Bowlero Corp. - Quarter Report: 2023 October (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-Q
___________________________________
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended October 1, 2023
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Commission file number 001-40142
___________________________________
BOWLERO CORP.
(Exact name of registrant as specified in its charter)
___________________________________
| Delaware | 98-1632024 | ||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| 7313 Bell Creek Road | |||||||||||
Mechanicsville, Virginia | 23111 | ||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | ||||||||||
(804) 417-2000
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Class A common stock, par value $0.0001 per share | BOWL | The New York Stock Exchange | ||||||
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☒ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☒ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The registrant had outstanding 92,768,345 shares of Class A common stock, 58,519,437 shares of Class B common stock, and 136,373 shares of Series A preferred stock as of November 1, 2023.
Table of Contents
| Page | ||||||||
| Part I - Financial Information | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Part II - Other Information | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 6. | ||||||||
i
Bowlero Corp.
Condensed Consolidated Balance Sheets
October 1, 2023 and July 2, 2023
(Amounts in thousands)
(Unaudited)
Item 1. Condensed Financial Statements
| October 1, 2023 | July 2, 2023 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 40,088 | $ | 195,633 | |||||||
Accounts and notes receivable, net of allowance for doubtful accounts | 4,087 | 3,092 | |||||||||
| Inventories, net | 13,183 | 11,470 | |||||||||
| Prepaid expenses and other current assets | 19,393 | 18,395 | |||||||||
| Assets held-for-sale | 2,069 | 2,069 | |||||||||
| Total current assets | 78,820 | 230,659 | |||||||||
| Property and equipment, net | 773,057 | 697,850 | |||||||||
| Internal use software, net | 20,792 | 17,914 | |||||||||
| Operating lease right of use assets, net | 550,113 | 449,085 | |||||||||
| Finance lease right of use assets, net | 540,186 | 515,339 | |||||||||
| Intangible assets, net | 100,087 | 90,986 | |||||||||
| Goodwill | 825,522 | 753,538 | |||||||||
| Deferred income tax asset | 86,237 | 73,807 | |||||||||
| Other assets | 12,582 | 12,096 | |||||||||
| Total assets | $ | 2,987,396 | $ | 2,841,274 | |||||||
| Liabilities, Temporary Equity and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued expenses | $ | 141,164 | $ | 121,226 | |||||||
| Current maturities of long-term debt | 9,595 | 9,338 | |||||||||
| Current obligations of operating lease liabilities | 26,194 | 23,866 | |||||||||
| Other current liabilities | 16,650 | 14,281 | |||||||||
| Total current liabilities | 193,603 | 168,711 | |||||||||
| Long-term debt, net | 1,276,371 | 1,138,687 | |||||||||
| Long-term obligations of operating lease liabilities | 541,937 | 431,295 | |||||||||
| Long-term obligations of financing lease liabilities | 678,720 | 652,450 | |||||||||
| Earnout liability | 71,364 | 112,041 | |||||||||
| Other long-term liabilities | 35,220 | 34,380 | |||||||||
| Deferred income tax liabilities | 4,079 | 4,160 | |||||||||
| Total liabilities | 2,801,294 | 2,541,724 | |||||||||
Commitments and Contingencies (Note 10) | |||||||||||
| Temporary Equity | |||||||||||
| Series A preferred stock | 144,329 | 144,329 | |||||||||
1
| October 1, 2023 | July 2, 2023 | ||||||||||
| Stockholders’ Equity | |||||||||||
| Class A common stock | $ | 10 | $ | 11 | |||||||
| Class B common stock | 6 | 6 | |||||||||
| Additional paid-in capital | 507,935 | 506,112 | |||||||||
| Treasury stock, at cost | (268,063) | (135,401) | |||||||||
| Accumulated deficit | (201,440) | (219,659) | |||||||||
| Accumulated other comprehensive income | 3,325 | 4,152 | |||||||||
| Total stockholders’ equity | 41,773 | 155,221 | |||||||||
| Total liabilities, temporary equity and stockholders’ equity | $ | 2,987,396 | $ | 2,841,274 | |||||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
Bowlero Corp.
Condensed Consolidated Statements of Operations
Three Months Ended October 1, 2023 and October 2, 2022
(Amounts in thousands, except share and per share amounts)
(Unaudited)
| Three Months Ended | |||||||||||
| October 1, 2023 | October 2, 2022 | ||||||||||
| Revenues | $ | 227,405 | $ | 230,260 | |||||||
| Costs of revenues | 182,921 | 165,202 | |||||||||
| Gross profit | 44,484 | 65,058 | |||||||||
| Operating (income) expenses: | |||||||||||
| Selling, general and administrative expenses | 37,765 | 32,494 | |||||||||
| Asset impairment | 26 | 84 | |||||||||
| Gain on sale or disposal of assets | (27) | (155) | |||||||||
| Other operating expense | 1,364 | 1,362 | |||||||||
| Total operating expense | 39,128 | 33,785 | |||||||||
| Operating profit | 5,356 | 31,273 | |||||||||
| Other (income) expenses: | |||||||||||
| Interest expense, net | 37,449 | 23,570 | |||||||||
| Change in fair value of earnout liability | (40,682) | 40,760 | |||||||||
| Other expense | 53 | 48 | |||||||||
| Total other (income) expense | (3,180) | 64,378 | |||||||||
| Income (loss) before income tax (benefit) expense | 8,536 | (33,105) | |||||||||
| Income tax (benefit) expense | (9,683) | 429 | |||||||||
| Net income (loss) | 18,219 | (33,534) | |||||||||
| Series A preferred stock dividends | (1,962) | (2,801) | |||||||||
| Earnings allocated to Series A preferred stock | (1,049) | — | |||||||||
| Net income (loss) attributable to common stockholders | $ | 15,208 | $ | (36,335) | |||||||
| Net income (loss) per share attributable to common stockholders | |||||||||||
| Basic | $ | 0.09 | $ | (0.22) | |||||||
| Diluted | $ | 0.09 | $ | (0.22) | |||||||
| Weighted-average shares used in computing net loss per share attributable to common stockholders | |||||||||||
| Basic | 160,929,391 | 162,854,597 | |||||||||
| Diluted | 168,903,508 | 162,854,597 | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
Bowlero Corp.
Condensed Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended October 1, 2023 and October 2, 2022
(Amounts in thousands)
(Unaudited)
| Three Months Ended | |||||||||||
| October 1, 2023 | October 2, 2022 | ||||||||||
| Net income (loss) | $ | 18,219 | $ | (33,534) | |||||||
| Other comprehensive loss, net of income tax: | |||||||||||
| Unrealized loss on derivatives | (340) | — | |||||||||
| Foreign currency translation adjustment | (487) | (367) | |||||||||
| Other comprehensive loss | (827) | (367) | |||||||||
| Total comprehensive income (loss) | $ | 17,392 | $ | (33,901) | |||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
Bowlero Corp.
Condensed Consolidated Statements of Changes in Temporary Equity and Stockholders’ Equity
Three Months Ended October 1, 2023 and October 2, 2022
(Amounts in thousands, except share amounts)
(Unaudited)
| Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A | Class A | Class B | Additional | other | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| preferred stock | common stock | common stock | Treasury stock | paid-in | Accumulated | comprehensive | stockholders’ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | capital | deficit | income (loss) | equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | — | — | (33,534) | — | (33,534) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | — | — | — | — | (367) | (367) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 50,317 | — | — | — | — | — | 3,279 | — | — | 3,279 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of Class A common stock into Treasury stock | — | — | (468,103) | — | — | — | 468,103 | (5,462) | — | — | — | (5,462) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, October 2, 2022 | 200,000 | $ | 206,002 | 109,977,844 | $ | 11 | 55,911,203 | $ | 6 | 3,898,770 | $ | (40,019) | $ | 338,294 | $ | (346,385) | $ | (1,673) | $ | (49,766) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, July 2, 2023 | 136,373 | $ | 144,329 | 107,666,301 | $ | 11 | 60,819,437 | $ | 6 | 11,312,302 | $ | (135,401) | $ | 506,112 | $ | (219,659) | $ | 4,152 | $ | 155,221 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | — | 18,219 | — | 18,219 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | — | — | — | — | (487) | (487) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized loss on derivatives | — | — | — | — | — | — | — | — | — | — | (340) | (340) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Class B common stock into Class A common stock | — | — | 2,300,000 | — | (2,300,000) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 15,489 | — | — | — | — | — | 1,823 | — | — | 1,823 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of Class A common stock into Treasury stock | — | — | (12,131,185) | (1) | — | — | 12,131,185 | (132,662) | — | — | — | (132,663) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, October 1, 2023 | 136,373 | $ | 144,329 | 97,850,605 | $ | 10 | 58,519,437 | $ | 6 | 23,443,487 | $ | (268,063) | $ | 507,935 | $ | (201,440) | $ | 3,325 | $ | 41,773 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
Bowlero Corp.
Condensed Consolidated Statements of Cash Flows
Three Months Ended October 1, 2023 and October 2, 2022
(Amounts in thousands)
(Unaudited)
| Three Months Ended | |||||||||||
| October 1, 2023 | October 2, 2022 | ||||||||||
| Operating activities | |||||||||||
| Net income (loss) | $ | 18,219 | $ | (33,534) | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Asset impairment | 26 | 84 | |||||||||
| Depreciation and amortization | 31,352 | 26,267 | |||||||||
| Gain on sale or disposal of assets, net | (27) | (155) | |||||||||
| Income from joint venture | (71) | (99) | |||||||||
| Amortization of deferred financing costs | 846 | 956 | |||||||||
| Amortization of deferred rent incentive | — | (567) | |||||||||
| Non-cash interest expense on capital lease obligation | — | 4,510 | |||||||||
| Non-cash interest expense on finance lease obligation | 935 | — | |||||||||
| Non-cash operating lease expense | 7,822 | — | |||||||||
| Non-cash portion of gain on lease modification | (499) | — | |||||||||
| Amortization of deferred sale lease-back gain | — | (257) | |||||||||
| Deferred income taxes | (9,697) | — | |||||||||
| Share-based compensation | 1,911 | 3,648 | |||||||||
| Distributions from joint venture | 72 | 109 | |||||||||
| Change in fair value of earnout liability | (40,682) | 40,760 | |||||||||
| Change in fair value of marketable securities | — | (89) | |||||||||
| Changes in assets and liabilities, net of business acquisitions: | |||||||||||
| Accounts receivable and notes receivable, net | (995) | (205) | |||||||||
| Inventories | (1,178) | (824) | |||||||||
| Prepaids, other current assets and other assets | (1,913) | (915) | |||||||||
| Accounts payable and accrued expenses | 16,613 | (3,947) | |||||||||
| Other current liabilities | (163) | (1,125) | |||||||||
| Other long-term liabilities | (6,488) | 956 | |||||||||
| Net cash provided by operating activities | 16,083 | 35,573 | |||||||||
| Investing activities | |||||||||||
| Purchases of property and equipment | (50,674) | (44,709) | |||||||||
| Purchases of intangible assets | (112) | (17) | |||||||||
| Proceeds from sale of intangibles | 65 | — | |||||||||
| Purchase of marketable securities | — | (11,594) | |||||||||
| Proceeds from sale of marketable securities | — | 9,746 | |||||||||
| Acquisitions, net of cash acquired | (125,855) | (15,918) | |||||||||
| Net cash used in investing activities | (176,576) | (62,492) | |||||||||
6
| Three Months Ended | |||||||||||
| October 1, 2023 | October 2, 2022 | ||||||||||
| Financing activities | |||||||||||
| Repurchase of Class A common stock into Treasury stock | $ | (130,140) | $ | (7,558) | |||||||
| Proceeds from long-term debt | — | 15,350 | |||||||||
| Proceeds from Revolver draws | 140,000 | — | |||||||||
| Payment of long-term debt | (3,109) | (2,126) | |||||||||
| Payment on finance leases | (1,576) | — | |||||||||
| Payments for tax withholdings on share-based compensation | (84) | (499) | |||||||||
| Net cash provided by financing activities | 5,091 | 5,167 | |||||||||
| Effect of exchange rates on cash | (143) | (123) | |||||||||
| Net decrease in cash and equivalents | (155,545) | (21,875) | |||||||||
| Cash and cash equivalents at beginning of period | 195,633 | 132,236 | |||||||||
| Cash and cash equivalents at end of period | $ | 40,088 | $ | 110,361 | |||||||
See accompanying notes to unaudited condensed consolidated financial statements.
7
Bowlero Corp.
Index For Notes to Condensed Consolidated Financial Statements (Unaudited)
| Page | |||||||||||
8
Bowlero Corp.
Notes to Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
(Unaudited)
(1) Description of Business and Significant Accounting Policies
Bowlero Corp., a Delaware corporation, and its subsidiaries (referred to herein as , the “Company”, “Bowlero”, “we,” “us” and “our”) are the world’s largest operator of bowling entertainment centers.
The Company operates bowling entertainment centers under different brand names. Our AMF and Bowl America branded centers are traditional bowling centers, while the Bowlero and Lucky Strike 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. See Note - 3 Business Acquisitions for additional information on our newly acquired Lucky Strike centers. Additionally, within the brands, there exists a spectrum where some AMF branded centers are more upscale and some Bowlero branded centers are more traditional. All of our centers, regardless of branding, are managed in a fully integrated and consistent basis since all of our centers are in the same business of operating bowling entertainment.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated. Our quarterly financial data should be read in conjunction with the audited financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended July 2, 2023.
Principles of Consolidation: The consolidated financial statements and related notes include the accounts of Bowlero Corp. and the subsidiaries it controls. Control is determined based on ownership rights or, when applicable, based on whether the Company is considered to be the primary beneficiary of a variable interest entity. The Company’s interest in 20% to 50% owned companies that are not controlled are accounted for using the equity method, unless the Company does not sufficiently influence the management of the investee. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates: The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the balance sheets, statement of operations and accompanying notes. Significant estimates made by management include, but are not limited to, cash flow projections; the fair value of assets and liabilities in acquisitions; derivatives with hedge accounting; share-based compensation; depreciation and impairment of long-lived assets; carrying amount and recoverability analyses of property and equipment, assets held for sale, goodwill and other intangible assets; valuation of deferred tax assets and liabilities and income tax uncertainties; and reserves for litigation, claims and self-insurance costs. Actual results could differ from those estimates.
Fair-value Estimates: We have various financial instruments included in our financial statements. Financial instruments are carried in our financial statements at either cost or fair value. We estimate fair value of assets and liabilities using the following hierarchy using the highest level possible:
Level 1: Quoted prices in active markets that are accessible at the measurement date for identical assets and liabilities.
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 highly liquid investments classified as cash equivalents of $8,997 and $166,510 at October 1, 2023 and July 2, 2023, 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
9
days to be cash equivalents. Amounts due from the banks for these transactions classified as cash equivalents totaled $10,439 and $9,066 at October 1, 2023 and July 2, 2023, respectively.
Derivatives: We are exposed to interest rate risk. To manage this risk, we entered into interest rate collar derivative transactions associated with a portion of our outstanding debt. The interest rate collars, which are designated for accounting purposes as cash flow hedges, establish a cap and floor on the Secured Overnight Financing Rate (SOFR). The Company's interest rate collars expire on March 31, 2026.
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.
The interest rate collar agreements effectively modified our exposure to interest rate risk by converting a portion of our interest payments on floating rate debt to include a cap and floor, thus reducing the impact of interest rate changes on future interest expense. See Note 8 - Debt for more information.
Net Income (Loss) Per Share Attributable to Common Stockholders: We compute net income (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. In periods where the Company reports a net loss, all potentially dilutive securities are 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 will be the same. Dilutive securities include convertible preferred stock, earnouts, stock options, and restricted stock units (“RSUs”). See Note 15 - Net Income (Loss) Per Share.
Emerging Growth Company Status: The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as modified by the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with those of another public company that is neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition period difficult because of the potential differences in accounting standards used.
Recently Issued Accounting Standards: We reviewed the accounting pronouncements that became effective for fiscal year 2024 and determined that either they were not applicable, or they did not have a material impact on the consolidated financial statements. We also reviewed the recently issued accounting pronouncements to be adopted in future periods and determined that they are not expected to have a material impact on the consolidated financial statements.
10
(2) Revenue
The following table presents the Company’s revenue disaggregated by major revenue categories:
| Three Months Ended | |||||||||||||||||||||||
| October 1, 2023 | % of revenues | October 2, 2022 | % of revenues | ||||||||||||||||||||
| Major revenue categories: | |||||||||||||||||||||||
| Bowling | $ | 116,430 | 51.2 | % | $ | 115,327 | 50.1 | % | |||||||||||||||
| Food and beverage | 74,913 | 32.9 | % | 79,023 | 34.3 | % | |||||||||||||||||
| Amusement and other | 30,369 | 13.4 | % | 30,809 | 13.4 | % | |||||||||||||||||
| Media | 5,693 | 2.5 | % | 5,101 | 2.2 | % | |||||||||||||||||
| Total revenues | $ | 227,405 | 100.0 | % | $ | 230,260 | 100.0 | % | |||||||||||||||
(3) Business Acquisitions
Acquisitions: The Company continually evaluates potential acquisitions, which can be either business combinations or asset purchases, that strategically fit within the Company’s existing portfolio of centers as a key part of the Company’s overall growth strategy in order to expand our market share in key geographic areas, and to improve our ability to leverage our fixed costs.
2024 Business Acquisitions: For business combinations, the Company allocates the consideration transferred to the identifiable assets acquired and liabilities assumed based on their preliminary estimated fair values as of the acquisition date. We estimate the fair values of the assets acquired and liabilities assumed using valuation techniques, such as the income, cost and market approaches. During the three months ended October 1, 2023, the Company acquired substantially all of the assets of Lucky Strike Entertainment, LLC (“Lucky Strike”) which includes 14 bowling entertainment centers for a total consideration of $90,475. The Company also had two other acquisitions in which we acquired three bowling entertainment centers for a total consideration of $35,380. The Company is still in the process of finalizing its valuation analysis. The remaining fair value estimates include working capital, intangibles, property and equipment, and operating and finance lease assets and liabilities. If necessary, for business combinations, we will continue to refine our estimates throughout the permitted measurement period, which may result in corresponding offsets to goodwill. We expect to finalize the valuations as soon as possible, but no later than one year after the acquisition dates. Acquisitions that were considered preliminary at July 2, 2023 were finalized during the three months ended October 1, 2023.
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The following table summarizes the preliminary purchase price allocations for the fair values of the identifiable assets acquired and liabilities assumed, components of consideration transferred and the transactional related expenses using the acquisition method of accounting:
| Identifiable assets acquired and liabilities assumed | Lucky Strike | Other Acquisitions | Total | |||||||||||||||||
| Current assets | $ | 586 | $ | 89 | $ | 675 | ||||||||||||||
| Property and equipment | 43,114 | 10,814 | 53,928 | |||||||||||||||||
| Operating lease ROU | 95,232 | 12,923 | 108,155 | |||||||||||||||||
| Finance lease ROU | 25,132 | — | 25,132 | |||||||||||||||||
Identifiable intangible assets (1) | 9,015 | 1,755 | 10,770 | |||||||||||||||||
| Goodwill | 48,268 | 23,716 | 71,984 | |||||||||||||||||
| Deferred income tax asset | 2,615 | — | 2,615 | |||||||||||||||||
| Total assets acquired | $ | 223,962 | $ | 49,297 | $ | 273,259 | ||||||||||||||
| Current liabilities | $ | (3,350) | $ | (994) | $ | (4,344) | ||||||||||||||
| Operating lease liabilities | (106,910) | (12,923) | (119,833) | |||||||||||||||||
| Finance lease liabilities | (22,996) | — | (22,996) | |||||||||||||||||
| Other liabilities | (231) | — | (231) | |||||||||||||||||
| Total liabilities assumed | (133,487) | (13,917) | (147,404) | |||||||||||||||||
Total fair value, net of cash acquired of $127 | $ | 90,475 | $ | 35,380 | $ | 125,855 | ||||||||||||||
| Components of consideration transferred | ||||||||||||||||||||
| Cash | $ | 90,475 | $ | 34,690 | $ | 125,165 | ||||||||||||||
Holdback (2) | — | 690 | 690 | |||||||||||||||||
| Total consideration transferred | $ | 90,475 | $ | 35,380 | $ | 125,855 | ||||||||||||||
(1) Of the identifiable intangible assets acquired, $6,740 relates to the indefinite-lived Lucky Strike trade name. The remaining identifiable intangible assets acquired consist of definite-lived trade names, customer relationships, and non-compete agreements and indefinite-lived liquor licenses. See Note 4 - Goodwill and Other Intangible Assets for more information.
(2) The holdback represents a portion of the consideration transferred that is retained to indemnify the Company for general claims during a certain period subsequent to the acquisition date (the “holdback period”). Holdback funds, to the extent any funds remain, are released to the seller upon expiration of the holdback period.
(4) Goodwill and Other Intangible Assets
Goodwill:
The changes in the carrying amount of goodwill for the period ended October 1, 2023:
Balance as of July 2, 2023 | $ | 753,538 | |||
Goodwill resulting from acquisitions during the period | 71,984 | ||||
Balance as of October 1, 2023 | $ | 825,522 | |||
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Intangible Assets:
| October 1, 2023 | July 2, 2023 | ||||||||||||||||||||||||||||||||||
| Gross carrying amount | Accumulated amortization | Net carrying amount | Gross carrying amount | Accumulated amortization | Net carrying amount | ||||||||||||||||||||||||||||||
| Finite-lived intangible assets: | |||||||||||||||||||||||||||||||||||
| AMF trade name | $ | 9,900 | $ | (9,418) | $ | 482 | $ | 9,900 | $ | (9,253) | $ | 647 | |||||||||||||||||||||||
| Other acquisition trade names | 4,460 | (1,635) | 2,825 | 2,630 | (1,423) | 1,207 | |||||||||||||||||||||||||||||
| Customer relationships | 23,852 | (19,855) | 3,997 | 23,712 | (18,755) | 4,957 | |||||||||||||||||||||||||||||
| Management contracts | 1,800 | (1,735) | 65 | 1,800 | (1,726) | 74 | |||||||||||||||||||||||||||||
| Non-compete agreements | 4,131 | (1,733) | 2,398 | 3,211 | (1,572) | 1,639 | |||||||||||||||||||||||||||||
| PBA member, sponsor & media relationships | 1,400 | (655) | 745 | 1,400 | (627) | 773 | |||||||||||||||||||||||||||||
| Other intangible assets | 921 | (418) | 503 | 921 | (377) | 544 | |||||||||||||||||||||||||||||
| 46,464 | (35,449) | 11,015 | 43,574 | (33,733) | 9,841 | ||||||||||||||||||||||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||||||||||||||||||||||
| Liquor licenses | 12,332 | — | 12,332 | 11,145 | — | 11,145 | |||||||||||||||||||||||||||||
| PBA trade name | 3,100 | — | 3,100 | 3,100 | — | 3,100 | |||||||||||||||||||||||||||||
| Lucky Strike trade name | 6,740 | — | 6,740 | — | — | — | |||||||||||||||||||||||||||||
| Bowlero trade name | 66,900 | — | 66,900 | 66,900 | — | 66,900 | |||||||||||||||||||||||||||||
| 89,072 | — | 89,072 | 81,145 | — | 81,145 | ||||||||||||||||||||||||||||||
| $ | 135,536 | $ | (35,449) | $ | 100,087 | $ | 124,719 | $ | (33,733) | $ | 90,986 | ||||||||||||||||||||||||
The following table shows amortization expense for finite-lived intangible assets for each reporting period:
| Three Months Ended | |||||||||||
| October 1, 2023 | October 2, 2022 | ||||||||||
| Amortization expense | $ | 1,781 | $ | 1,582 | |||||||
(5) Property and Equipment
As of October 1, 2023 and July 2, 2023, property and equipment consists of:
| October 1, 2023 | July 2, 2023 | ||||||||||
| Land | $ | 99,281 | $ | 98,896 | |||||||
| Buildings and improvements | 144,585 | 139,402 | |||||||||
| Leasehold improvements | 436,000 | 383,444 | |||||||||
| Equipment, furniture, and fixtures | 509,580 | 472,146 | |||||||||
| Construction in progress | 46,998 | 43,271 | |||||||||
| 1,236,444 | 1,137,159 | ||||||||||
| Accumulated depreciation | (463,387) | (439,309) | |||||||||
| Property and equipment, net of accumulated depreciation | $ | 773,057 | $ | 697,850 | |||||||
The following table shows depreciation expense related to property and equipment for each reporting period:
| Three Months Ended | |||||||||||
| October 1, 2023 | October 2, 2022 | ||||||||||
| Depreciation expense | $ | 24,178 | $ | 20,339 | |||||||
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(6) Leases
The Company leases various assets under non-cancellable operating and finance leases. These assets include bowling entertainment centers, office space, vehicles, and equipment.
Most of our leases contain payments for some or all of the following: base rent, contingent rent, common area maintenance, insurance, real-estate taxes, and other operating expenses. Rental payments are subject to escalation depending on future changes in designated indices or based on pre-determined amounts agreed upon at lease inception.
The following table summarizes the components of the net lease cost for the three months ended October 1, 2023:
| Lease Costs: | Location on Consolidated Statements of Operations | October 1, 2023 | ||||||||||||
Operating Lease Costs: (1) | ||||||||||||||
| Operating lease costs associated with master leases | Primarily cost of revenues | $ | 4,428 | |||||||||||
| Operating lease costs associated with non-master leases | Primarily cost of revenues | 11,577 | ||||||||||||
| Gains from modifications to operating leases | Other operating expense | (499) | ||||||||||||
| Finance Lease Costs: | ||||||||||||||
| Amortization of right-of-use assets | Primarily cost of revenues | 4,111 | ||||||||||||
| Interest on lease liabilities | Interest expense, net | 12,021 | ||||||||||||
| Financing Obligation Costs: | ||||||||||||||
| Interest expense | Interest expense, net | 106 | ||||||||||||
Variable lease cost (2) | Primarily cost of revenues | 18,003 | ||||||||||||
Short-term lease cost (3) | Cost of revenues; SG&A | 250 | ||||||||||||
| Sublease income | Revenues | (1,304) | ||||||||||||
| Total net lease costs | $ | 48,693 | ||||||||||||
(1)This represents cash and non-cash lease costs for operating leases. Operating lease costs are recognized evenly over the remaining lease term and differ from the actual cash payments made for our leases. Cash payments and lease costs can differ due to the timing of cash payments relative to straight-line rent expense, non-cash adjustments as a result of purchase accounting, and various other non-cash adjustments to lease costs. Please see the table below for cash paid for our leases.
(2)This includes variable leases costs such as utilities, common area maintenance, property insurance, real estate taxes, and percentage rent
(3)Sublease income primarily represents short-term leases with pro-shops and various retail tenants
Supplemental cash flow information related to leases for the three months ended October 1, 2023:
| October 1, 2023 | ||||||||
Cash paid for amounts included in the measurement of lease liabilities (1) | ||||||||
| Operating cash flows paid for operating leases | 15,393 | |||||||
| Operating cash flows paid for interest portion of finance leases | 11,062 | |||||||
| Financing cash flows paid for principal portion of finance leases | 1,576 | |||||||
| Operating cash flows paid for interest portion of financing obligations | 113 | |||||||
(1)This table includes cash paid for amounts included in the measurement of our lease liabilities. Since the lease liability only includes amounts that are contractually fixed, this table excludes cash paid for amounts that are variable in nature, such as utilities, common area maintenance, property insurance, real estate taxes, and percentage rent.
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(7) Accounts Payable and Accrued Expenses
As of October 1, 2023 and July 2, 2023, accounts payable and accrued expenses consist of:
| October 1, 2023 | July 2, 2023 | ||||||||||
| Accounts Payable | $ | 57,304 | $ | 53,513 | |||||||
| Customer deposits | 20,855 | 12,703 | |||||||||
| Taxes and licenses | 15,398 | 13,076 | |||||||||
| Deferred revenue | 10,700 | 7,144 | |||||||||
| Compensation | 10,998 | 14,670 | |||||||||
| Professional fees | 8,136 | 4,307 | |||||||||
| Insurance | 6,633 | 6,168 | |||||||||
| Utilities | 5,248 | 4,607 | |||||||||
| Interest | 1,497 | 904 | |||||||||
| Other | 4,395 | 4,134 | |||||||||
| Total accrued expenses | $ | 141,164 | $ | 121,226 | |||||||
(8) Debt
The following table summarizes the Company’s debt structure as of October 1, 2023 and July 2, 2023:
| October 1, 2023 | July 2, 2023 | ||||||||||
Term Loan (Maturing February 8, 2028 and bearing variable rate interest; 8.82% and 8.65% at October 1, 2023 and July 2, 2023, respectively) | $ | 1,147,125 | $ | 1,150,000 | |||||||
Revolver (Maturing December 15, 2026 and bearing variable rate interest; 7.92% at October 1, 2023) | 140,000 | — | |||||||||
Other Equipment Loan (Maturing August 19, 2029 and bearing a fixed interest rate; 6.24%) | 14,728 | 14,662 | |||||||||
| 1,301,853 | 1,164,662 | ||||||||||
| Less: | |||||||||||
| Unamortized financing costs | (15,887) | (16,637) | |||||||||
| Current portion of unamortized financing costs | 3,182 | 3,123 | |||||||||
| Current maturities of long-term debt | (12,777) | (12,461) | |||||||||
| Total long-term debt | $ | 1,276,371 | $ | 1,138,687 | |||||||
Term Loan: The Term Loan matures on February 8, 2028 and is repaid on a quarterly basis in principal payments of $2,875, which began on September 29, 2023. The Term Loan bears interest at a rate per annum equal to the Adjusted Term SOFR plus 3.50%. Interest is due on the last day of the interest period. The interest period, as agreed upon between the Company and its lender, can be either , , or six months in length. As of October 1, 2023, the interest period is one month.
Revolver: Under the First Lien Credit Agreement, the Company has access to a senior secured revolving credit facility (the “Revolver”). As of October 1, 2023, the Revolver commitment is $235,000. The outstanding balance on the Revolver is due on December 15, 2026. Interest on borrowings under the Revolver is based on the Adjusted Term SOFR.
First Lien Credit Agreement Covenants: Obligations owed under the First Lien Credit Agreement 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. The Company 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 amounts outstanding on the Revolver exceed an amount equal to 35% of the aggregate Revolver commitment (subject to certain exclusions) at the end of such fiscal quarter. In addition, payment of borrowings under the Revolver may be accelerated if there is an event of default, and Bowlero would no longer be permitted to borrow additional funds under the Revolver while a default or event of default were outstanding.
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Letters of Credit: Outstanding standby letters of credit as of October 1, 2023 and July 2, 2023 totaled $10,386, and are guaranteed by JP Morgan Chase Bank, N.A. The available amount of the Revolver is reduced by the outstanding standby letters of credit.
Other Equipment Loan: On August 19, 2022, the Company entered into an equipment loan agreement for a principal amount of $15,350 with JP Morgan Chase Bank, N.A.. The loan matures August 19, 2029 and bears a fixed interest rate of 6.24%. The loan is repaid on a monthly basis in fixed payments of $153 plus a final payment at maturity. The loan obligation is secured by a lien on the equipment.
Covenant Compliance: The Company was in compliance with all debt covenants as of October 1, 2023.
Interest rate collars: The Company entered into two interest rate collars effective as of March 31, 2023 for an aggregate notional amount of our Term Loan of $800,000. The collar hedging strategy stabilizes interest rate fluctuations by setting both a floor and a cap. The hedge transactions have a trade and hedge designation date of April 4, 2023. The hedge transactions, each for a notional amount of $400,000, provide for interest rate collars. The interest rate collars establish a floor on SOFR of 0.9429% and 0.9355%, respectively, and a cap on SOFR of 5.50%. The interest rate collars have a maturity date of March 31, 2026.
The fair value of the collar agreements as of October 1, 2023 and July 2, 2023 was an asset of $4,145 and $4,608, respectively, and is included within other current assets and other assets in the consolidated balance sheet.
Since SOFR was within the collar cap and floor rates, there was no interest impact on the statement of income.
(9) Income Taxes
The Company uses the estimated annual effective tax rate method for calculating its tax provision in interim periods, which represents the Company's best estimate of the effective tax rate expected for the full year. Certain items, including those deemed to be unusual, infrequent or that cannot be reliably estimated (discrete items), are excluded from the estimated annual effective tax rate, and the related tax expense or benefit is reported in the same period as the related item. The Company’s effective tax rate for the three months ended October 1, 2023 was (113.4)%, which differs from the US federal statutory rate of 21% primarily due to income recognized in the period for book purposes associated with the change in fair value of the earnout liability which is treated as a discrete tax item and not included as taxable income. The Company’s effective tax rate for the three months ended October 2, 2022 was (1.3)% and differs from the US federal statutory rate of 21% due to certain non-deductible expenses, changes in the valuation allowance, and state and local taxes.
(10) Commitments and Contingencies
Litigation and Claims: The Company is currently, and from time to time may be, subject to claims and actions arising in the ordinary course of its business, including general liability, fidelity, workers’ compensation, employment claims, and Americans with Disabilities Act (“ADA”) claims. The Company has insurance to cover general liability and workers’ compensation claims and reserves for claims and actions in the ordinary course. The insurance is subject to a self-insured retention. In some actions, plaintiffs request punitive or other damages that may not be covered by insurance.
There is currently a group of approximately 73 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 55 of the charges, which the Company contests and intends to defend vigorously. The EEOC has also alleged a pattern or practice of age discrimination, which resulted in a determination of probable cause and, on August 22, 2022, the EEOC submitted a proposal for the Company to participate in the conciliation process. The EEOC’s proposal included a demand for monetary and non-monetary remedies. On April 11, 2023, the EEOC provided notice to the Company that its conciliation efforts were unsuccessful; moreover, the Company continues to contest the determinations issued by the EEOC with respect to all charges and intends to defend vigorously. The Company cannot estimate reasonably possible range of loss, if any, associated with these EEOC matters.
(11) Earnouts
There were 11,418,357 unvested earnout shares outstanding as of October 1, 2023 and July 2, 2023.
The outstanding unvested earnout shares will vest if the closing share price of Bowlero’s Class A common stock equals or exceeds $17.50 per share for any 10 trading days within any consecutive 20 trading day period that occurs from December 15, 2021 through December 15, 2026.
All but 54,686 earnout shares are classified as a liability and changes in the fair value of the earnout shares are 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.
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(12) Fair Value of Financial Instruments
Debt
The fair value and carrying value of our debt as of October 1, 2023 and July 2, 2023 are as follows:
| October 1, 2023 | July 2, 2023 | ||||||||||
| Carrying value | $ | 1,301,853 | $ | 1,164,662 | |||||||
| Fair value | 1,293,808 | 1,158,912 | |||||||||
The fair value of our debt is estimated based on trading levels of lenders buying and selling their participation levels of funding (Level 2).
There were no transfers in or out of any of the levels of the valuation hierarchy during the three months ended October 1, 2023 and the fiscal year ended July 2, 2023.
Items Measured at Fair Value on a Recurring Basis
The Company holds certain assets and liabilities that are required to be measured at fair value on a recurring basis. The following table is a summary of fair value measurements and hierarchy level as of October 1, 2023 and July 2, 2023:
| October 1, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Interest rate collars | $ | — | $ | 4,145 | $ | — | $ | 4,145 | |||||||||||||||
| Total assets | $ | — | $ | 4,145 | $ | — | $ | 4,145 | |||||||||||||||
| Earnout shares | $ | — | $ | — | $ | 71,364 | $ | 71,364 | |||||||||||||||
| Total liabilities | $ | — | $ | — | $ | 71,364 | $ | 71,364 | |||||||||||||||
| July 2, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Interest rate collars | — | 4,608 | — | 4,608 | |||||||||||||||||||
| Total assets | $ | — | $ | 4,608 | $ | — | $ | 4,608 | |||||||||||||||
| Earnout shares | $ | — | $ | — | $ | 112,041 | $ | 112,041 | |||||||||||||||
| Total liabilities | $ | — | $ | — | $ | 112,041 | $ | 112,041 | |||||||||||||||
The fair value of earnout shares was estimated using a Monte Carlo simulation model (level 3 inputs). The key inputs into the Monte Carlo simulation as of October 1, 2023 were as follows:
| October 1, 2023 | |||||
| Expected term in years | 3.21 | ||||
| Expected volatility | 50% | ||||
| Risk-free interest rate | 4.78% | ||||
| Stock price | $9.62 | ||||
| Dividend yield | — | ||||
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The following table sets forth a summary of changes in the estimated fair value of the Company's Level 3 Earnout liability for the periods ended October 1, 2023 and October 2, 2022:
| Three Months Ended | |||||||||||
| October 1, 2023 | October 2, 2022 | ||||||||||
| Balance as of beginning of period | $ | 112,041 | $ | 210,952 | |||||||
| Issuances | 5 | 67 | |||||||||
| Changes in fair value | (40,682) | 40,760 | |||||||||
| Balance as of end of period | $ | 71,364 | $ | 251,779 | |||||||
Items Measured at Fair Value on a Non-Recurring Basis
The Company’s significant assets measured at fair value on a non-recurring basis subsequent to their initial recognition include assets held for sale. We utilize third party brokers for an estimate of value to record the assets held for sale at their fair value less costs to sell. These inputs are classified as Level 2 fair value measurements.
Other Financial Instruments
Other financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable and accrued expenses. The financial statement carrying amounts of these items approximate the fair value due to their short duration.
(13) Common Stock, Preferred Stock and Stockholders’ Equity
The Company is authorized to issue three classes of stock to be designated, respectively, Class A common stock, Class B common stock (together with Class A common stock, the “Common Stock”) and Series A preferred stock (the “Preferred Stock”). The total number of shares of capital stock which the Company shall have authority to issue is 2,400,000,000, divided into the following:
Class A common stock:
•Authorized: 2,000,000,000 shares, with a par value of $0.0001 per share as of October 1, 2023 and July 2, 2023.
•Issued and Outstanding: 97,850,605 shares (inclusive of 1,595,485 shares contingent on certain stock price thresholds but excluding 23,443,487 shares held in treasury) as of October 1, 2023 and 107,666,301 shares (inclusive of 1,595,930 shares contingent on certain stock price thresholds but excluding 11,312,302 shares held in treasury) as of July 2, 2023.
Class B common stock:
•Authorized: 200,000,000 shares, with a par value of $0.0001 per share as of October 1, 2023 and July 2, 2023.
•Issued and Outstanding: 58,519,437 and 60,819,437 shares as of October 1, 2023 and July 2, 2023, respectively.
Preferred Stock:
•Authorized: 200,000,000 shares, with a par value of $0.0001 per share as of October 1, 2023 and July 2, 2023.
•Issued and Outstanding: 136,373 shares as of October 1, 2023 and July 2, 2023.
Series A Preferred Stock
Dividends accumulate on a cumulative basis on a 360-day year commencing from the issue date. The dividend rate is fixed at 5.5% per annum on a liquidation preference of $1,000 per share. Payment dates are June 30 and December 31 of each year with a record date of June 15 for the June 30 payment date and December 15 for the December 31 payment date. 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. For the period ended October 1, 2023, there were no dividends declared or paid in cash on the Preferred Stock. For the period ended October 1, 2023, no accumulated dividends were added to the liquidation preference and deemed to be declared and paid in-kind. For the period ended October 1, 2023, dividends in the amount of $1,962 were accumulated on the Preferred Stock.
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Shares Repurchase Program
On February 7, 2022, the Company announced that its Board of Directors authorized a share repurchase program providing for repurchases of up to $200,000 of the Company’s outstanding Class A common stock through February 3, 2024. On September 6, 2023, the Board of Directors authorized a second replenishment of the share repurchase program to $200,000. Treasury stock purchases are stated at cost and presented as a reduction of equity on the condensed consolidated balance sheets. Repurchases of shares are made in accordance with applicable securities laws and may be made from time to time in the open market or by negotiated transactions. The amount and timing of repurchases are based on a variety of factors, including stock price, regulatory limitations, debt agreement limitations, and other market and economic factors. The share repurchase plan does not require the Company to repurchase any specific number of shares, and the Company may terminate the repurchase plan at any time.
As of October 1, 2023, the remaining balance of the repurchase plan was $134,369. For the quarter ended October 1, 2023, 12,131,185 shares of Class A common stock were repurchased for a total of $131,350, for an average purchase price per share of $10.83.
(14) Share-Based Compensation
The Company has three stock plans: the 2017 Stock Incentive Plan (“2017 Plan”), the Bowlero Corp. 2021 Omnibus Incentive Plan (“2021 Plan”) and the Bowlero Corp. Employee Stock Purchase Plan (“ESPP”). These stock incentive plans are designed to attract and retain key personnel by providing them the opportunity to acquire equity interest in the Company and align the interest of key personnel with those of the Company’s stockholders.
As of October 1, 2023 and July 2, 2023, the total compensation cost not yet recognized is as follows:
| Award Plan | October 1, 2023 | July 2, 2023 | |||||||||||||||
| Stock options | 2021 Plan | $ | 23,901 | $ | 31,032 | ||||||||||||
| Service based RSUs | 2021 Plan | 4,615 | 5,743 | ||||||||||||||
| Market and service based RSUs | 2021 Plan | 1,120 | 1,351 | ||||||||||||||
| Earnout RSUs | 2021 Plan | 276 | 300 | ||||||||||||||
| ESPP | 240 | 378 | |||||||||||||||
| Total unrecognized compensation cost | $ | 30,152 | $ | 38,804 | |||||||||||||
Share-based compensation recognized in the consolidated statement of operations for the three months ended October 1, 2023 and October 2, 2022 is as follows:
| Three Months Ended | |||||||||||||||||
| Award Plan | October 1, 2023 | October 2, 2022 | |||||||||||||||
| Stock options | 2021 Plan | $ | 669 | $ | 2,358 | ||||||||||||
| Service based RSUs | 2021 Plan | 914 | 982 | ||||||||||||||
| Market and service based RSUs | 2021 Plan | 170 | 141 | ||||||||||||||
| Earnout RSUs | 2021 Plan | 20 | 45 | ||||||||||||||
| ESPP | 138 | 122 | |||||||||||||||
| Total share-based compensation expense | $ | 1,911 | $ | 3,648 | |||||||||||||
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(15) Net Income (Loss) Per Share
The computation of basic and diluted net income (loss) per share of Class A common stock and Class B common stock is as follows:
Three Months Ended | |||||||||||||||||||||||||||||||||||
| October 1, 2023 | October 2, 2022 | ||||||||||||||||||||||||||||||||||
| Class A | Class B | Total | Class A | Class B | Total | ||||||||||||||||||||||||||||||
| Numerator | |||||||||||||||||||||||||||||||||||
| Net income (loss) allocated to common stockholders | $ | 9,465 | $ | 5,743 | $ | 15,208 | $ | (23,860) | $ | (12,475) | $ | (36,335) | |||||||||||||||||||||||
| Denominator | |||||||||||||||||||||||||||||||||||
| Weighted-average common shares outstanding | 100,160,503 | 60,768,888 | 160,929,391 | 106,943,394 | 55,911,203 | 162,854,597 | |||||||||||||||||||||||||||||
| Net income (loss) per share, basic | $ | 0.09 | $ | 0.09 | $ | 0.09 | $ | (0.22) | $ | (0.22) | $ | (0.22) | |||||||||||||||||||||||
Three Months Ended | |||||||||||||||||||||||||||||||||||
| October 1, 2023 | October 2, 2022 | ||||||||||||||||||||||||||||||||||
| Class A | Class B | Total | Class A | Class B | Total | ||||||||||||||||||||||||||||||
| Numerator | |||||||||||||||||||||||||||||||||||
| Net income (loss) allocated to stockholders | $ | 9,465 | $ | 5,743 | $ | 15,208 | $ | (23,860) | $ | (12,475) | $ | (36,335) | |||||||||||||||||||||||
| Denominator | |||||||||||||||||||||||||||||||||||
| Weighted-average common shares outstanding | 100,160,503 | 60,768,888 | 160,929,391 | 106,943,394 | 55,911,203 | 162,854,597 | |||||||||||||||||||||||||||||
| Impact of incremental shares | 2,517,655 | 5,456,462 | 7,974,117 | * | * | * | |||||||||||||||||||||||||||||
| Total | 102,678,158 | 66,225,350 | 168,903,508 | 106,943,394 | 55,911,203 | 162,854,597 | |||||||||||||||||||||||||||||
| Net income (loss) per share, diluted | $ | 0.09 | $ | 0.09 | $ | 0.09 | $ | (0.22) | $ | (0.22) | $ | (0.22) | |||||||||||||||||||||||
*The impact of 25,124,943 potentially dilutive convertible preferred stock, service based RSUs, stock options, and purchases of shares under our ESPP were excluded from the diluted per share calculations because they would have been antidilutive.
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(16) Supplemental Cash Flow Information
| October 1, 2023 | October 2, 2022 | ||||||||||
| Cash paid during the period for: | |||||||||||
Interest (1) | $ | 36,651 | $ | 18,517 | |||||||
| Income taxes, net of refunds | 28 | 2,519 | |||||||||
| Noncash investing and financing transactions: | |||||||||||
| Capital expenditures in accounts payable | 24,313 | 10,695 | |||||||||
| Change in fair value of interest rate collars | (463) | — | |||||||||
| Unsettled trade payable | 8,329 | 1,999 | |||||||||
| Excise tax | 1,312 | — | |||||||||
(1)Includes cash paid for the interest portion on finance leases. See Note 6 - Leases for more information
(17) Subsequent Events
On October 19, 2023, the Company entered into a transaction with VICI Properties Inc. (“VICI”) relating to the transfer of land and real estate assets of 38 bowling entertainment centers for an aggregate value of $432,900, in which we received cash proceeds of $404,800. The Company then entered into a triple-net master lease agreement with VICI for an initial term of 25 years, with six 5-year tenant renewal options.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This discussion should be read in conjunction with Bowlero Corp.’s unaudited condensed consolidated financial statements and the related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended July 2, 2023 as filed with the Securities and Exchange Commission (“SEC”) on September 11, 2023. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended July 2, 2023. Actual results may differ materially from those contained in any forward-looking statements. All period references are to our fiscal periods unless otherwise indicated. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “we,” “us,” “our,” the “Company,” and “Bowlero” are intended to mean the business and operations of Bowlero Corp. and its consolidated subsidiaries. All financial information in this section is presented in thousands, unless otherwise noted, except share and per share amounts.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements regarding, among other things, the plans, strategies and prospects, both business and financial of Bowlero. These statements are based on the beliefs and assumptions of our management. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that it will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Generally, statements that are not historical facts, including statements concerning possible or assumed future actions, business strategies, events or results of operations, are forward-looking statements. The words “anticipates,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predicts,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, statements about our business strategy, financial projections, anticipated growth and market opportunities.
These forward-looking statements are based on information available as of the date of this Quarterly Report on Form 10-Q, and current expectations, forecasts and assumptions, and involve a number of risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
In addition, statements that we “believe,” and similar statements reflect only our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on
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Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and these statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Factors that could cause our actual results to differ include those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended July 2, 2023.
Overview
Bowlero Corp. is the world’s largest operator of bowling entertainment centers. The Company operates traditional bowling centers and more upscale entertainment concepts with lounge seating, arcades, enhanced food and beverage offerings, and more robust customer service for individuals and group events, as well as hosting and overseeing professional and non-professional bowling tournaments and related broadcasting.
The Company remains focused on creating long-term shareholder value through continued organic growth, the conversion and upgrading of centers to more upscale entertainment concepts offering a broader range of offerings, the opening of new centers and acquisitions.
Recent Developments
Bowlero’s results for the quarter ended October 1, 2023 exhibited the planned fiscal year 2024 reinvestment in the business through acquisitions, new builds, and conversions. To highlight the Company’s recent activity during the quarter ended October 1, 2023 and through the filing of this Quarterly Report on Form 10-Q:
•We made three acquisitions in which we acquired 17 bowling entertainment centers during the quarter ended October 1, 2023. We have signed two agreements to acquire two additional centers as of October 1, 2023, which are expected to close in the second quarter of fiscal year 2024.
•We completed and opened one new build-out during the quarter ended October 1, 2023 and have a total of seven signed agreements for build-outs in prime markets.
•Renovations and remodels are underway at 14 bowling centers.
•We entered into a transaction with VICI Properties Inc. (“VICI”) on October 19, 2023 relating to the transfer of land and real estate assets of 38 bowling entertainment centers for an aggregate value of $432,900.
Trends
There are a number of factors that could to materially affect our future profitability, including changing economic conditions with the resulting impact on our sales, profitability, and capital spending, changes in our debt levels and applicable interest rates, and increasing prices of labor, raw materials and other food and beverage costs. Additionally, sales and results of operations could be impacted by acquisitions and restructuring projects. Restructuring can include various projects, including closure of centers not performing well, cost reductions through staffing reductions, and optimizing and allocating resources to improve profitability.
Our operating results fluctuate seasonally. We typically generate our highest sales volumes during the third quarter of each fiscal year due to the timing of leagues, holidays and changing weather conditions. School operating schedules, holidays and weather conditions may also affect our sales volumes in some operating regions differently than others. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for our full fiscal year.
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Presentation of Results of Operations
The Company reports on a fiscal year, with each quarter generally comprised of one 5-week period and two 4-week periods.
Results of Operations
Three Months Ended October 1, 2023 Compared to the Three Months Ended October 2, 2022
Analysis of Consolidated Statement of Operations. The following table displays certain items from our consolidated statements of operations for the quarters presented below:
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||
| (in thousands) | October 1, 2023 | %(1) | October 2, 2022 | %(1) | Change | % Change | ||||||||||||||||||||||||||||||||
| Revenues | $ | 227,405 | 100.0 | % | $ | 230,260 | 100.0 | % | $ | (2,855) | (1.2) | % | ||||||||||||||||||||||||||
| Costs of revenues | 182,921 | 80.4 | % | 165,202 | 71.7 | % | 17,719 | 10.7 | % | |||||||||||||||||||||||||||||
| Gross profit | 44,484 | 19.6 | % | 65,058 | 28.3 | % | (20,574) | (31.6) | % | |||||||||||||||||||||||||||||
| Operating (income) expenses: | ||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 37,765 | 16.6 | % | 32,494 | 14.1 | % | 5,271 | 16.2 | % | |||||||||||||||||||||||||||||
| Asset impairment | 26 | — | % | 84 | — | % | (58) | (69.0) | % | |||||||||||||||||||||||||||||
| Gain on sale or disposal of assets | (27) | — | % | (155) | (0.1) | % | (128) | (82.6) | % | |||||||||||||||||||||||||||||
| Other operating expense | 1,364 | 0.6 | % | 1,362 | 0.6 | % | 2 | 0.1 | % | |||||||||||||||||||||||||||||
| Total operating expense | 39,128 | 17.2 | % | 33,785 | 14.7 | % | 5,343 | 15.8 | % | |||||||||||||||||||||||||||||
| Operating profit | 5,356 | 2.4 | % | 31,273 | 13.6 | % | (25,917) | (82.9) | % | |||||||||||||||||||||||||||||
| Other (income) expenses: | ||||||||||||||||||||||||||||||||||||||
| Interest expense, net | 37,449 | 16.5 | % | 23,570 | 10.2 | % | 13,879 | 58.9 | % | |||||||||||||||||||||||||||||
| Change in fair value of earnout liability | (40,682) | (17.9) | % | 40,760 | 17.7 | % | (81,442) | * | ||||||||||||||||||||||||||||||
| Other expense | 53 | — | % | 48 | — | % | 5 | 10.4 | % | |||||||||||||||||||||||||||||
| Total other (income) expense | (3,180) | (1.4) | % | 64,378 | 28.0 | % | (67,558) | * | ||||||||||||||||||||||||||||||
| Income (loss) before income tax (benefit) expense | 8,536 | 3.8 | % | (33,105) | (14.4) | % | 41,641 | * | ||||||||||||||||||||||||||||||
| Income tax (benefit) expense | (9,683) | (4.3) | % | 429 | 0.2 | % | (10,112) | * | ||||||||||||||||||||||||||||||
| Net income (loss) | $ | 18,219 | 8.0 | % | $ | (33,534) | (14.6) | % | 51,753 | * | ||||||||||||||||||||||||||||
___________
(1) Percent calculated as a percentage of revenues and may not total due to rounding.
*Represents a change equal to or in excess of 100% or one that is not meaningful.
Revenues: For the quarter ended October 1, 2023, revenues totaled $227,405 and represented a decrease of $2,855, or 1%, over the same period of last fiscal year. The decrease in revenues is primarily attributable to a decrease in same-store revenue. The following table summarizes the decrease in the Company’s revenue on a same-store-basis for the quarter ended October 1, 2023 as compared to the corresponding period last fiscal year:
| Three Months Ended | |||||||||||||||||||||||
| (in thousands) | October 1, 2023 | October 2, 2022 | Change | % Change | |||||||||||||||||||
Center revenues on a same-store basis (1) | $ | 209,146 | $ | 224,668 | $ | (15,522) | (6.9) | % | |||||||||||||||
| Revenues for media, new and closed centers | 18,259 | 5,592 | 12,667 | 226.5 | % | ||||||||||||||||||
| Total revenues | $ | 227,405 | $ | 230,260 | $ | (2,855) | (1.2) | % | |||||||||||||||
(1) Revenues from 312 centers are included in the same-store comparable center base for the comparison in the above table. In our previously filed 10-Q for the three months ended October 2, 2022, revenues from 291 centers were included in the same-store
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comparable center base for the comparison to the three months ended September 26, 2021. The comparable center base changes from period to period as a result of fluctuations in the center population through acquisitions, new builds and closed centers.
Same-store revenues includes revenue from centers that are open in periods presented (open in both the current period and the prior period being reported) and excludes revenues from centers that are not open in periods presented such as acquired new centers or centers closed for upgrades, renovations or other such reasons, as well as media revenues. The decrease in same-store revenues during the quarter ended October 1, 2023 reflects, among other factors, a reduction in walk-in or retail business relative to the consumer environment during the same period of last fiscal year, which was partially offset by increased league and group event business.
Cost of Revenues: Cost of revenues increased $17,719, or 11%. Increases in costs were in most areas and include labor, supplies, repairs & maintenance, depreciation, rent, and utilities. The increase in costs was mainly attributable to bowling center count growth from acquisitions and lease agreements since the first quarter of fiscal 2023 coupled with higher costs due to inflation. For instance, the increase in labor costs reflects the additional staffing and higher pay rates to support the growing business and leave it in a strong position to maximize results in the key second and third quarters of the fiscal year. Furthermore, the increase in depreciation reflects the added depreciable assets through acquisitions and capital expenditures. Cost of revenues as a percent of revenues increased from 72% during the first quarter of fiscal 2023 to almost 80% during the first quarter of fiscal 2024, mainly due to the aforementioned costs increasing at a faster rate than revenues.
Selling, general and administrative expenses (“SG&A”): SG&A expenses increased $5,271 or 16% to $37,765, mainly due to the increases in compensation and benefits and professional fees. The increase in compensation reflects the increases in pay rates and higher staffing to support the growing business. The increase in professional fees is mainly attributable to the heightened acquisition activity (inclusive of activity by the Company to pursue potential acquisitions) and scale of acquisitions as compared to the first quarter of fiscal 2023. The aforementioned increases were partially offset by lower share-based compensation expense due to forfeitures. Total SG&A expenses as a percent of revenues for the first quarter of fiscal 2024 was approximately 17% as compared to 14% during the corresponding period last fiscal year. The increase in SG&A costs as a percent of revenues is mainly due to the certain costs, including compensation-related costs and professional fees, increasing at a faster rate than revenues.
Interest expense, net: Interest expense primarily relates to interest on debt and finance leases. Interest expense increased $13,879, or 59%, to $37,449. The higher interest expense is primarily the result of higher interest rates and our increased debt and finance lease obligations.
Change in fair value of earnouts: The favorable impact on the statement of operations during the quarter ended October 1, 2023 is mainly due to the decrease in the fair value of the earnouts, which mainly reflects the decrease in the Company’s stock price in the current quarter.
Income Taxes: Income tax (benefit) expense and deferred tax assets and liabilities reflect management’s assessment of the Company’s tax position. The effective tax rate of (113.4)% for the quarter ended October 1, 2023 was primarily attributed to income recognized for book purposes in the period associated with the change in fair value of the earnout liability which is treated as a discrete tax item and not included as taxable income. The effective tax rate of (1.3)% for the quarter ended October 2, 2022 was primarily attributed to state income tax expense and certain non-deductible expenses offset in part by changes in the valuation allowance.
Non-GAAP measure
Adjusted EBITDA is a non-GAAP financial measure that is not in accordance with, or an alternative to, measures prepared in accordance with GAAP. The Company believes certain financial measures which meet the definition of non-GAAP financial measures provide important supplemental information. The Company considers Adjusted EBITDA as an important financial measure because it provides a financial measure of the quality of the Company’s earnings. Other companies may calculate Adjusted EBITDA differently than we do, which might limit its usefulness as a comparative measure. Adjusted EBITDA is used by management in addition to and in conjunction with the results presented in accordance with GAAP. We have presented Adjusted EBITDA solely as a supplemental disclosure because we believe it allows for a more complete analysis of results of operations and assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, such as Interest Expense, Income Taxes, Depreciation and Amortization, Impairment Charges, Share-based Compensation, EBITDA from Closed Centers, Foreign Currency Exchange Loss (Gain), Asset Disposition Loss (Gain), Transactional and other advisory costs, Changes in the value of earnouts, and Other. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.
Refer to notes below for additional details concerning the respective items for Adjusted EBITDA.
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The following table provides a reconciliation from net income (loss) to Adjusted EBITDA for the three months ended October 1, 2023 and October 2, 2022:
| October 1, 2023 | October 2, 2022 | |||||||||||||
| Net income (loss) | $ | 18,219 | $ | (33,534) | ||||||||||
| Adjustments: | ||||||||||||||
| Interest expense | 39,032 | 23,570 | ||||||||||||
| Income tax (benefit) expense | (9,683) | 429 | ||||||||||||
| Depreciation, amortization and impairment charges | 32,026 | 26,351 | ||||||||||||
| Share-based compensation | 1,911 | 3,648 | ||||||||||||
Closed center EBITDA (1) | 2,462 | 379 | ||||||||||||
| Foreign currency exchange loss (gain) | 79 | (71) | ||||||||||||
| Asset disposition gain | (27) | (155) | ||||||||||||
Transactional and other advisory costs (2) | 8,398 | 4,166 | ||||||||||||
Changes in the value of earnouts (3) | (40,682) | 40,760 | ||||||||||||
Other, net (4) | 399 | (234) | ||||||||||||
| Adjusted EBITDA | $ | 52,134 | $ | 65,309 | ||||||||||
Notes to Adjusted EBITDA:
(1)The closed center adjustment is to remove EBITDA for closed centers. Closed centers are those centers that are closed for a variety of reasons, including permanent closure, newly acquired or built centers prior to opening, centers closed for renovation or rebranding and conversion. If a center is not open on the last day of the reporting period, it will be considered closed for that reporting period. If the center is closed on the first day of the reporting period for permanent closure, the center will be considered closed for that reporting period.
(2)The adjustment for transaction costs and other advisory costs is to remove charges incurred in connection with any transaction, including mergers, acquisitions, refinancing, amendment or modification to indebtedness, dispositions and costs in connection with an initial public offering, in each case, regardless of whether consummated.
(3)The adjustment for changes in the value of earnouts is to remove of the impact of the revaluation of the earnouts. As a result of the Business Combination, the Company recorded liabilities for earnouts. Changes in the fair value of the earnout liability is recognized in the statement of operations. Decreases in the liability will have a favorable impact on the statement of operations and increases in the liability will have an unfavorable impact.
(4)Other includes the following related to transactions that do not represent ongoing or frequently recurring activities as part of the Company’s operations: (i) non-routine expenses, net of recoveries for matters outside the normal course of business and (ii) other individually de minimis expenses. Certain prior year amounts have been reclassified to conform to current year presentation.
Liquidity and Capital Resources
We manage our liquidity through assessing available cash-on-hand, our ability to generate cash and our ability to borrow or otherwise raise capital to fund operating, investing and financing activities. The Company remains in a positive financial position with available cash balances.
A core tenet of our long-term strategy is to grow the size and scale of the Company in order to improve our operating profit margins through leveraging our fixed costs. As such, one of the Company’s known cash requirements is for capital expenditures related to the construction of new centers and upgrading and converting existing centers. We believe our financial position, generation of cash, available cash on hand, existing credit facility, and access to potentially obtain additional financing from sale-lease-back transactions or other sources will provide sufficient capital resources to fund our operational requirements, capital expenditures, and material short and long-term commitments for the foreseeable future. However, there are a number of factors that may hinder our ability to access these capital resources, including but not limited to our degree of leverage and potential borrowing restrictions imposed by our lenders See “Risk Factors” included in our previously filed Annual Report on Form 10-K for the fiscal year ended July 2, 2023 for further information.
At October 1, 2023, we had approximately $40,088 of available cash and cash equivalents.
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Three Months Ended October 1, 2023 Compared To the Three Months Ended October 2, 2022
The following compares the primary categories of the consolidated statements of cash flows for the period ended October 1, 2023 and October 2, 2022:
| Three Months Ended | $ Change | |||||||||||||||||||
| (in thousands) | October 1, 2023 | October 2, 2022 | ||||||||||||||||||
| Net cash provided by operating activities | $ | 16,083 | $ | 35,573 | $ | (19,490) | ||||||||||||||
| Net cash used in investing activities | (176,576) | (62,492) | (114,084) | |||||||||||||||||
| Net cash provided by financing activities | 5,091 | 5,167 | (76) | |||||||||||||||||
| Effect of exchange rate changes on cash | (143) | (123) | (20) | |||||||||||||||||
| Net change in cash and cash equivalents | $ | (155,545) | $ | (21,875) | $ | (133,670) | ||||||||||||||
During the quarter ended October 1, 2023, net cash provided from operations totaled $16,083, as compared to $35,573 during the same period of the prior fiscal year. The decrease in cash provided by operating activities primarily reflects higher cost of revenues.
Investing activities utilized $176,576, reflecting our acquisitions of businesses and capital expenditures, as well as center conversions and related capital expenditures. The higher level of cash used in investing activities during the period mainly reflects the acquisition of Lucky Strike, which had a larger purchase price as compared to the bowling centers acquired during the same period of the prior fiscal year. We expect to continue to invest in accretive acquisitions in future periods as well as center upgrades and conversions.
Financing activities generated $5,091, reflecting proceeds from revolver draws of $140,000, partially offset by $130,140 for the repurchase of treasury stock.
Our contractual obligations primarily include, but are not limited to, debt service, self-insurance liabilities, and leasing arrangements. We believe our sources of liquidity, namely available cash on hand, positive operating cash flows, and access to capital markets will continue to be adequate to meet our contractual obligations, as well as fund working capital, planned capital expenditures, center acquisitions, and execute purchases under our share repurchase program.
On October 19, 2023, we entered into a transaction with VICI relating to the transfer of land and real estate assets of 38 bowling entertainment centers for aggregate value of $432,900. Proceeds are expected to be used to accelerate new builds, deploy capital into acquisitions and conversions, return capital to shareholders, pay down a portion of Bowlero’s debt, and for general corporate purposes. The Company then entered into a triple-net master lease agreement with VICI for an initial term of 25 years, with six 5-year tenant renewal options.
Critical Accounting Estimates
Our critical accounting estimates are discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our fiscal year 2023 Form 10-K under “Critical Accounting Estimates.” There have been no significant changes in our critical accounting estimates during the three months ended October 1, 2023.
Recently Issued Accounting Standards
For a description of recently issued Financial Accounting Standards that we adopted during the quarter ended October 1, 2023 and, that are applicable to us and likely to have material effect on our consolidated financial statements, but have not yet been adopted, see Note 1 - Description of Business and Significant Accounting Policies of the notes to Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Emerging Growth Company Accounting Election
We are currently an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in, among other things, interest rates, credit risk, labor costs, health insurance claims and foreign currency exchange rates, which could impact its results of operations and financial condition. We attempt to address our exposure to these risks through our normal operating and financing activities.
Interest Rate Risk
Under our term and revolving credit facilities, we are exposed to a certain level of interest rate risk. Interest on the principal amount of our borrowings under our revolving credit facility loan accrues at the Adjusted Term Secured Overnight Financing Rate or the Alternate Base Rate, as further described in the credit agreement governing our term and revolving credit facilities. An increase or decrease of 1.0% in the effective interest rate would cause an increase or decrease to interest expense of approximately $12,870 over a twelve month period on our outstanding debt without considering the impact of hedging. The Company entered into two hedging transactions effective as of March 31, 2023 for an aggregate notional amount of our Term Loan of $800,000. The hedge transactions have a trade and hedge designation date of April 4, 2023. The hedge transactions, each for a notional amount of $400,000, provide for interest rate collars. The interest rate collars establish a floor on SOFR of 0.9429% and 0.9355%, respectively, and a cap on SOFR of 5.50%. The interest rate collars have a maturity date of March 31, 2026.
Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist of cash and temporary investments. We are exposed to credit losses in the event of non-performance by counter parties to our financial instruments. We place cash and temporary investments with various high-quality financial institutions. Although we do not obtain collateral or other security to secure these obligations, we periodically monitor the third-party depository institutions that hold our cash and cash equivalents. Our emphasis is primarily on safety and liquidity of principal and secondarily on maximizing yield on those funds.
Commodity Price Risk
We are exposed to market price fluctuation in food, beverage, supplies and other costs such as energy. Given the historical volatility of certain of our food product prices, including proteins, produce, dairy products, and cooking oil, these fluctuations can materially impact our food costs. While our purchasing commitments partially mitigate the risk of such fluctuations, there is no assurance that supply and demand factors such as disease or inclement weather will not cause the prices of the commodities used in our food operations to fluctuate. Additionally, the cost of purchased materials may be influenced by tariffs and other trade regulations which are outside of our control. To the extent that we do not pass along cost increases to our customers, our results of operations may be adversely affected.
Inflation
We experience inflation related to our purchase of certain products that we need to operate our business. This price volatility could potentially have a material impact on our financial condition and/or our results of operations. In order to mitigate price volatility, we monitor price fluctuations and may adjust our prices accordingly, however, our ability to recover higher costs through increased pricing may be limited by the competitive environment in which we operate.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is properly and timely reported and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of October 1, 2023.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting practices or processes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during our first quarter ended October 1, 2023.
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Part II
Item 1. Legal Proceedings
For a description of all material pending legal proceedings, see Note 10 - Commitments and Contingencies of the notes to Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
There have been no material changes to our risk factors contained in Part I. Item IA. “Risk Factors” of our Annual Report on Form 10-K for the year ended July 2, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information regarding purchases of our securities made by us for the quarter ended October 1, 2023.
| Fiscal Period | Total Number of Class A Shares Purchased | Average Price Paid per Class A Share* | Total Number of Shares Purchased as Part of Publicly Announced Programs | Dollar Value of Shares That May Yet Be Purchased Under The Publicly Announced Repurchase Program* | ||||||||||||||||||||||
| July 3, 2023 to August 6, 2023 | 6,221,060 | $ | 11.45 | 6,221,060 | $ | 76,559 | ||||||||||||||||||||
| August 7, 2023 to September 3, 2023 | 510,967 | 12.02 | 510,967 | 70,418 | ||||||||||||||||||||||
| September 4, 2023 to October 1, 2023 | 5,399,158 | 9.99 | 5,399,158 | 134,369 | ||||||||||||||||||||||
| Total | 12,131,185 | $ | 10.83 | 12,131,185 | ||||||||||||||||||||||
*The average price paid per share and dollar value of shares that may yet be purchased under the plan includes any commissions paid to repurchase stock (but excludes any excise taxes).
Item 6. Exhibits
| Exhibit No. | Description | |||||||
| 31.1+ | ||||||||
| 31.2+ | ||||||||
| 32.1+ | ||||||||
| 32.2+ | ||||||||
| 101.INS | XBRL Instance Document | |||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | |||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline iXBRL document). | |||||||
____________
+ Filed herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BOWLERO CORP. | |||||||||||
| Date: | November 7, 2023 | By: | /s/ Robert M. Lavan | ||||||||
| Name: | Robert M. Lavan | ||||||||||
| Title: | Chief Financial Officer | ||||||||||
| (Principal Financial Officer) | |||||||||||
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