 27, 2021, 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 $8,688 and $8,534 at July 3, 2022 and June 27, 2021, respectively.
Accounts Receivable: The Company records accounts receivable at the invoiced amount. Accounts receivable do not bear interest unless specified in a formal agreement. An allowance for doubtful accounts is provided based on management’s best estimate of the amount of probable credit losses in the existing accounts receivable. The Company determines the allowance based on a number of factors, including historical write-off experience and its knowledge of specific customer accounts. Past-due balances meeting specific criteria are reviewed individually for collectability. The Company reviews all other balances on a pooled basis. Accounts are written off once collection efforts have been exhausted and the potential for recovery is considered remote. Actual uncollectable accounts could exceed the Company’s estimates, and changes to estimates are accounted for in the period of change. The Company does not have any off-balance sheet credit exposures to its customers.
Inventories: Inventory, which includes operational items such as food and beverages, is valued at the lower of cost or market, with cost determined using an average cost method.
Prepaid Expenses and Other Current Assets: Prepaid expenses consists primarily of payments made for goods and services to be received in the near future. Prepaid expenses consists of prepaid rents, sales tax, insurance premiums, deposits, and other costs. Other current assets of $676 and $980 at July 3, 2022 and June 27, 2021, respectively, are included with prepaid expenses on our consolidated balance sheets.
Property and Equipment: Property and equipment are recorded at cost. Depreciation is calculated principally on the straight-line method based on the estimated useful lives of individual assets or classes of assets.
Leasehold improvements are recorded at cost. Amortization of leasehold improvements is calculated principally on the straight-line method over the lesser of the estimated useful life of the leasehold improvement or the lease term. Renewal periods are included in the lease term when the renewal is determined to be reasonably assured.
Internal costs, including compensation and employee benefits for employees directly associated with capital projects, are capitalized and amortized over the estimated useful life of the asset.
Estimated useful lives of property and equipment are as follows:
| | | | | |
| Buildings and improvements | 2 – 39 years |
| Leasehold improvements | lesser of asset’s useful life or lease term (1 month– 20 years) |
| Equipment, furniture, and fixtures | 2 – 15 years |
Expenditures for routine maintenance and repairs that do not improve or extend the life of an asset are expensed as incurred. Improvements are capitalized and amortized over the lesser of the remaining life of the asset or, if applicable, the lease term. Upon retirement or sale of an asset, its cost and related accumulated depreciation are removed from property and equipment and any gain or loss is recognized.
The Company’s policy is to capitalize interest cost incurred on debt during the construction of major projects. Interest costs are capitalizable for all assets that require a period of time to get them ready for their intended use (an acquisition period). The amount capitalized in an accounting period is determined by applying the capitalization rate to the accumulated expenditures for the asset during the period. The capitalization rate used is based on the rates applicable to borrowings outstanding during the acquisition period.
Leases: For operating leases, we recognize rent expense straight-line over the lease term, including rent-free periods. To offset the costs of leasehold improvements, some leases also provide allowances in the form of cash, or credits against monetary obligations payable by us within the lease. All lease incentives are recorded as a liability and amortized over the term of the lease. Where applicable, we recognize contingent rent expense when total gross sales exceed specific thresholds, and we accrue for contingent rent expense when probable those thresholds will be met. Future payments for contingent rent and other costs such maintenance, insurance, taxes and other expenses are excluded from minimum lease payments. For 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.
Tenant Improvement Incentives — The Company has leasehold improvement allowances of $14,254 and $15,100 as of July 3, 2022 and June 27, 2021, respectively, from landlords recorded as liabilities in other current liabilities and other long-term liabilities and amortized as a reduction of rent expense over the life of the lease.
Internal Use Software: We capitalize qualifying software costs incurred during the “application development stage” when the preliminary project stage has been completed, management has authorized the project, and it is probable that the project will be completed. The estimated useful life of internal-use software is between three and five years.
Costs related to the development or purchase of internal-use software are capitalized and depreciated over the estimated useful life of the software. Costs that are capitalized include external direct costs of materials and services to develop or obtain the software, interest, and internal costs, including compensation and employee benefits for employees directly associated with a software development project. As of July 3, 2022 and June 27, 2021, the Company has recognized internal use software, net of amortization, of $11,423 and $9,062, respectively. Amortization expense was $3,298 and $2,400 for the fiscal years 2022 and 2021, respectively.
Goodwill and Intangible Assets: Goodwill is recognized for the excess of the purchase price over the fair value of assets acquired and liabilities assumed of businesses acquired.
Indefinite-lived intangible assets include liquor licenses and the Bowlero and Professional Bowlers Association trade names. The cost of purchasing liquor licenses in quota controlled states are capitalized as indefinite lived intangible assets. Because the number of liquor licenses in a quota controlled state are based on the population count, the values ascribed to these liquor licenses are primarily dependent on the supply and demand in the particular jurisdictions in which they are issued. Liquor licenses are an intangible asset which are not assigned a useful life and not amortized. Bowlero is the corporate name of the Company and the brand name associated with many of the Company’s bowling centers. Professional Bowlers Association is the brand name of the entity owned by the Company associated with the main sanctioning body for ten-pin bowling. The fair value of the trade names stems from the customer appeal and revenue streams derived from these brands.
Finite-lived intangible assets primarily include AMF and other acquired trade names, customer relationships and management contracts, which have remaining useful lives ranging from 1 to 9 years. Finite-lived intangible assets are amortized based on the pattern in which the economic benefits are used or on a straight-line basis.
Favorable and Unfavorable leases: Favorable and unfavorable leases are included in other assets and other long-term liabilities, respectively, and are amortized on a straight-line basis, over remaining lease terms, which range from 1 to 36 years.
Impairment of Goodwill, Intangible and Long-Lived Assets: Goodwill is tested at least annually for impairment at the reporting unit level. The Company has determined it has one reporting unit, operating a bowling entertainment business.
We perform our annual impairment testing on the first day of our fiscal fourth quarter of each year. When evaluating goodwill and tradenames for impairment, the Company first performs a qualitative assessment to determine whether it is more likely than not that its reporting unit or tradenames are impaired. For fiscal 2021, the Company performed a quantitative assessment of goodwill using the income approach due to the economic impact of the COVID-19 pandemic with the temporary closure of our centers. For fiscal 2022, the Company performed a qualitative assessment of goodwill and concluded it was not more likely than not that the fair value of the reporting unit was less than its carrying value. There were no impairment charges for goodwill or indefinite-lived intangible assets, excluding liquor licenses, recorded in fiscal years 2022 or 2021.
For long-lived assets (such as property and equipment and other definite-lived intangibles), an impairment is indicated whenever events or changes in circumstances indicate that the asset or asset group’s carrying value may not be recoverable. An asset group may not be recoverable if the total estimated undiscounted cash flows associated with the use and eventual disposition of the asset group is less than its carrying value. If the asset group isn’t recoverable and the fair value is less than its carrying value, then an impairment exists and an adjustment is made to write down the asset to its fair value. The Company recognized impairment charges of $1,548 and $386 in fiscal years 2022 and 2021, respectively. The impairment charges in fiscal years 2022 and 2021 relate to long-lived assets and liquor licenses. We estimated the fair value of these assets utilizing either an income approach that projects the total cash flows from use and eventual disposition of the asset group discounted using a risk adjusted discount rate, or a market based approach using orderly liquidation values or broker quotes for sale of similar properties.
Derivatives: We are exposed to interest rate risk. To manage these risks, we entered into interest rate swap derivative transactions to manage the interest rate risk 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.
For financial derivative instruments that are designated as a cash flow hedge for accounting purposes, the effective portion of the gain or loss on the financial derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction, and in the same period or periods during which the forecasted transaction affects earnings. Gains and losses on the financial derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
We have entered into interest rate swap agreements that effectively modified our exposure to interest rate risk by converting a portion of our interest payments on floating rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense. These agreements typically involved the receipt of floating rate amounts in exchange for fixed interest rate payments over the life of the agreements without an exchange of the underlying principal amount. See Note 9 - Debt for more information.
Self-Insurance Programs: The Company is self-insured for a portion of its general liability, workers’ compensation and certain health care exposures. We also purchase stop-loss insurance coverage through third-party insurers. The undiscounted costs of these self-insurance programs are accrued based upon estimates of settlements and costs for known and anticipated claims. For claims that exceed the deductible amount, the Company records a receivable representing expected recoveries pursuant to the stop-loss coverage and a corresponding gross liability for its legal obligation to the claimant, since the Company is not legally relieved of our obligation to the claimant. The Company recorded gross estimated liabilities of $15,797 and $17,363 at July 3, 2022 and June 27, 2021, respectively, to cover known general liability, health and workers’ compensation claims, and the estimate of claims incurred but not reported. Corresponding stop-loss receivables for expected recoveries of self-insured claims in the amounts of $4,414 and $4,780 were recorded at July 3, 2022 and June 27, 2021, respectively.
The short-term portion of the self-insurance liabilities is included in accrued expenses in the accompanying consolidated balance sheets. The long-term portion is included in other long-term liabilities in the accompanying consolidated balance sheets. The stop-loss receivable is included in other assets.
Income Taxes: The Company utilizes the asset and liability approach in accounting for income taxes. We recognize income taxes in each of the jurisdictions in which we have a presence. For each jurisdiction, we estimate the actual amount of income taxes currently payable or receivable, as well as deferred income tax assets and liabilities. Deferred tax assets and liabilities are recorded to recognize the expected future tax benefits or costs of events that have been, or will be, reported in different years for financial statement purposes than tax purposes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which these items are expected to reverse. We review our deferred tax assets to determine if it is more-likely-than-not that they will be realized. If we determine it is not more-likely-than-not that a deferred tax asset will be realized, we record a valuation allowance to reverse the previously recognized tax benefit.
The Company recognizes tax benefits related to uncertain tax positions if we believe it is more likely than not the benefit will be realized. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which a change in judgment occurs.
Interest and penalties were $3 in fiscal year 2022 and $36 in fiscal year 2021. The U.S. federal, and in general, state returns are open to examination for the fiscal year ended June 30, 2019 and thereafter. The net operating loss carryforward from fiscal year ended July 3, 2005 is also open to examination.
Revenue Recognition: The following table presents the Company’s revenue disaggregated by major revenue categories:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| July 3,
2022 | | % of revenues | | June 27,
2021 | | % of revenues |
| Major revenue categories: | | | | | | | |
| Bowling | $ | 452,349 | | | 51 | % | | $ | 203,730 | | | 52 | % |
| Food and beverage | 321,441 | | | 35 | % | | 128,393 | | | 32 | % |
| Amusement | 118,940 | | | 13 | % | | 48,414 | | | 12 | % |
| Media | 18,975 | | | 2 | % | | 14,697 | | | 4 | % |
| Total revenues | $ | 911,705 | | | 100 | % | | $ | 395,234 | | | 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 and food and beverage revenue, almost all of our revenue is earned at a point-in-time.
Media revenue — The Company earns media revenue from sanctioning official PBA tournaments and licensing media content to our customers, which include television networks and multi-year contracts. The Company considers each tournament as a separate performance obligation because each tournament’s pricing is negotiated separately and represents its 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.
The Company sells gift and game cards that do not expire. Gift and game card revenue is recognized as gift and game cards or game-play tokens are redeemed by customers. The Company accrues unearned revenue as a liability for the unredeemed tickets that may be redeemed or used in the future. Gift and game card sales are recorded as an unearned gift and game card revenue liability when sold. Unearned gift and game card revenue or deferred revenue is reported in accrued expenses in the consolidated balance sheets and is disclosed in Note 8 - Accrued Expenses.
The Company also has a loyalty program called the Most Valuable Bowler (MVB) program. MVB participants earn rewards in the form of coupons or points based on their cumulative spend with an expiration date. The loyalty program creates material rights, which are valued as separate performance obligations and deferred until use or expiration. The deferred portion is included in deferred revenue and is not material to the financial statements.
From time to time, the Company offers discount vouchers through outside vendors. Revenue for these vouchers is recognized as revenue when the voucher is redeemed by the guest or as breakage on a pro-rated basis based on historical redemption patterns. Revenue is recognized for the gross amount paid by customers for purchased vouchers. The fee paid to the outside vendors, in the form of the discount, is recognized in cost of revenues. We recognize this revenue on a gross basis, as we are responsible for providing the service desired by the customer.
Taxes collected from customers and remitted to government authorities are excluded from revenue in the consolidated statement of operations. The remittance obligation is included in accrued liabilities until the taxes are sent to the appropriate taxing authorities.
Costs of Revenues: The Company’s costs of revenues all relate to center operations and are comprised primarily of fixed costs that are not variable or less variable with changes in revenues, and include depreciation, amortization, property taxes, supplies, insurance, fixed rent, and utilities. Variable costs included within costs of revenues primarily comprise labor, food and beverage costs, supplies, prize funds, variable rent, tournament production expenses and amusement costs.
Selling, General and Administrative Expenses (“SG&A”): SG&A expenses are comprised primarily of employee costs, media and promotional expenses, and depreciation and amortization (excluding those related to our center operations), and other miscellaneous expenses. A portion of SG&A costs are not variable in nature and do not fluctuate significantly with changes in revenue, and include such expenses as depreciation, amortization and certain compensation.
Other Operating Expenses: Other operating expenses comprise various costs primarily driven by professional fees and transactional related expenses associated with business acquisitions, and foreign currency gains/losses.
Pre-Opening Costs: Pre-opening costs are expensed as incurred, and primarily consist of labor, rent, occupancy costs, travel, marketing expenses and other miscellaneous expenses incurred prior to the opening of a new center.
Share-Based Compensation: Stock based compensation is recorded based on the grant-date fair value. Bowlero Corp. recognizes share-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 consolidated statement of operations based on the employees’ respective functions. The Company records deferred tax assets for awards that may 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.
Advertising and Television Costs: Costs for advertising are expensed when incurred and recorded as operating expenses. Total advertising expenses for fiscal years 2022 and 2021 were $3,942 and $3,576, respectively. Advertising expense is included within costs of revenues on the consolidated statement of operations. Television spending, including costs associated with bowling tournaments that are televised, are capitalized as prepaid costs and expensed at the time the event takes place.
Foreign Currency Translation: The Company’s financial statements are reported in U.S. dollars. Our foreign subsidiaries maintain their records in the currency of the country in which they operate.
Assets and liabilities of foreign subsidiaries are translated into U.S. dollars using rates of exchange at the balance sheet date. Translation adjustments are recorded in other comprehensive income (loss). Revenues and expenses are translated at rates of exchange in effect during the year. Transaction gains and losses are recorded in net income (loss).
Commitments and contingencies: Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
Business Interruption Insurance: The Company recognized $20,188 of business interruption insurance recoveries as other operating income in the consolidated statements of operations during fiscal year 2021, as a result of the insured claim resulting from the temporarily suspension of operations in compliance with local, state, and federal governmental restrictions to prevent the spread of the COVID-19.
Series A Preferred Stock: As part of the reverse recapitalization, the Company issued redeemable 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 15 - 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, 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 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 17 - 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 acceleration provisions, that result in settlement value not fully indexed to share price, all but 152,370 of the earnout shares are reported as a liability in the consolidated balance sheets. Changes in the value of earnouts are recorded as a non-operating item in the 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 performance hurdles. The Company evaluated its earnouts under 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 consolidated statements of operations and comprehensive loss at each reporting date. See Note 13 - Earnouts and Note 14 - Fair Value of Financial Instruments for further information.
Warrants: Previously outstanding warrants consisted of public warrants and private warrants, including warrants issued by Isos which continued to exist following the Closing Date and warrants issued by the Company on the Closing Date. The outstanding warrants were accounted for as freestanding financial instruments and were classified as liabilities on the Company’s consolidated balance sheets. The estimated fair value of the warrants is described in Note 12 - Warrants. Changes in the value of warrants were recorded as a non-operating item in the 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 met 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 consolidated statements of operations and comprehensive loss at each reporting date. The Company completed the redemption of all outstanding publicly traded and privately held warrants on May 16, 2022.
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 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 Adopted Accounting Standards: In April 2020, the FASB issued interpretive guidance (Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic) in response to the COVID-19 pandemic. The guidance permits entities to elect to not evaluate whether lease-related relief that lessors provide to mitigate the economic effects of COVID-19 on lessees is a lease modification under Accounting Standards Codification (ASC) 840. This election is available for concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or our obligations as the lessee, i.e. the total payments required by the modified contract are substantially the same or less than the total payments required by the original contract. The FASB staff expects that reasonable judgement will be exercised in making those determinations and expects that there will be multiple ways to account for those deferrals, none of which the staff believes are more preferable than the others. Two of those methods include:
a.Account for the concessions as if no changes to the lease were made. Under that method, a lessor would increase its lease receivable, and a lessee would increase its liabilities as receivables/payments accrue. In its income statement, a lessor would continue to recognize income, and a lessee would continue to recognize expense during the deferral period.
b.Account for the deferred payments as variable lease payments.
In certain circumstances, the Company adopted option (a) for deferrals of rental payments and option (b) for abatements.
Recently Issued Accounting Standards: In February 2016, the FASB issued 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 at commencement, 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, which is the present value of future payments. Operating leases will remain being expensed on the straight-line basis of the lease, 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. The Company has not adopted Topic 842, which be effective for the Company for its fiscal year ending 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. Although management continues to evaluate the effect on the Company’s consolidated financial statements and disclosures, management currently estimates
total operating lease assets and liabilities will increase approximately $430,000 to $530,000, respectively, upon adoption based on the lease population as of July 3, 2022. 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. We do not believe the adoption of this standard will have a material impact on our statement of operations or cash flows.
(3) Business Combinations and Acquisitions
Business Combination: 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 cash proceeds from SPAC shareholders | $ | 94,413 | |
| |
| Cash-PIPE issuance | $ | 150,604 | |
| Cash-Forward issuance | 100,000 | |
| Net cash proceeds from SPAC shareholders | 94,413 | |
| Cash-Preferred issuance | 95,000 | |
| Less: Bowlero transaction costs | (20,670) | |
| Total cash received, net of transaction costs | 419,347 | |
| |
| Payoff of preferred stock and accumulated dividends | (145,298) | |
| Consideration to existing Bowlero shareholders | (226,000) | |
| Consideration to Bowlero option holders | (15,467) | |
| Total distributions | (386,765) | |
| Net cash received | $ | 32,582 | |
| |
| Earnout liability | $ | 181,113 | |
| Warrant liability | 22,426 | |
| Total liabilities recognized | $ | 203,539 | |
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 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.
Acquisitions that meet the definition of a business under ASC 805, “Business Combinations,” are accounted for using the acquisition method of accounting. The Company estimates the fair value of the tangible and intangible assets acquired and liabilities assumed as of the acquisition date for business combinations and utilizes valuation specialists to assist in doing so. 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 goodwill acquired in the business combinations 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
From the business combinations during fiscal year 2022, $8,097 of the goodwill recognized is deductible for tax purposes.
Acquisitions that do not meet the definition of a business under ASC 805 are accounted for as an asset acquisition, using a cost accumulation model. Assets acquired and liabilities assumed are recognized at cost, which is the consideration the acquirer transfers to the seller, including direct transaction costs, on the acquisition date. The cost of the acquisition is then allocated to the assets acquired based on their relative fair values. Goodwill is not recognized in an asset acquisition.
2022 Business Combinations: The Company’s accounting for the allocations of the purchase price for the acquisitions of bowling businesses that were treated as 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 Company completed eight acquisitions for a total consideration of $72,737. The Company's consolidated financial statements reflect final and preliminary allocations of the purchase price to the assets and liabilities assumed based on fair value as of the date of the acquisition. The total consideration of acquisitions with final purchase price allocations was $53,146. The one transaction with a preliminary purchase allocation, which occurred at the end of the fourth quarter of fiscal 2022, was for a total consideration of $19,591. The Company’s preliminary estimate of the fair value of specifically identifiable assets acquired and liabilities assumed as of the date of acquisition is subject to change upon finalizing its valuation analysis. The remaining fair value estimates to finalize include working capital, intangibles, and property and equipment. The final determination may result in changes in the fair value of certain assets and liabilities as compared to these preliminary estimates, which is expected to be finalized in fiscal year 2023.
The following table summarizes the final and 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 | | Final | | Preliminary | | Total |
| Current assets | | $ | 2,531 | | | $ | 16 | | | $ | 2,547 | |
| Property and equipment | | 32,718 | | | 17,293 | | | 50,011 | |
| Identifiable intangible assets | | 3,400 | | | 620 | | | 4,020 | |
| Goodwill | | 14,944 | | | 1,762 | | | 16,706 | |
| Total assets acquired | | 53,593 | | | 19,691 | | | 73,284 | |
| | | | | | |
| Current liabilities | | (447) | | | (100) | | | (547) | |
| Total liabilities assumed | | (447) | | | (100) | | | (547) | |
Total fair value, net of cash acquired of $49 | | $ | 53,146 | | | $ | 19,591 | | | $ | 72,737 | |
| | | | | | |
| Components of consideration transferred | | | | | | |
| Cash | | 50,068 | | | 19,191 | | | 69,259 | |
| Holdback | | 1,608 | | | 400 | | | 2,008 | |
| Contingent consideration | | 1,470 | | | — | | | 1,470 | |
| Total consideration transferred | | $ | 53,146 | | | $ | 19,591 | | | $ | 72,737 | |
| Transaction expenses included in “other operating expense” in the consolidated statement of operations for fiscal year 2022 | | $ | 880 | | | $ | 241 | | | $ | 1,121 | |
2022 Asset Acquisitions: The following table summarizes the application of the cost accumulation model to acquired bowling centers treated as asset acquisitions:
| | | | | | | | | | | | | | | | | | | | |
| 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 | |
2021 Business Combination: The Company acquired the following bowling business (“2021 Business Combination”) in fiscal year 2021 for a total purchase price of $2,760, net of cash acquired. The balance sheets reflect assets acquired and liabilities assumed recorded at fair values and resulting recognition of goodwill.
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 using the acquisition method of accounting:
| | | | | | | | |
| Identifiable assets acquired and liabilities assumed | | Total |
| Current assets | | $ | 90 | |
| Property and equipment | | 181 | |
| Identifiable intangible assets | | 465 | |
| Goodwill | | 2,350 | |
| Total assets acquired | | 3,086 | |
| | |
| Current liabilities | | 326 | |
| Total liabilities assumed | | 326 | |
Total fair value, net of cash acquired of $5 | | $ | 2,760 | |
| | |
| Components of consideration transferred | | |
| Cash | | $ | 2,760 | |
| Transaction expenses included in "other operating expense" in the consolidated statement of operations for fiscal year 2021 | | $ | 69 | |
The following summarizes key valuation approaches and assumptions utilized in calculating the fair values for Business Combinations and Asset Acquisitions, which are accounted for under the acquisition method of accounting and cost accumulation model, respectively:
Property and equipment — Buildings, improvements, and equipment are valued using the cost approach and land is valued at its highest and best use by the market or sales comparison approach. The fair value of tangible personal property was determined primarily using variations of the cost approach. Certain assets with an active secondary market were valued using the market 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 assist with our determination of the assets held for sale estimated fair value less costs to sell, using a market approach. 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 and an indefinite life for Professional Bowlers Association trade name as management intends to use the trade name in perpetuity.
–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 bowling leagues for Business Combinations and Asset Acquisitions based on the fair value of relationships 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 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.
(4) Goodwill and Other Intangible Assets
Goodwill:
The changes in the carrying amount of goodwill for the fiscal years ended July 3, 2022 and June 27, 2021:
| | | | | |
Balance June 28, 2020 | $ | 724,932 | |
| Goodwill resulting from acquisitions made during fiscal 2021 | 2,350 | |
| Foreign currency translation adjustment | (1,126) | |
Balance as of June 27, 2021 | 726,156 | |
| Goodwill resulting from acquisitions during fiscal 2022 | 16,706 | |
| Goodwill adjustments made during fiscal 2022 | (193) | |
Balance as of July 3, 2022 | $ | 742,669 | |
Intangible Assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| July 3, 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 | | | $ | (8,593) | | | $ | 1,307 | | | 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 | 4 | | 1,761 | | | (651) | | | 1,110 | | | 7 | | 1,010 | | | (173) | | | 837 | |
| Customer relationships | 2 | | 21,112 | | | (13,989) | | | 7,123 | | | 3 | | 18,370 | | | (10,471) | | | 7,899 | |
| Management contracts | 2 | | 1,800 | | | (1,443) | | | 357 | | | 2 | | 1,800 | | | (1,150) | | | 650 | |
| Non-compete agreements | 4 | | 2,450 | | | (1,067) | | | 1,383 | | | 4 | | 1,200 | | | (514) | | | 686 | |
| PBA member, sponsor & media relationships | 8 | | 1,400 | | | (504) | | | 896 | | | 8 | | 1,400 | | | (322) | | | 1,078 | |
| Other intangible assets | 4 | | 921 | | | (133) | | | 788 | | | | | — | | | — | | | — | |
| 3 | | 45,844 | | | (32,880) | | | 12,964 | | | 4 | | 40,180 | | | (23,150) | | | 17,030 | |
| Indefinite-lived intangible assets: | | | | | | | | | | | | | | | |
| Liquor licenses | | | 9,629 | | | — | | | 9,629 | | | | | 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 | |
| | | 79,629 | | | — | | | 79,629 | | | | | 79,027 | | | — | | | 79,027 | |
| | | $ | 125,473 | | | $ | (32,880) | | | $ | 92,593 | | | | | $ | 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 $3,412 for the fiscal year ended July 3, 2022.
The following table shows amortization expense for finite-lived intangible assets for each reporting period:
| | | | | | | | | | | |
| Fiscal Year Ended |
| July 3, 2022 | | June 27, 2021 |
| Amortization expense | $ | 9,461 | | | $ | 6,030 | |
The estimated aggregate amortization expense for finite-lived intangibles included in intangible assets in our consolidated Balance Sheet for the next five fiscal years is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
| Amortization expense | $ | 6,088 | | | $ | 4,453 | | | $ | 879 | | | $ | 648 | | | $ | 370 | | | $ | 526 | |
Favorable and unfavorable leases:
The Company has favorable lease assets of $30,732 and $34,618, net of $14,002 and $12,300 accumulated amortization, reported in other assets in the consolidated balance sheets for the fiscal years ended July 3, 2022 and June 27, 2021, respectively. Total amortization expenses for fiscal years 2022 and 2021 were $4,265 and $3,075, respectively.
The Company has unfavorable lease liabilities of $294 and $1,096, net of $2,537 and $5,135 accumulated amortization, reported in other long-term liabilities in the consolidated balance sheets for the fiscal years ended July 3, 2022 and June 27, 2021, respectively. Total amortization expenses for fiscal years 2022 and 2021 were $478 and $458, respectively.
(5) Property and Equipment
As of July 3, 2022 and June 27, 2021, property and equipment consists of:
| | | | | | | | | | | |
| July 3, 2022 | | June 27, 2021 |
| Land | $ | 77,006 | | | $ | 19,879 | |
| Buildings and improvements | 69,219 | | | 16,155 | |
| Leasehold improvements | 349,534 | | | 313,441 | |
| Equipment, furniture, and fixtures | 375,780 | | | 315,719 | |
| Construction in progress | 15,638 | | | 27,028 | |
| 887,177 | | | 692,222 | |
| Accumulated depreciation | (352,456) | | | (276,561) | |
| Property and equipment, net of accumulated depreciation | $ | 534,721 | | | $ | 415,661 | |
The following table shows depreciation expense related to property and equipment for each reporting period:
| | | | | | | | | | | |
| Fiscal Year Ended |
| July 3, 2022 | | June 27, 2021 |
| Depreciation expense | $ | 77,471 | | | $ | 67,934 | |
Assets held for sale:
Total assets held for sale at July 3, 2022 and June 27, 2021 of $8,789 and $686, included liquor licenses of $315 and $175, respectively. Assets held for sale are valued at the lower of its carrying value or its fair value less the costs to sell. During the fiscal year ended July 3, 2022, we acquired approximately $8,474 in real property, which we plan to sell within the next 12 months.
(6) Leases
The Company leases various assets under non-cancellable operating and capital leases. These assets include bowling centers, office space, vehicles, and equipment.
The Company has three master lease agreements with a single landlord covering over 200 bowling centers. Our three master leases contain initial terms ending in 2044 and 2047 with 8 renewal options for 10 years each. Most of our real estate leases have terms ranging from 10 to 15 years with renewal options that are typically for five years each.
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 $26,417 and $26,853 within other current liabilities and other long-term liabilities on the consolidated balance sheets as of July 3, 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 fiscal year 2022.
Capital Leases: We had $47,298 and $34,609 in accumulated amortization on property and equipment under capital leases as of July 3, 2022 and June 27, 2021, respectively
The following tables summarize the Company’s costs for operating and capital leases:
| | | | | | | | | | | |
| Fiscal Year Ended |
| July 3, 2022 | | June 27, 2021 |
| Operating Leases | | | |
| Rent expense | $ | 55,189 | | | $ | 58,114 | |
| | | |
| Capital Leases | | | |
| Interest expense | $ | 39,514 | | | $ | 35,599 | |
| Amortization expense | 12,940 | | | 12,870 | |
| Total capital lease cost | $ | 52,454 | | | $ | 48,469 | |
The future minimum rent payments under our operating and capital leases as of July 3, 2022, were as follows:
| | | | | | | | | | | |
| Operating Leases | | Capital Leases |
| 2023 | $ | 49,783 | | | $ | 41,261 | |
| 2024 | 46,800 | | | 42,524 | |
| 2025 | 50,345 | | | 42,551 | |
| 2026 | 47,767 | | | 37,426 | |
| 2027 | 48,269 | | | 39,989 | |
| Thereafter | 525,028 | | | 995,185 | |
| Total rent payments | $ | 767,992 | | | $ | 1,198,936 | |
| Less: Imputed interest payments for capital leases | | | 798,306 | |
| Present value of capital lease obligation | | | $ | 400,630 | |
(7) Supplemental Cash Flow Information
The table below presents supplemental cash flow information for each reporting period:
| | | | | | | | | | | |
| Fiscal Year Ended |
| July 3, 2022 | | June 27, 2021 |
| Cash paid during the period for: | | | |
| Interest | $ | 88,292 | | | $ | 81,685 | |
| Income taxes, net of refunds | 3,898 | | | 818 | |
| Noncash investing and financing transactions: | | | |
| Capital expenditures in accounts payable | 8,895 | | | 4,193 | |
| Capital lease assets obtained in exchange for capital lease liabilities | 7,463 | | | 5,401 | |
| Modifications of capital lease assets and liabilities | (15,001) | | | 6,971 | |
| Change in fair value of interest rate swap | 8,869 | | | 8,631 | |
| Issuance of warrants in Business Combination | 22,426 | | | — | |
| Issuance of earnout shares in Business Combination | 181,113 | | | — | |
| Warrant redemption | (40,156) | | | — | |
| Unsettled treasury stock trade payable | 3,094 | | | — | |
(8) Accrued Expenses
As of July 3, 2022 and June 27, 2021, accrued expenses consist of:
| | | | | | | | | | | |
| July 3, 2022 | | June 27, 2021 |
| Compensation | $ | 15,746 | | | $ | 13,577 | |
| Taxes and licenses | 11,568 | | | 9,646 | |
| Customer deposits | 10,728 | | | 7,114 | |
| Insurance | 5,229 | | | 8,285 | |
| Deferred revenue | 6,384 | | | 5,885 | |
| Utilities | 4,185 | | | 3,399 | |
| Deferred rent | 3,252 | | | 4,384 | |
| Professional fees | 3,062 | | | 4,473 | |
| Interest | 498 | | | 4,693 | |
| Other | 2,202 | | | 2,194 | |
| Total accrued expenses | $ | 62,854 | | | $ | 63,650 | |
(9) Debt
The following table summarizes the Company’s debt structure as of July 3, 2022 and June 27, 2021:
| | | | | | | | | | | |
| July 3, 2022 | | June 27, 2021 |
First Lien Credit Facility Term Loan (Maturing July 3, 2024 and bearing variable rate interest; 5.17% and 4.55% at July 3, 2022 and June 27, 2021, respectively, excluding impact of hedging) | $ | 790,271 | | | $ | 800,534 | |
New Revolver (Maturing April 4, 2024 and bearing variable rate interest; 4.13% at July 3, 2022) | 86,434 | | | — | |
| First Lien Credit Facility Revolver | — | | | 39,853 | |
| Incremental Liquidity Facility | — | | | 45,000 | |
| 876,705 | | | 885,387 | |
| Less: | | | |
| Unamortized financing costs | (6,649) | | | (9,800) | |
| Current portion of unamortized financing costs | 3,245 | | | 3,152 | |
| Current maturities of long-term debt | (8,211) | | | (8,211) | |
| Total long-term debt | $ | 865,090 | | | $ | 870,528 | |
As of July 3, 2022, minimum repayments of debt by fiscal year were as follows:
| | | | | |
| 2023 | $ | 8,211 | |
| 2024 | 94,645 | |
| 2025 | 773,849 | |
| |
| |
| $ | 876,705 | |
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 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.
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 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.
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.
The Company had previously entered into a $150,000 Incremental Liquidity Facility with JP Morgan Chase Bank, N.A. as the lender with a maturity date of July 3, 2024 at an interest rate of the applicable LIBOR rate plus an initial applicable margin of 3.00%. The loan was structured as a revolver, with $45,000 utilized at the closing date and with the remaining $105,000 available subject to approval by Atairos as credit support provider and the prior satisfaction of certain conditions. The Incremental Liquidity Facility was secured on a pari passu first lien basis with the existing credit facility (with respect to assets of Bowlero Corp. and its guarantor subsidiaries).
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.
The Company had previously entered into a $50,000 First Lien Credit Facility Revolver with JP Morgan Chase Bank, N.A. as the lender with a maturity date of July 3, 2022. Obligations owed under the First Lien Credit Facility bore interest at a rate per annum equal to the applicable LIBOR rate, subject to a floor of 1.00%, plus an applicable margin of 3.75% to 4.25% depending on the leverage level. Interest on loans under the First Lien Facility bearing interest based upon the Base Rate was due quarterly, and interest on loans bearing interest based upon the LIBOR rate was 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. The Base Rate was defined as a rate per annum equal to the highest of (a) the Federal Funds Effective Rate in effect on such day plus 0.50%, (b) to the extent ascertainable, the Published LIBOR Rate plus 1.00%, (c) the Prime Rate and (d) solely with respect to the expanded term loan under the July 2018 Credit Agreement, 2.00%.
Pursuant to the First Lien Credit Agreement collateral and guarantee requirement, obligations owed under the First Lien Credit Facilities were secured by a first priority security interest on substantially all assets of Bowlero Corp. and the
guarantor subsidiaries. The First Lien Credit Agreement contained customary events of default, restrictions on indebtedness, liens, investments, asset dispositions, dividends and affirmative and negative covenants.
Letters of Credit: Outstanding standby letters of credit as of July 3, 2022 and June 27, 2021 totaled $9,136 and $9,100, respectively, 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 as of July 3, 2022 and the available amount of the First Lien Credit Facility Revolver was reduced by the outstanding standby letters of credit as of June 27, 2021.
Covenant Compliance: The Company was in compliance with all debt covenants as of July 3, 2022.
Interest rate swaps and caps
Derivatives: The Company used interest rate swaps and cap agreements which expired as of July 3, 2022, 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:
| | | | | | | | | | | | | | |
| | June 27, 2021 |
| | Notional
Amounts | | Expiration |
| Interest rate swaps | | $ | 552,500 | | | June 30, 2022 |
| Interest rate caps | | 97,500 | | | March 31, 2022 |
| Total notional amounts | | $ | 650,000 | | | |
Under the swap agreements, the Company paid a fixed rate of interest of 2.561% and received an average variable rate of the one-month LIBOR adjusted monthly. Under the interest rate cap agreements, the Company paid a fixed rate fee of 0.179% on the notional amount and had a strike rate of 3.00%.
The fair value of the swap and cap agreements as of June 27, 2021 was a liability of $8,869, and was included in other current liabilities in the consolidated balance sheet.
The reclassifications from accumulated other comprehensive income (“AOCI”) into income during each reporting period were as follows:
| | | | | | | | | | | |
| July 3, 2022 | | June 27, 2021 |
| Interest expense reclassified from AOCI into net loss | $ | 8,809 | | | $ | 9,002 | |
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.
(10) Income Taxes
Total loss before income taxes consists of:
| | | | | | | | | | | |
| Fiscal Year Ended |
| July 3, 2022 | | June 27, 2021 |
| Loss before tax: | | | |
| U.S. | $ | (31,388) | | | $ | (123,360) | |
| Foreign | 764 | | | (4,136) | |
| Total loss before tax | $ | (30,624) | | | $ | (127,496) | |
Income tax (benefit) expense consists of the following:
| | | | | | | | | | | |
| Fiscal Year Ended |
| July 3, 2022 | | June 27, 2021 |
| Current income tax provision: | | | |
| Federal | $ | 2,481 | | | $ | — | |
| State and local | 3,601 | | | 505 | |
| Foreign | 107 | | | (122) | |
| Total current provision | 6,189 | | | 383 | |
| | | |
| Deferred income tax provision: | | | |
| Federal | (6,307) | | | 9 | |
| State and local | (895) | | | (1,707) | |
| Foreign | 323 | | | 280 | |
| Total deferred provision | (6,879) | | | (1,418) | |
| Total income tax benefit | $ | (690) | | | $ | (1,035) | |
The 2022 and 2021 provision for income taxes differs from the amount computed by applying the statutory rate to the income before income taxes primarily due to the changes in the valuation allowance, state and local taxes and for 2022, items associated with the Business Combination and asset acquisitions.
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| July 3, 2022 | | June 27, 2021 |
| Federal statutory rate | $ | (6,431) | | | 21.0 | % | | $ | (26,774) | | | 21.0 | % |
| State and local tax net of federal benefit | 6,675 | | | (21.8) | | | (6,190) | | | 4.9 | |
| Deferred tax asset valuation allowance | (29,901) | | | 97.6 | | | 34,060 | | | (26.7) | |
| Business Combination and asset acquisition items | 10,800 | | | (35.3) | | | — | | | — | |
| Compensation limited by section 162(m) of the Internal Revenue Code | 17,590 | | | (57.4) | | | — | | | — | |
| Uncertain tax positions | 1 | | | — | | | 2 | | | 0.0 | |
| Foreign tax rate difference | 65 | | | (0.2) | | | (1,251) | | | 1.0 | |
| Other | 511 | | | (1.6) | | | (882) | | | 0.6 | |
| Effective tax rate | $ | (690) | | | 2.3 | % | | $ | (1,035) | | | 0.8 | % |
The Company’s effective tax rate was impacted by the reduction of the valuation allowance due to the recognition of deferred tax liabilities with the Bowl America acquisition, as well as becoming subject to Section 162(m) of the Internal Revenue Code that limits executive compensation tax deductibility and non-deductible transaction related costs as a result of the Business Combination. The increase in state and local tax expense reflects higher taxable income and the impact of having fully utilized net operating losses in certain states.
As of July 3, 2022, the Company had a net consolidated income tax receivable of $147 reflected in other current assets, a current consolidated income tax payable of $2,417 reflected in other current liabilities and a non-current consolidated income tax payable of $27 reflected in other long-term liabilities. As of June 27, 2021, the Company had a net consolidated income tax receivable of $119 reflected in other current assets and a non-current consolidated income tax payable of $26 reflected in other long-term liabilities.
The tax effects of temporary differences and carryforwards that give rise to significant components of deferred income tax assets and liabilities consist of:
| | | | | | | | | | | |
| July 3, 2022 | | June 27, 2021 |
| Deferred income tax assets: | | | |
| Reserves not currently deductible | $ | 21,961 | | | $ | 40,458 | |
| Capital lease liability | 105,157 | | | 98,545 | |
| Net operating loss, interest, and tax credit carryforwards | 109,504 | | | 132,184 | |
| Subtotal | 236,622 | | | 271,187 | |
| Less: Valuation allowance | 138,605 | | | 166,323 | |
| Total net deferred income tax assets | 98,017 | | | 104,864 | |
| | | |
| Deferred income tax liabilities: | | | |
| Property and equipment | 83,994 | | | 85,377 | |
| Favorable and unfavorable leases | 7,827 | | | 8,886 | |
| Goodwill and intangibles | 21,078 | | | 22,468 | |
| Total deferred income tax liabilities | 112,899 | | | 116,731 | |
| Net deferred income tax liabilities | $ | 14,882 | | | $ | 11,867 | |
As of July 3, 2022, the Company has U.S. tax credit carryforwards of $209, U.S. federal net operating loss carryforwards (NOLs) of $460,572, and interest carryforward of $20,825. As of June 27, 2021, the Company has U.S. tax credit carryforwards of $209, U.S. federal net operating loss carryforwards (NOLs) of $546,452, and interest carryforward of $24,340. The tax credits were generated in the July 1, 2007 and June 29, 2008 tax years. The credits have a 20-year federal carryover period and will begin to expire starting in the fiscal year ending 2027. The NOL carryforwards will begin to expire in 2023. The interest carryforward and $37,851 of NOL carryforwards do not expire.
Realization of deferred tax assets associated with deductible temporary differences, net operating losses and other carryforwards is dependent on generating sufficient future taxable income. Under Sections 382 and 383 of the Code, the Company’s federal net operating loss carryforwards and other tax attributes may become subject to an annual limitation in the event of certain cumulative changes in the ownership of the Company’s stock. An “ownership change” pursuant to Section 382 of the Code generally occurs if one or more stockholders or group of stockholders who own at least 5% of a company’s stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three year period. The Company’s ability to utilize certain net operating loss carryforwards and other tax attributes to offset future taxable income or tax liabilities may be limited as a result of ownership changes. Similar rules may apply under state laws. It is currently estimated that $276,057 of the Company’s NOLs are subject to limitation due to the changes in ownership that occurred in 2004 and 2017 and that $195,900 of this amount may expire unused even if there is sufficient taxable income to absorb such NOLs. The Company has not experienced an ownership change, as defined under Section 382 and 383, since July 2017.
Based on the historical losses of the Company and limitations placed on NOLs due to changes in ownership in 2004 and 2017, the Company believes it is more-likely-than-not that the Company will not realize the benefit of certain deferred tax assets, and, accordingly, has established a valuation allowance against certain deferred tax assets of $138,605 as of July 3, 2022 and $166,323 as of June 27, 2021.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the fiscal years ended July 3, 2022 and June 27, 2021 was as follows:
| | | | | | | | | | | |
| July 3, 2022 | | June 27, 2021 |
| Balance at beginning of year | $ | 26 | | | $ | 22 | |
| Additions for tax positions of prior years | 1 | | | 4 | |
| Reductions for tax positions of prior years | — | | | — | |
| Tax settlements | — | | | — | |
| Balance at end of year | $ | 27 | | | $ | 26 | |
The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at July 3, 2022 was $6, along with $21 affecting deferred taxes. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at June 27, 2021 was $5, along with $21 affecting deferred taxes.
As of July 3, 2022 and June 27, 2021, the Company had not recorded an income tax liability on certain undistributed earnings of its foreign subsidiaries. It is expected that these earnings will be permanently reinvested in the operations within the respective country. The Company has not calculated the deferred tax liability that would come due if the earnings were distributed to the U.S. as the calculations are not material.
(11) 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, a proposal for the Company to participate in conciliation. 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.
(12) Warrants
Warrant activity from the Closing Date to July 3, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Warrants outstanding at Closing Date | | Repurchased | | Exercised (a) | | Redeemed | | Warrants outstanding at July 3, 2022 |
| Publicly traded warrants | 11,827,864 | | | (2,690,272) | | | (9,128,891) | | | (8,701) | | | — | |
| Private placement warrants | 3,778,480 | | | — | | | (3,778,480) | | | — | | | — | |
| Unvested private placement warrants | 1,619,348 | | | — | | | (1,619,348) | | | — | | | — | |
| Total | 17,225,692 | | | (2,690,272) | | | (14,526,719) | | | (8,701) | | | — | |
_____________
a - As a result of exercising the warrants, 4,266,439 shares of Class A common stock were issued, of which 475,440 shares that were issued in exchange for unvested private placement warrants are subject to additional earnout provisions. Please refer to Note 13 - Earnouts for more details on the additional Earnout Shares. Share and Warrant Repurchase Plan: 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. 2,690,272 warrants were repurchased for
Redemption of Public and Private Placement Warrants: On April 14, 2022, the Company announced that it would redeem all of its outstanding publicly traded and privately held warrants to purchase shares of its Class A common stock as of May 16, 2022 (the “Redemption Date”) for a redemption price of $0.10 per warrant (the “Redemption Price”).
After the announcement and prior to the Redemption Date, holders of the warrants could choose to 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”), which was $12.0985 per warrant. As a result, holders who exercised their warrants on a “cashless” basis before the Redemption Date received 0.2936 shares of Class A common stock per warrant exercised.
As a result of the completion of the redemption of the warrants, the Company issued 4,266,439 shares of Class A common stock after 9,128,891 publicly traded warrants and 5,397,828 privately held warrants were exercised on a cash or cashless basis. The Company redeemed 8,701 publicly traded warrants at the redemption price of $0.10 per warrant. The amount of cash generated from the exercise of warrants and the amount of cash paid at the redemption price of $0.10 per warrant was not material. In connection with the warrant redemption, the warrants ceased trading on the NYSE and were delisted. The change in value of the warrants was recorded through earnings through the settlement date. The Company no longer has any warrants outstanding.
(13) 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 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 129,336 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.
(14) Fair Value of Financial Instruments
Debt
The fair value and carrying value of our debt as of July 3, 2022 and June 27, 2021 are as follows:
| | | | | | | | | | | |
| July 3, 2022 | | June 27, 2021 |
| Carrying value | $ | 876,705 | | | $ | 885,387 | |
| Fair value | 841,637 | | | 887,102 | |
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 in fiscal years 2022 and 2021.
Items Measured at Fair Value on a Recurring Basis
The Company holds certain 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 July 3, 2022 and June 27, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 27, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Interest rate swaps and caps | $ | — | | | $ | 8,869 | | | $ | — | | | $ | 8,869 | |
| Total liabilities | $ | — | | | $ | 8,869 | | | $ | — | | | $ | 8,869 | |
The fair value of earn-out shares was established using a Monte Carlo simulation Model (level 3 inputs). The key inputs into the Monte Carlo simulation as of July 3, 2022 were as follows:
| | | | | |
| Earnout |
| Expected term in years | 4.45 |
| Expected volatility | 55 | % |
| Risk-free interest rate | 2.87 | % |
| Stock price | $ | 11.00 | |
| 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 July 3, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 27,
2021 | | Issuances (a) | | Settlements | | Changes in fair value | | July 3,
2022 |
| Earnout liability | | $ | — | | | $ | 185,152 | | | $ | — | | | $ | 25,800 | | | $ | 210,952 | |
_____________
a - In addition to the earnout liability resulting from the Business Combination, the issuances include $3,854 related to the 475,440 shares subject to earnout provisions that were issued upon the cashless exercise of unvested private placement warrants. Please refer to Note 13 - Earnouts for more details on the additional Earnout Shares. 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 assist with determining the fair market value of our redeemable common stock based upon our estimated enterprise value using the income approach, which includes the use of Level 3 inputs. As a result, the redeemable common stock was classified within Level 3 of the fair value hierarchy. Key assumptions used in estimating the fair value of Old Bowlero's 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 15 - 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.
(15) 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 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 shares, with a par value of $0.0001 per share as of July 3, 2022. As of June 27, 2021, Old Bowlero authorized 496,829,868 shares at a $.0001 par value per share, which is inclusive of redeemable Common Stock.
•Issued and Outstanding: 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. As of June 27, 2021, Old Bowlero had 146,848,328 shares issued and outstanding, which is inclusive of redeemable Common Stock.
Class B:
•Authorized: 200,000,000 shares, with a par value of $0.0001 per share as of July 3, 2022. There were no Class B shares authorized as of June 27, 2021
•Issued and Outstanding: 55,911,203 shares as of July 3, 2022.
Preferred Stock:
•Authorized: 200,000,000 shares, with a par value of $0.0001 per share as of July 3, 2022. As of June 27, 2021, Old Bowlero had 4,968,299 shares authorized at a $0.0001 par value per share.
•Issued and Outstanding: 200,000 shares and 2,642,587 shares as of July 3, 2022 and June 27, 2021, respectively
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 the 15th anniversary of the Closing Date, or terms associated with Thomas F. Shannon, which consists of his death or disability, ceasing to beneficially own at least 10% of the outstanding shares of Class A common stock and Class B common stock or his employment as our CEO for 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 out in shares. 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 July 3, 2022, there was no Old Bowlero Redeemable Common Stock remaining.
Series A Preferred Stock - Old Bowlero
Old Bowlero had issued 2,642,587 shares of Old Bowlero Series A Preferred Stock (“Old Bowlero Preferred Stock”) which were 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 July 3, 2022, there was no Old Bowlero Preferred Stock outstanding.
Series A Preferred Stock
As of July 3, 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 July 3, 2022, there have been no dividends declared or paid in cash. For the fiscal year ended July 3, 2022, accumulated dividends in the amount of $6,002 were added to the liquidation preference and deemed to be declared and paid in-kind. For the fiscal year ended July 3, 2022, dividends in the amount of $6,097 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.
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. 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. Please refer to Note 12 - Warrants for more details on warrant repurchases under the program. As of July 3, 2022, the remaining balance of the repurchase plan was $160,061. For the fiscal year ended July 3, 2022, 3,430,667 shares of Class A common stock have been repurchased for a total of $34,557.
(16) Stock 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.
2017 Stock Incentive 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 the Closing Date, 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 fiscal year ended June 27, 2021, we recorded compensation cost of $3,140 in selling, general and administrative expenses and $24 in cost of revenues within the consolidated statements of operations.
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 year ended July 3, 2022 was $70,576, and the total intrinsic value of options repurchased during the year ended July 3, 2022 was $4,362.
A summary of the 2017 Plan stock options outstanding at July 3, 2022 and June 27, 2021, and changes during the years then ended is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of
Options | | Weighted
Average
Exercise
Price Per Share | | Weighted
Average
Remaining
Contractual
Term | | Aggregate Intrinsic Value |
Outstanding at June 28, 2020 | 49,789,060 | | | $ | 8.53 | | | 9.00 | | $ | — | |
| Granted | 68,513 | | | 3.25 | | | 11.00 | | — | |
| Exercised - stock | — | | | — | | | — | | | — | |
| Forfeited and cancelled | (526,093) | | | 3.12 | | | — | | | — | |
Outstanding at June 27, 2021 | 49,331,480 | | | 8.58 | | | 9.13 | | — | |
| Exercised - stock | (10,436,555) | | | 3.25 | | | — | | | — | |
| Repurchased - cash | (639,122) | | | — | | | — | | | — | |
| Forfeited and cancelled | (17,962,453) | | | 13.53 | | | — | | | — | |
Outstanding at July 3, 2022 | 20,293,350 | | | $ | 7.16 | | | 9.48 | | $ | 77,948 | |
Vested as of July 3, 2022 | 20,293,350 | | | $ | 7.16 | | | 9.48 | | $ | 77,948 | |
Exercisable as of July 3, 2022 | 20,293,350 | | | 7.16 | | | 9.48 | | 77,948 | |
The fair value of options at the date of grant was estimated using the Black-Scholes model with the following ranges of weighted average assumptions:
| | | | | |
| Options granted during the fiscal year ended June 27, 2021 |
| Expected term in years | 5.00 |
| Interest rate | 0.54 | % |
| Volatility | 71.5 | % |
| Dividend yield | — | |
The expected volatility is based on historical volatilities of companies considered comparable to the Company. The risk-free interest rates are based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The average expected life represents the weighted average period of time that options granted are expected to be outstanding
2021 Stock Incentive Plan
The 2021 Plan was effective December 14, 2021 and provides for the grant of equity awards to an individual employed by the Company or Subsidiary, a director or officer of the Company or Subsidiary, a consultant or advisor to the Company or an Affiliate or to a prospective employee, director, officer, consultant or director who has accepted an offer of employment or service from the Company. Equity awards include incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, RSUs and other stock based awards granted under the 2021 Plan. Shares to be granted under the 2021 Plan shall be not more than 26,446,033 shares of common stock, subject to an annual increase on the first day of each calendar year beginning January 1, 2022. As of July 3, 2022, the Company had 28,587,357 shares of common stock authorized under the 2021 plan. The Compensation Committee of the Board of Directors or subcommittee thereof, administers the 2021 Plan. The Compensation Committee may delegate all or any portion of its responsibilities and powers to any person(s) selected by it, except for grants of Awards to persons who are non-employee members of the Board or are otherwise subject to Section 16 of the Exchange Act. Any such delegation may be revoked by the Committee at any time. The Board may at any time and from time to time grant awards and administer the 2021 Plan with respect to such awards. In any such case, the Board shall have all the authority granted to the Compensation Committee under the 2021 Plan. The Compensation Committee approves grants to individuals, number of options, terms, conditions, performance measures, and other provisions of the award. Stock options granted under the 2021 Plan have a maximum contractual term of ten years from the date of grant, unless trading is prohibited by the Company’s insider-trading policy or
a Company-imposed blackout period, in which case the terms shall be extended automatically, and an exercise price not less than the fair value of the stock on the grant date. The manner and timing of vesting and expiration are determined by the Compensation Committee.
During the year ended July 3, 2022, the Company recorded $3,323 in compensation cost recognized for 665,912 fully vested options and $14,228 in compensation cost for 1,422,813 shares for a share-based bonus.
The Company issued fully vested and unvested stock options to certain employees. The unvested stock options vest based on a service condition. The average expected life represents the weighted average period of time that options granted are expected to be outstanding. The following table presents the significant assumptions used in the Black-Scholes model with the following range of weighted average assumptions for options granted in fiscal 2022:
| | | | | |
| Expected term in years | 6.68 |
| Interest rate | 1.39 | % |
| Volatility | 55.6 | % |
| Dividend yield | — | |
A summary of stock options outstanding under the 2021 Plan at July 3, 2022, and changes during the period then ended is presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of
Options | | Weighted
Average
Exercise
Price Per Share | | Weighted
Average
Remaining
Contractual
Term | | Aggregate Intrinsic Value |
| Outstanding at June 28, 2021 | — | | | $ | — | | | — | | | $ | — | |
| Granted | 9,415,912 | | | 13.72 | | | 10.00 | | — | |
| Exercised | — | | | — | | | — | | | — | |
| Forfeited and cancelled | — | | | — | | | — | | | — | |
| Repurchased or settled | — | | | — | | | — | | | — | |
Outstanding at July 3, 2022 | 9,415,912 | | | $ | 13.72 | | | 9.45 | | $ | 2,416 | |
Vested as of July 3, 2022 | 665,912 | | | $ | 10.00 | | | 9.45 | | $ | 666 | |
Exercisable as of July 3, 2022 | 665,912 | | | 10.00 | | | 9.45 | | 666 | |
The Company issued RSUs to employees and board members that vest based on service conditions (Service based RSUs). The Company measures the grant-date fair value based on the price of the Company's shares on the grant date. The following table presents a summary of RSUs subject to time-based service conditions and changes during the period then ended is presented below as of July 3, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of
Units | | Weighted
Average
Grant Date Fair Value Per Share | | Weighted
Average
Remaining
Contractual
Term | | Aggregate Intrinsic Value |
| Outstanding at June 28, 2021 | — | | | $ | — | | | — | | | $ | — | |
| Granted | 947,325 | | | 9.72 | | | 2.51 | | — | |
| Vested | — | | | — | | | — | | | — | |
| Forfeited | (29,700) | | | 9.67 | | | — | | | — | |
Outstanding at July 3, 2022 | 917,625 | | | $ | 9.72 | | | 2.14 | | $ | 10,094 | |
The Company issued earnout RSUs to employees that vest upon the achievement of market conditions with a 5-year expiration date (Earnout RSUs). The fair value of the earnout RSUs was determined based on a Monte-Carlo simulation method reflecting those market conditions, and the Company recognizes compensation expense evenly over the 5-year
service period. The following table presents a summary of the earnout RSUs subject to market conditions and changes during the period then ended as of July 3, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of
Units | | Weighted
Average
Grant Date Fair Value Per Share | | Weighted
Average
Remaining
Contractual
Term | | Aggregate Intrinsic Value |
| Outstanding at June 28, 2021 | — | | | $ | — | | | — | | | $ | — | |
| Granted | 152,370 | | | 8.16 | | | 5.00 | | — | |
| Vested | — | | | — | | | — | | | — | |
| Forfeited | (23,034) | | | 8.16 | | | — | | | — | |
Outstanding at July 3, 2022 | 129,336 | | | $ | 8.16 | | | 4.45 | | $ | 1,423 | |
The Company issued RSUs to employees and board members that vest based upon the achievement of market and service conditions (market and service based RSUs). The fair value of those RSUs was determined using a Monte-Carlo simulation method reflecting those market conditions. The following table presents a summary those RSUs subject to market and service conditions, and changes during the period then ended as of July 3, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of
Units | | Weighted
Average
Grant Date Fair Value Per Share | | Weighted
Average
Remaining
Contractual
Term | | Aggregate Intrinsic Value |
| Outstanding at June 28, 2021 | — | | | $ | — | | | — | | | $ | — | |
| Granted | 266,775 | | | 6.64 | | | 2.79 | | — | |
| Vested | — | | | — | | | — | | | — | |
| Forfeited | (9,900) | | | 6.64 | | | — | | | — | |
Outstanding at July 3, 2022 | 256,875 | | | $ | 6.64 | | | 2.45 | | $ | 2,826 | |
As of July 3, 2022, the total compensation cost not yet recognized is as follows:
| | | | | | | | | | | | | | | | | |
| Award Plan | | Unrecognized Compensation Cost | | Weighted Average Remaining Period of Recognition |
| Stock options | 2021 Plan | | $ | 37,273 | | | 2.68 |
| Service based RSUs | 2021 Plan | | 7,211 | | | 2.14 |
| Market and service based RSUs | 2021 Plan | | 1,498 | | | 2.45 |
| Earnout RSUs | 2021 Plan | | 939 | | | 4.45 |
| Total unrecognized compensation cost | | | $ | 46,921 | | | 2.63 |
Share-based compensation recognized in the consolidated statement of operations for the fiscal year ended July 3, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Award Plan | | Selling, general and administrative expenses | | Cost of revenues | | Total |
| Performance-based options | 2017 Plan | | $ | 24,468 | | | $ | 48 | | | $ | 24,516 | |
| Time-based options | 2017 Plan | | 916 | | | 36 | | | 952 | |
| Stock options | 2021 Plan | | 8,505 | | | — | | | 8,505 | |
| Service based RSUs | 2021 Plan | | 1,652 | | | 59 | | | 1,711 | |
| Market and service based RSUs | 2021 Plan | | 194 | | | 14 | | | 208 | |
| Earnout RSUs | 2021 Plan | | 116 | | | — | | | 116 | |
| Share-based bonus | — | | 14,228 | | | — | | | 14,228 | |
| Total share-based compensation expense | | | $ | 50,079 | | | $ | 157 | | | $ | 50,236 | |
The Company did not have any recognized income tax benefits, net of valuation allowances, related to our share-based compensation plans.
Employee Stock Purchase Plan
On December 14, 2021, the Board of Directors approved the ESPP, subject to stockholder approval. The ESPP became effective July 1, 2022, and purchase rights may be granted under the ESPP prior to stockholder approval, but no purchase rights may be exercised unless and until stockholder approval is obtained. The maximum number of shares of the Company’s Class A common stock available for sale under the ESPP shall not exceed an aggregate of 4,926,989 shares, subject to an annual increase on the first day of each calendar year beginning on January 1, 2022 and ending on and including January 1, 2031, equal to the least of (i) 1% of the aggregate number of Shares outstanding on the final day of the immediately preceding calendar year, (ii) 1,753,487 Shares and (iii) such number of shares as is determined by the Board. If the aggregate funds available for purchase of the Shares would cause an issuance of Shares in excess of the Shares then available for issuance under the ESPP, the Committee will proportionately reduce the number of Shares that would otherwise be purchased by each participant to eliminate the excess. Under the ESPP, employees are offered the option to purchase discounted shares of Class A common stock during offering periods designated by the administrator. Each offering period will be one year commencing each January 1 and ending on December 31 with the exception of the initial offering period, which commenced on July 1, 2022 and will end on December 31, 2022. Shares are purchased on the applicable exercise dates, which is the last trading day of each purchase period. The Company uses the Black-Scholes option pricing model to determine the grant date fair values of ESPP awards.
(17) Net Loss Per Share
Net loss 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. The computation of basic and diluted net loss per Class A and B common share is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| July 3, 2022 | | June 27, 2021 |
| Class A | | Class B | | Total | | Class A | | Class B | | Total |
| Numerator | | | | | | | | | | | |
| Net loss allocated to common stockholders | $ | (32,198) | | | $ | (7,969) | | | $ | (40,167) | | | $ | (134,476) | | | $ | — | | | $ | (134,476) | |
| | | | | | | | | | | |
| Denominator | | | | | | | | | | | |
| Weighted-average shares outstanding | 124,920,063 | | | 30,917,091 | | | 155,837,154 | | | 146,848,329 | | | — | | | 146,848,329 | |
| | | | | | | | | | | |
| Net loss per share, basic and diluted | $ | (0.26) | | | $ | (0.26) | | | $ | (0.26) | | | $ | (0.92) | | | $ | — | | | $ | (0.92) | |
The impact of potentially dilutive RSUs, PSUs, stock options, earnouts, and purchases of shares under our ESPP were excluded from the diluted per share calculations because they would have been antidilutive.
