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ONESPAWORLD HOLDINGS Ltd - Annual Report: 2021 (Form 10-K)

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2021

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from                      to                     

Commission File Number: 001-38843

 

 

OneSpaWorld Holdings Limited

(Exact name of registrant as specified in its charter)

 

 

 

Commonwealth of The Bahamas

 

Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

Harry B. Sands, Lobosky Management Co. Ltd.

Office Number 2

Pineapple Business Park
Airport Industrial Park

P.O. Box N-624

 Nassau, Island of New Providence, Commonwealth of The Bahamas 

 

Not Applicable

(Address of principal executive offices)

 

(Zip code)

 

 

Registrant’s telephone number, including area code: (242) 322-2670

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on

which registered

Common Shares, par value (U.S.) $0.0001 per share

 

OSW

 

The Nasdaq Capital Market

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.       Yes      No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.      Yes      No

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes      No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).      Yes      No

The aggregate market value of the registrant’s common shares held by non-affiliates was $659,091,058 as of June 30, 2021, based on the closing price of the common stock on the Nasdaq Capital Market on June 30, 2021, which is the last business day of the registrant’s most recently completed second fiscal quarter. Shares of the registrant’s common stock held by each director and executive officer and by each entity or person that, to the registrant’s knowledge, owned 10% or more of the registrant’s outstanding common shares as of June 30, 2021 have been excluded from this number in that these persons may be deemed affiliates of the registrant. This determination of affiliate status is not necessarily conclusive for other purposes.

As of February 25, 2022, the registrant had 78,646,455 voting shares and 13,421,914 non-voting shares of common stock issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our Proxy Statement prepared for our 2022 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

 

 


Table of Contents

 

TABLE OF CONTENTS

 

 

Page

 

 

PART I

2

 

 

ITEM 1. BUSINESS

2

 

 

ITEM 1A. RISK FACTORS

14

 

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

30

 

 

ITEM 2. PROPERTIES

30

 

 

ITEM 3. LEGAL PROCEEDINGS

30

 

 

ITEM 4. MINE SAFETY DISCLOSURES

30

 

 

PART II

30

 

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

30

 

 

ITEM 6. SELECTED FINANCIAL DATA

31

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

34

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

46

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

48

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

48

 

 

ITEM 9A. CONTROLS AND PROCEDURES

48

 

 

ITEM 9B. OTHER INFORMATION

48

 

 

PART III

48

 

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

48

 

 

ITEM 11. EXECUTIVE COMPENSATION

48

 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

49

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

49

 

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

49

 

 

PART IV

50

 

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

50

 

 

 

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OneSpaWorld Holdings Limited (“OneSpaWorld,” the “Company,” “we,” “our, “us” and other similar terms refer to OneSpaWorld Holdings Limited and its consolidated subsidiaries).

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

From time to time, including in this report and other disclosures, we may issue “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views about future events and are subject to known and unknown risks, uncertainties and other factors which may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We attempt, whenever possible, to identify these statements by using words like “will,” “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “forecast,” “future,” “intend,” “plan,” “estimate” and similar expressions of future intent or the negative of such terms.

 

Such forward-looking statements include statements impacted by or statements regarding:

 

the impact of COVID-19 on the industries in which the Company operates and the Company’s business, operations, results of operations and financial condition, including cash flows and liquidity;

 

the demand for the Company’s services together with the possibility that the Company may be adversely affected by other economic, business, and/or competitive factors or changes in the business environment in which the Company operates;

 

changes in consumer preferences or the markets for the Company’s services and products;

 

changes in applicable laws or regulations;

 

competition for the Company’s services and the availability of competition for opportunities for expansion of the Company’s business;

 

difficulties of managing growth profitably;

 

the loss of one or more members of the Company’s management team;

 

changes in the market for the products we offer for sale;

 

other risks and uncertainties included from time to time in the Company’s reports (including all amendments to those reports) filed with the U.S. Securities and Exchange Commission;

 

other risks and uncertainties indicated in this Annual Report on Form 10-K/A, including those set forth under the section entitled “Risk Factors”; and

 

other statements preceded by, followed by or that include the words “estimate,” “plan,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,” “target” or similar expressions.

These forward-looking statements are based on information available as of the date of this report and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. 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.

As a result 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. For a discussion of the risks involved in our business and investing in our common shares, see the section entitled “Risk Factors.”

Should one or more of these risks or uncertainties materialize, or should any of the assumptions underlying our forward-looking statements prove incorrect, actual results may vary in material respects from those expressed or implied by these forward-looking statements. You should not place undue reliance on these forward-looking statements.

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PART I

ITEM 1. BUSINESS

 

General

At our core, we are a global services company. With over 90% market share in the historically highly attractive outsourced maritime health and wellness market, we are the market leader at nearly 20x the size of our closest maritime competitor. Over the last 50 years, we have built our leading market position on our depth of staff expertise; broad and innovative service and product offerings; expansive global recruitment, training and logistics platform; and decades-long relationships with cruise line and destination resort partners. Throughout our history, our mission has been simple: helping guests look and feel their best during and after their stay. We serve a critical role for our cruise line and destination resort partners, operating a complex and increasingly important aspect of their overall guest experience. Decades of investment and know-how have allowed us to construct an unmatched global infrastructure to manage the complexity of our operations. We have consistently expanded our onboard offerings with innovative, leading-edge service and product introductions, and developed a powerful back-end recruiting, training and logistics platform to manage our operational complexity, maintain our industry-leading quality standards and maximize revenue per center. The combination of our renowned recruiting and training platform, deep labor pool, global logistics and supply chain infrastructure and proven revenue management capabilities represents a significant competitive advantage that we believe is not economically feasible to replicate. These competitive advantages have served our business well during these extremely challenging times for our industry.

Impact of Coronavirus (COVID-19)

In the face of the global impact of the coronavirus (“COVID-19”) pandemic, our cruise line partners paused their guest cruise operations and the majority of our U.S. and Caribbean-based destination resort spas temporarily closed in mid-March 2020. During 2021, we initiated our resumption of spa operations on cruise ships and in destination resorts in a phased manner, in concert with our cruise line and resort partners. As of February 25, 2022, our health and wellness centers on 105 ships of our cruise line partners and in 48 destination resort spas were operating as part of our gradual return to service.

The extent of the effects of COVID-19 on our business is uncertain and will depend on future developments, including, but not limited to, the duration and continued severity of COVID-19 and the length of time it takes to return the Company to profitability. The ongoing effects of COVID-19 have had, and will continue to have, a material negative impact on our financial results and liquidity.

We have implemented a number of proactive measures to mitigate the financial and operational impacts of COVID-19, including completing a private placement and various capital market transactions, reduction of capital expenditures and operating expenses, borrowing on our revolving credit facility, deferring payment of dividends declared and the suspension of our dividend program. To the extent necessary, we will continue to pursue other opportunities to improve our liquidity.

Our Business

The majority of our revenue and profits are earned through long-term revenue sharing agreements with cruise line partners that economically align both parties and contribute to our attractive asset-light financial profile. These agreements average approximately five years in length and provide us with the exclusive right to offer health, fitness, beauty and wellness services and the ability to sell complementary products onboard the ships we serve. Under these long-term agreements, cruise line partners retain a specified percentage of revenues from all our sales onboard. This inherent alignment encourages collaboration in all aspects of our operations, including facility design, product innovation, pre- and post-cruise sales opportunities, capacity utilization initiatives and other data-driven strategies to drive increased guest traffic and revenue growth. Most of our cruise line agreements encompass 100% of a partner cruise line’s existing fleet and all new ships introduced by the cruise line during the term of the agreement. As opposed to fixed-rent landlords, cruise lines and destination resorts serve as our aligned economic partners.

We are recognized by our cruise line and destination resort partners and our guests for our comprehensive suite of services and products. We curate and deliver a broad range of offerings centered on providing specific health, fitness, beauty, and wellness solutions to meet our guests’ lifestyle routines or objectives. These services include: (i) traditional body, salon, and skin care services and products; (ii) self-service fitness facilities, specialized fitness classes and personal fitness training; (iii) innovative pain management, detoxifying programs and comprehensive body composition analyses; (iv) weight management programs and products; and (v) advanced medi-spa services, among others. We also offer our guests access to leading beauty and wellness brands including ELEMIS ®, Kérastase ® and Dysport ®, with many brands offered exclusively by us in the cruise market. On average, during normal operating conditions, including prior to the near cessation of our operations due to COVID-19, guests spend $230 per visit and our solution sales approach drives substantial retail sales, with approximately 25% of our revenues derived from the sale of retail products.

Our state-of-the-art health, fitness, beauty and wellness centers are designed and branded for each cruise line and destination resort to optimize the guest experience, align with our partners’ overall hospitality atmosphere and maximize productivity. Centers can

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employ up to 105 highly trained professionals and range in size from 200 to over 30,000 square feet, depending on the cruise line or destination resort partner’s needs.

Our cruise line relationships average over 20 years and encompass substantially all of the major global cruise lines, including Carnival Cruise Line, Royal Caribbean Cruises, Princess Cruises, Norwegian Cruise Lines, Celebrity Cruises, Costa Cruises and Holland America, among many others. These partnerships extend across contemporary, premium, luxury and budget cruise lines that operate ships regionally and globally. We maintain what we believe to be an exceptional contract renewal rate with our cruise line partners, having renewed approximately 94% of our contracts based on ship count over the last 15 years, including 100% of our contracts with ships larger than 3,500 berths. We have not only maintained relationships with existing cruise line partners, but also have a history of winning contracts and gaining market share. In August 2021, we extended our current agreement with Azamara through May 2026. On land, we have longstanding relationships with the world’s leading destination hotel and resort operators, including Marriott, Hilton, Wyndham, Atlantis, ClubMed, Caesars Entertainment, Lotte, Loews, Four Seasons, and Mohegan Sun, among others.

Our Operations and Performance

We are a Bahamian international business company that earns a substantial portion of our revenue in low- or no-tax jurisdictions, benefitting from a comparatively low effective cash tax rate. Additionally, we have minimal capital expenditures, as our cruise line and destination resort partners typically fund the build-out, maintenance, and refurbishment of our health and wellness centers. The combination of our attractive tax rate and asset-light operating model leads to a financial profile that delivers comparatively high Unlevered After-Tax Free Cash Flow. In fiscal 2017, 2018 and 2019, prior to the cessation of operations due to the COVID-19 pandemic, we converted approximately 90% of our Adjusted EBITDA to Unlevered After-Tax Free Cash Flow.

We have historically driven strong financial performance and believe our leading market position in a growing industry, differentiated business model and entrenched cruise line and destination resort partner relationships position our business for future growth. Due to the impact of COVID-19 on our operations in 2020 and 2021, current year data is not meaningful. However, for the year ended December 31, 2019, we achieved revenues of $562.2 million, Adjusted EBITDA of $59.0 million, Net Loss of $56.7 million and Unlevered After-Tax Free Cash Flow of $55.4 million.

Attractive Market Opportunity

 

Despite the adverse conditions impacting global operations and economies resulting from the COVID-19 outbreak, we continue to operate at the intersection of the historically attractive health and wellness and travel leisure industries. We believe we are well-positioned to grow as the cruise industry recovers from the COVID-19 pandemic.

 

Historical Cruise Industry Growth

 

Prior to COVID-19, the cruise industry had been among the fastest-growing segments in the travel leisure industry, including through the recessions of 2001 and 2008-2010. We estimate, based on annual statistics published by Cruise Lines International Association (“CLIA”), that global passenger counts had grown every year until 2020 from approximately 6.3 million passengers in 1995 to an all-time high of approximately 30.0 million passengers in 2019, representing a compound annual growth rate of 6.7%. This passenger growth had been driven by consistent, significant investments in new cruise ship capacity, strong loyalty among experienced cruisers and the large and growing appeal of cruising to all demographics, including millennials. From 2018 to 2020, the Caribbean, Bahamas and Bermuda were the top cruise destinations, representing 44% of passenger volume during that period, according to the CLIA. Although the COVID-19 pandemic has significantly adversely affected, and continues to affect, passenger volume in the global cruise industry, passenger volume has started to recover since a number of cruise lines restarted their operations beginning in July 2021. CLIA forecasts passenger volume to exceed 2019 levels by the end of 2023 and possibly by the end of 2022. Additionally, in a survey of international vacationers conducted by CLIA in connection with its 2022 State of the Cruise Industry Outlook, 80% of respondents who had previously been on a cruise said that they were likely to cruise again in the next few years, with millennials representing 85% of the cruise passenger respondents who plan to cruise again.

 

Historically Large and Growing Health and Wellness Industry

 

Our health and wellness centers cater to guests seeking a continuation of their health, fitness, beauty and wellness activities while traveling and those who want to trial services while away from home. As consumers increasingly incorporate health and wellness activities into their daily lives, they are placing a higher priority on health and wellness services while traveling and vacationing. According to CLIA, passenger volume in a baseline forecast on cruises is expected to surpass 2019 levels by the end of 2023, with passenger volume in an upside forecast projected to recover to 101% of 2019 levels by the end of 2022. Further, according to CLIA, the same percentage of travelers who have cruised before the pandemic say they will cruise again.

 

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Our Evolution

 

Our history dates back to the early 1960’s, when we opened the world’s first salons at sea onboard transatlantic cruise ships, including the Queen Mary and Queen Elizabeth II. Over more than 50 years, we have continuously defined and redefined the onboard health, fitness, beauty and wellness category by consistently expanding our onboard offerings with innovative and leading-edge service and product introductions, while developing the powerful back-end recruiting, training and logistics platforms to manage and optimize the complexity of our operations and maintain our industry-leading quality standards. We have successfully evolved the onboard health, fitness, beauty and wellness category from what was once a consumer-centric amenity for passengers to a key onboard revenue driver for our cruise line partners.

In 2015, a consortium led by L Catterton acquired Steiner Leisure, the holding company of OneSpaWorld at that time. Since then, OneSpaWorld has strengthened its already proven platform by leveraging L Catterton’s expertise in consumer services, consumer products, multi-unit retail operations and customer acquisition, among other expertise. OneSpaWorld has enhanced collaboration with its cruise line and destination resort partners to reinforce its market leading position and introduced innovative revenue initiatives to accelerate its revenue growth. Key recent initiatives include:

 

executing an effective return to service as our cruise line and destination resort partners resumed operations;

 

reopening our London Wellness Academy, which is integral to our status as a leader in training and certification;

 

continued innovation in our service and product offerings, coupled with enhanced consultative sales training techniques, resulting in a shifting revenue mix toward higher value-add and higher priced services, higher-priced products, and higher attachment rates for product purchases in connection with a guest service;

 

enhancing and expanding collaboration with cruise line and destination resort partners;

 

expanding pre-marketing, pre-booking and pre-payment platforms with optimal positioning on cruise line websites;

 

employing data-driven, dynamic pricing of services to optimize facility utilization and revenue generation; and

 

incorporating advanced direct marketing programs, including personalized communications and value promotions, to drive consumer demand.

On March 19, 2019 (the “Business Combination Date”), OneSpaWorld consummated a business combination pursuant to a Business Combination Agreement, dated as of November 1, 2018 (as amended on January 7, 2019, by Amendment No. 1 to the Business Combination Agreement), by and among Steiner Leisure Limited (“SLL”, “Steiner Leisure,” “Steiner,” or “Parent”), Steiner U.S. Holdings, Inc., Nemo (UK) Holdco, Ltd., Steiner UK Limited, Steiner Management Services, LLC, Haymaker Acquisition Corp. (“Haymaker”), OneSpaWorld, Dory US Merger Sub, LLC, Dory Acquisition Sub, Limited, Dory Intermediate LLC, and Dory Acquisition Sub, Inc. (the “Business Combination”), in which Haymaker acquired from Steiner operating business known as OSW Predecessor (“OSW”). Prior to the consummation of the Business Combination, OneSpaWorld was a wholly-owned subsidiary of Steiner Leisure. On the Business Combination Date, OneSpaWorld became the ultimate parent company of the Haymaker and OSW company.

Prior to the cessation of our cruise line and land-based destination resort operations due to COVID-19, our comprehensive suite of premium health, fitness, beauty and wellness services and products reached more consumers than ever before, with 175 centers onboard cruise ships addressing a captive audience of over 20 million passengers annually, and 68 destination resort centers serving global travelers at premier destination resorts around the world.

Our Strengths

 

As noted above, we cannot yet fully predict the impacts of COVID-19 on the travel leisure industry or on our business. Despite this uncertainty, we believe that our competitive strengths historically have positioned us, and will continue to position us, as a leader in the hospitality-based health and wellness industry and the category dominant leader in the cruise industry.

 

Global Leader in the Hospitality-Based Health and Wellness Industry

 

As the pre-eminent global operator of health and wellness centers onboard cruise ships and a leading operator of health and wellness centers at destination resorts worldwide, we are at the center of the intersection between the health and wellness and travel leisure industries. In 2018, the Global Wellness Institute reported that global wellness tourism was a $639 billion industry. We command over 90% market share in the highly attractive outsourced maritime health and wellness market and we are nearly 20x the size of our closest competitor. Through our market share, we have had access to a captive audience of over 20 million passengers.

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Cruise ship guests are an attractive demographic, with average annual household incomes of over $100,000. As a result of our scale, our captive consumer audience, and consumers’ increasing desire for more health, fitness, beauty and wellness services and products, we are well-positioned in the global health and wellness industry and have a large and highly attractive addressable consumer market at sea and on land.

 

Differentiated Business Model That Would Be Difficult and Uneconomic to Replicate

 

For more than 50 years, our business model has been built through investment in global infrastructure and training, decades-long relationships with our cruise line and destination resort partners and our reputation for offering our guests a best-in-class health, fitness, beauty and wellness experience. Our robust infrastructure and processes required to operate and maximize revenue across our network of global health and wellness centers separates us from our peers. In 2021, we embarked on over 2,000 voyages that welcomed over three million passengers at more than 73 ports of embarkation. Our business model is centered on providing our cruise line and destination resort partners with the following solutions:

 

 

Creating Extraordinary Guest Experiences —We pride ourselves on creating extraordinary guest experiences in our health and wellness facilities, offering our cruise line and destination resort partners’ guests a comprehensive suite of premium health, wellness, fitness and beauty services, treatments, and products.

 

Global Recruiting, Training and Logistics —Prior to the near cessation of our operations due to COVID-19, we recruited, trained and managed over 3,000 health, fitness, beauty and wellness professionals annually around the world, representing 88 nationalities and 24 spoken languages. With seven global training facilities, we serve each cruise line’s needs for specific onboard staff with complex language, cultural and service modality requirements and are the only company with the infrastructure to commission highly trained staff at over 1,200 ports of call worldwide. Our commitment to our onboard and destination resort staff has proven to be an essential element of our successful return to service performance.

 

Supply Chain and Logistics —We manage the complex delivery of all products and supplies to our health and wellness centers onboard vessels operating itineraries around the world, leveraging proprietary data to accurately forecast and stock each health and wellness center. Products and supplies can only be loaded at designated ports around the world during a limited window of time while the ship is in port, in many cases overnight, adding to the complexity of the process.

 

Yield and Revenue Management —We have developed proprietary technology, processes and staff training tools to consistently measure, analyze and maximize onboard and destination resort revenue and profitability.

 

Exclusive Relationships with Global Brands —Due to our scale, superior operations, industry longevity and attractive captive consumer audience, prior to the near cessation of our operations due to COVID-19, we had over 1,100 product SKUs sourced from over 75 vendors offered through the OneSpaWorld platform at sea, including ELEMIS, Kérastase, Thermage ®, GoodFeet ® Arch Supports and GO SMILE ® Teeth Whitening.

 

Facility Design and Branding Expertise —We design our state-of-the-art health and wellness centers specifically for each cruise line vessel and destination resort, creating bespoke branding, guest experience, guest services offerings, complementary retail products assortment, and competitive differentiation for each of our cruise line and destination resort partners to optimize guest experiences and maximize productivity and financial performance.

The above capabilities have contributed to building a differentiated and defensible strategy around our leading market position in a historically growing and attractive industry.

Unmatched Breadth of Service and Product Offering

 

We offer our guests a comprehensive suite of health, fitness, beauty and wellness services and products to meet any and all of their needs. We are continuously innovating and evolving our offerings based on the latest trends and tailor our service and product offerings to regional preferences. In addition to conventional services, we offer the latest in fitness, a full range of massage treatments, nutrition/weight management consultations, teeth whitening, and acupuncture, among a broad spectrum of personal care services. OneSpaWorld has also introduced innovative, higher-ticket medi-spa services at sea, including BOTOX ® Cosmetic, Dysport, Restylane ®, CoolSculpting ®, Thermage and dermal fillers, among others. With our captive audience of over 20 million cruise guests annually, OneSpaWorld is a compelling distribution channel for leading health, fitness, beauty and wellness brands. Renowned brands, including ELEMIS and Kérastase, have partnered with us for exclusive distribution at sea. Cruise line and destination resort partners depend on us to provide their guests with the best and broadest assortment of services and products to enhance their vacation experience and the competitive positioning and consumer value of their brands.

 

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Entrenched Partnerships with Economic Alignment

 

We have cultivated partnerships with most of the largest and most reputable cruise lines and premier resorts in the world. Our cruise line relationships average over 20 years and encompass substantially all of the major global cruise lines, including Carnival Cruise Line, Royal Caribbean Cruises, Princess Cruises, Norwegian Cruise Lines, Celebrity Cruises, Crystal Cruises, Costa Cruises, Seabourn Cruise Line, Virgin Voyages, and Holland America, among many others. The majority of our revenues and profits are earned through our long-term revenue sharing agreements with our cruise line partners that economically align both parties and create a collaborative relationship. On land, we partner with market leaders at highly attractive destinations, including Atlantis Paradise Island Bahamas, The Ocean Club, a Four Seasons Resort, Hilton Hawaiian Village Beach Resort and Spa, and the Mohegan Sun Resort, among others. Our long-standing relationships, with economic alignment at the core, strengthen our competitive advantage.

 

Highly Visible and Predictable Revenue Streams

 

Historically, we have had access to over 20 million passengers annually, with potential long-term passenger growth expected in the future, post the COVID-19 pandemic, as new ships are commissioned in the industry. This new ship growth is highly visible as demonstrated in a publicly available global order book outlining over five years of new ship orders. Across our contracts, OneSpaWorld typically operates on all ships in a fleet and on new ships added during the contract term, securing both existing and new ship revenue. A new ship requires approximately two to four years to be built and is rarely delayed, as cruise lines typically sell out the vessel’s maiden voyage over a year in advance. New ships do not have a revenue ramp-up period given these advanced marketing efforts. Our cruise line partners are experts at dependably filling their ships with passengers, as demonstrated by the industry’s historical average occupancy rate of above 100%, even through recessionary periods. Due to historically consistent industry practices and decades of proprietary operating history data, OneSpaWorld has had strong visibility into our future revenue realization for the next three to five years. Despite current market conditions related to COVID-19, we expect these revenue streams to rebound in the future to historical levels.

Asset-Light Model with After-Tax Free Cash Flow Generation

 

Third parties typically fund the build-out, maintenance, and refurbishment of our onboard health and wellness centers, resulting in an asset-light profile with minimal capex required. Our capital expenditures averaged 1% of revenues over the three years preceding the near cessation of our operations due to COVID-19. Being a Bahamian international business company and earning a significant portion of our revenue in low-tax or no-tax jurisdictions, including international waters, our effective cash tax rate had been approximately 1% over the three years preceding the near cessation of our operations due to COVID-19. This combination translates to exceptional after-tax free cash flow. Annually, from 2017 through 2019, we converted approximately 90% of our Adjusted EBITDA to Unlevered After-Tax Free Cash Flow.

 

Seasoned and Proven Leadership Team

 

OneSpaWorld is led by a management team that has operated the Company for nearly 20 years. Our Executive Chairman, President and Chief Executive Officer, Leonard Fluxman, and our Chief Financial Officer and Chief Operating Officer, Stephen Lazarus, together led OneSpaWorld's predecessor company, Steiner Leisure, as a public company for more than a decade. Mr. Fluxman and Mr. Lazarus now lead an internally developed senior management team with over 150 years of combined industry experience.

Additionally, our Chief Commercial Officer, Susan Bonner, has over 20 years of experience in the cruise line sector and is a seasoned executive with a proven track record and significant background in strategy, revenue management, operations management, sales, and marketing. We also benefit from Haymaker’s investing and operational experience at Fortune 500 companies, particularly in the consumer and hospitality sectors. The OneSpaWorld management team’s deep experience and proven track record in managing the business in both public and private markets positions OneSpaWorld as an attractive vehicle for future long-term growth within the global hospitality-based health and wellness industry.

Growth Strategies

Our management plans to continue growing the business through the following strategies:

 

Capture Highly Visible New Ship Growth with Current Cruise Line Partners

 

We expect to continue to benefit long-term from a return to the cruise industry’s capacity for growth, with a consistent and visible pipeline of new ships commissioned annually by our cruise line partners. By the end of 2023, our existing cruise line partners

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are expected to introduce 23 new ships. Through established cruise line partner relationships, current contracts, and an approximately 94% contract renewal rate over the last 15 years, we are well-positioned to capture new ship growth over the long term.

Expand Market Share by Adding New Potential Cruise Line Partners

 

Although we have over 90% market share in the outsourced maritime health and wellness market, there is an opportunity to continue to grow our market share by winning new contracts. We also routinely meet with cruise lines that do not currently outsource their health and wellness centers or utilize our smaller competitors, but that may have an interest in contracting with us in the future due to our strong reputation and historical results. As evidenced by our successful history of winning new contracts, we remain focused on continuing to protect and grow our dominant market share at sea.

Continue Launching More Value-Added Services and Products

 

We have successfully innovated services and products to meet guests’ ever-changing needs, attract more guests and generate more revenue per guest. Medi-spa has been a highly successful innovation for OneSpaWorld at sea and is now a critical component of our offerings. Performed by licensed physicians, the medi-spa offerings provide the latest cosmetic medical services to guests, such as non-surgical cosmetic procedures, including BOTOX Cosmetic, Dysport, Restylane, CoolSculpting, Thermage, and dermal fillers. Guests purchasing medi-spa services spend on average up to 10x more than on traditional health, beauty and wellness services. We continue to roll out incremental revenue opportunities, including the Capillus® Laser Therapy Cap and HypericeTM percussion and vibration therapy products and related services. We will continue to focus on launching higher value-add services and products that meet guest demands, align with and enhance our cruise line and destination resort partner brands, optimize health and wellness center utilization, and maximize center-level profitability.

Focus on Enhancing Health and Wellness Center Productivity

 

Cruise lines have become increasingly focused on growing onboard revenue as a way to enhance revenue beyond traditional cabin ticket sales. Between 2013 and 2019, onboard spend on the three largest cruise operators we serve increased by $2.6 billion, from $6.5 billion to $9.1 billion. According to an independent global consulting study, 45% of passengers say they are interested in using our health and wellness centers onboard. We are focused on collaborating with cruise line partners to increase passenger penetration and maximize revenue yield through the following initiatives:

 

 

Increase Pre-Booking and Pre-Payment Capture Rate —We are working with our cruise line partners to expand our marketing efforts to engage guests upon booking their vacation experience, well before boarding a ship, through pre-booking. Pre-booked appointments can yield approximately 30% more revenue than services booked onboard the ship. Due to our success across select cruise lines that have implemented pre-booking capabilities, we are in the process of implementing pre-booking across additional partner cruise lines.

 

Expand Targeted Marketing and Promotion Initiatives —We are now directly marketing and distributing promotions to onboard passengers as a result of enhanced collaboration with select cruise line partners. These promotions are personalized and individually tailored to guests’ profiles and have successfully driven traffic and revenue at our health and wellness centers. Examples include “happy anniversary” messages to couples, “happy birthday” notes to individual guests, and promotional retail credits offered to guests who visit our centers before the end of their cruise. Guests that received these customized promotions were responsible for approximately 8% of revenues generated during the year ended December 31, 2021.

 

Utilize Technology to Increase Utilization and Enhance Service Mix —We have recently begun to successfully introduce and expand technology-enabled dynamic pricing initiatives with selected cruise line partners. While dynamic pricing strategies have historically been applied manually by onboard staff, we are currently rolling out online and pre-cruise access to drive off-peak utilization rates and fill higher-demand time slots with higher-value bookings. This enhanced dynamic pricing capability is currently available with only a few cruise line partners, representing a significant opportunity for revenue growth as it is rolled out and optimized fleet-wide.

 

Extend Retail Beyond the Ship —Our Shop & Ship program provides guests the ability to buy retail products onboard and have products shipped directly to their home to avoid the hassle of packing products in their luggage. On average, a Shop & Ship customer spends more than 3.5x the amount of a non-Shop & Ship customer on retail products. The Shop & Ship program, combined with our e-commerce platform timetospa.com, gives us the ability to maintain a connection with each guest beyond the cruise voyage.

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Health and Wellness Services

 

We curate and deliver an ever-innovating broad range of offerings for our cruise line and destination resort partners, centered around a holistic wellness approach, which includes:

 

Spa and Beauty. We offer massages and a broad variety of other body and beauty treatments including facials, hair cutting and styling, manicures and pedicures, and tanning. Additionally, we offer teeth whitening services in the majority of our onboard health and wellness centers.

 

Medi-spa. We offer medi-spa services on the majority of our ships. Our service menu consists of the leading medi-spa brands, including BOTOX Cosmetic, Dysport, Restylane, CoolSculpting, Thermage, dermal fillers, and microneedling, among others. Medi-spa services are administered by certified medical physicians. Prior to the cessation of our operations due to COVID-19, medi-spa services were available on 99 ships. Subject to the continued resumption of operations by our cruise line partners, by the end of 2022, we expect to offer medi-spa services on 130 ships.

 

Fitness. We offer guests use of fitness centers as well as paid services by a fitness professional to our cruise and destination resort guests. The fitness centers offer guests use of strength equipment, cardiovascular equipment such as treadmills, elliptical machines, exercise bicycles and rowing and stair machines. Boutique fitness classes, including yoga, Pilates, F45 Training, cycling, and aerobics, are also available to guests for a fee or at no charge, depending on the class. Our fitness instructors are available to provide paid services, such as body composition analysis and personal training.

 

Nutrition. In addition to fitness services, we offer guests paid services including personal nutritional and dietary advice, weight management, nutrition coaching and detoxification. Guests can begin a program on the cruise and remain connected to our professional coach after the cruise to ensure successful completion of the program, such as a nutrition or detoxification plan, including by continuing to purchase nutritional and detoxification products via or e-commerce platform timetospa.com.

 

Health. We first introduced acupuncture in 2005 and have since rapidly expanded our health and pain management, offerings to be one of our largest categories. Today, we offer acupuncture, electro acupuncture, cupping, posture and gait analysis, GoodFeet Arch Supports, physical therapy, and NormaTec ® recovery. Our services are enhanced by our retail channel; GoodFeet, a premium arch support insert, is now a leading retail product for us.

 

Mind-Body and Wellness. We also offer our guests yoga, Tai Chi and sound therapy in addition to meditation and biofeedback.

Products

 

We sell over 1,100 branded product SKUs sourced from over 75 vendors due to our scale, superior operations, industry longevity and attractive captive audience at sea and on land. We sell products from leading brands, including ELEMIS, Thermage, Dysport, GoodFeet Arch Supports and GO SMILE Teeth Whitening. We have an exclusive 10-year supply agreement with ELEMIS. We believe we have a leading retail attachment rate based on the number of products purchased in conjunction with a service compared to the broader consumer personal care services and retail industry. During 2021, approximately 20% of our revenues come from product sales, enabling incremental revenue even at full treatment room utilization.

 

We utilize three warehouses, consisting of one 27,000 square foot bonded warehouse in Miami, FL, one 21,600 square foot warehouse in Miami, FL, and one 5,000 square foot warehouse in New Jersey. The Miami warehouses provide fulfillment services for cruise inventory, and the New Jersey warehouse provides fulfillment for e-commerce and the Shop & Ship program.

 

Health and Wellness Centers

As of December 31, 2021, we operated state-of-the-art health and wellness centers on 170 ships, including virtually all of the major cruise lines globally, and 52 land-based destination resorts, principally in the United States, the Caribbean and Asia. Centers are designed and branded for each cruise and destination resort partner to optimize the guest experience, maximize revenues and align with our partners’ brand and hospitality environment. Centers can range in size from approximately 200 square feet to over 30,000 square feet and generally provide fitness areas, treatment rooms and salons, as well as elaborate thermal suites and/or saunas. Cruise centers are generally located on higher ship decks, which encourages increased passenger interest and guest traffic.

 

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Facility Design

 

Our cruise line and destination resort partners each seek differentiated health and wellness experiences for their guests. As such, we provide design capabilities for our cruise line and destination resort partners, creating bespoke branding and design consulting to optimize guest experiences and maximize revenues. We operate health and wellness centers under proprietary brands of Mandara ® and Chavana ®, as well as brands curated specifically for each cruise line, complete with cruise line and/or ship-specific service menus. Prior to the near cessation of our operations due to COVID-19, as of December 31, 2019, we had 39 health and wellness centers under the Mandara brand, 11 centers under the Chavana brand, and one center under our destination resort health and wellness brand, “Glow ®, a Mandara Spa.”

Principal Cruise Line Customers

A significant portion of our revenue is generated from each of the following cruise lines, which accounted for more than 10% of our total revenues in 2021, 2020 and 2019, respectively: Carnival (including Carnival, Carnival Australia, Costa, Cunard, Holland America, P&O, Princess, and Seabourn cruise lines): 36.7%, 43.4%, and 46.7%, Royal Caribbean (including Royal Caribbean, Celebrity Cruises, Pullmantur, Azamara and Silversea cruise lines): 22.8%, 20.9%, and 23.1%, and Norwegian Cruise Line (including Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises): 11.4%, 16.3%, and 14.7%. These companies, combined, accounted for 140 of the 170 ships served by OneSpaWorld as of December 31, 2021. Our contracts are signed at the cruise line-level, not with the parent operator, giving OneSpaWorld a diverse customer base despite parent-level consolidation. Our contracts average five years in duration.

The numbers of ships served as of December 31, 2021 under cruise line agreements with the respective cruise lines are listed below:

 

Cruise Line

Ships Served

 

Royal Caribbean (2)

 

25

 

Carnival (1)

 

24

 

Norwegian (3)

 

17

 

Princess (1)

 

14

 

Celebrity (2)

 

11

 

Costa (1)

 

11

 

Holland America (1)

 

11

 

Silversea  (2)

 

8

 

Oceania (3)

 

6

 

P&O (1)

 

6

 

Windstar

 

6

 

Regent (3)

 

5

 

Seabourn (1)

 

5

 

Disney

 

4

 

Azamara  (2)

 

3

 

Crystal

 

3

 

Cunard

 

3

 

Dream

 

2

 

Marella

 

2

 

Saga

 

2

 

Carnival Australia (1)

 

1

 

Virgin

 

1

 

Total

 

170

 

 

 

(1)

Carnival Corporation, the parent company of Carnival Cruise Line, also owns Carnival Australia, Costa, Holland America, P&O, Princess, and Seabourn.

 

(2)

Azamara, Celebrity, and Silversea are owned by Royal Caribbean.

 

(3)

Oceania and Regent are owned by Norwegian Cruise Lines.

 

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Destination Resort Locations and Partners

As of December 31, 2021, we provided health and wellness services at destination resorts in the following locations:

 

Country

 

Number of Destination Resort Spas

 

Maldives

 

 

14

 

United States (1)

 

 

12

 

Malaysia

 

 

10

 

Indonesia

 

 

2

 

Bahamas

 

 

3

 

Palau

 

 

2

 

Russia

 

 

2

 

United Arab Emirates

 

 

2

 

Japan

 

 

2

 

Bahrain

 

 

1

 

Aruba

 

 

1

 

Egypt

 

 

1

 

Total

 

 

52

 

 

(1)

Includes Puerto Rico.

Cruise Line and Destination Resort Agreements

 

Through our cruise line and destination resort agreements, we have the exclusive right to offer health, fitness, beauty and wellness services and the ability to sell complementary products onboard the ships and at the destination resorts we serve. Under the cruise line agreements, guests pay for our services through our cruise line partners, who retain a specified percentage of gross receipts from such sales before remitting the remainder to us. Our revenue share agreements result in a highly variable cost model, where the primary fixed costs are the meals and accommodations for our shipboard employees. Most of our cruise line agreements cover all of the then-operating ships of a cruise line and typically new ships are added to ships in service through an amendment to the agreement. The agreements have specified terms ranging from three to 10.7 years, with an average remaining term per ship of approximately 3.7 years as of December 31, 2021. Cruise lines can terminate the agreements with limited or no advance notice under certain circumstances, including, among other things, the withdrawal of a ship from the cruise trade, the sale or lease of a ship, or our failure to achieve specified passenger service standards. However, we have never had a contract terminated prior to our respective expiration date.

 

We operate our destination resort centers pursuant to agreements with the owners of the properties involved. Our destination resort centers generally are required to pay rent based on a percentage of our revenues, with others having fixed rents. Some of our destination resort center agreements also require that we make minimum rental payments irrespective of the amount of our revenues. The terms of the agreements for our destination resort centers generally range from five to 20 years (including the terms of renewals available at our option). In the U.S. and Caribbean, destination resort centers generally have a higher investment cost and lower revenue share with higher staff costs and contracts lasting ten years on average. In Asia, destination resort centers have lower investment cost, higher revenue share, lower staff costs, and contracts averaging five years.

 

Marketing and Promotion

 

We promote our services and products to cruise passengers and destination resort guests through targeted marketing, including pre-and post-cruise emails, website advertising, on-site demonstrations and seminars, video presentations shown on in-cabin/in-room television, ship newsletters, tours of our centers, and dedicated signage around the ship. We also encourage our employees to cross-sell, as they believe that such cross-promotional activities frequently result in our customers purchasing services and/or products in addition to those they initially contemplated buying. For example, we cross-sell our fitness body assessment with detox programs, vitamins, and seaweed wraps. We also maintain a dedicated sales desk to facilitate pre-cruise health and wellness services booking and to disseminate health and wellness information for charters and other groups of cruise passengers.

 

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Recent collaborative initiatives with cruise line partners have proven to enhance performance across certain key performance indicators. We have developed a fully integrated pre-booking platform, which allows guests to book health and wellness treatments six to eight weeks prior to the voyage. Pre-booked and pre-paid guests on average spend approximately 30% more than guests who book services once already onboard. We recently introduced a new pricing strategy, simplifying the choice architecture for our guests while continuing to make price adjustments across multiple areas within our spas. Guests have responded positively, resulting in an increased service spend coupled with a higher frequency of longer treatments booked, and a shift toward booking relatively more premium and signature services. We have begun rolling out our dynamic pricing model to our full cruise fleet, which provides the ability to optimize demand and maximize utilization of our health and wellness centers. We continually monitor the results of our marketing efforts and adjust our strategies in order to use our marketing resources in a cost-effective manner.

Competition

 

On cruise ships, we compete with passenger activity alternatives for onboard passenger dollars. We also compete with other maritime wellness facility providers, including cruise lines that insource the activity, as well as potential other outsource providers. Across the destination resorts business, we compete with other outsource providers of health, fitness, beauty and wellness services to hotel and destination resort operators. The destination resorts business is highly fragmented, and there is no one leader within this category.

 

Seasonality

 

A significant portion of our revenues are generated onboard cruise ships and are subject to specific individual cruise itineraries as to time of year and geographic location, among other factors. As a result, we experience varying degrees of seasonality as the demand for cruises is stronger in the Northern Hemisphere during the summer months and during holidays. Accordingly, the third quarter and holiday periods generally result in the highest revenue yields for us. Further, cruises and destination resorts have been negatively affected by the frequency and intensity of hurricanes, which may be impacted by climate change. The negative impact of hurricanes in the Northern Hemisphere is highest during peak hurricane season from August to October.

 

Trademarks

 

We hold or control numerous trademarks in the United States and a number of other countries. Our most recognized health and wellness products and services trademarks are for Mandara and Chavana. We believe that the use of our trademarks is important in establishing and maintaining our reputation for providing high quality health and wellness services, as well as cosmetic goods, and we are committed to protecting these trademarks by all appropriate legal means.

 

Registrations for the OneSpaWorld, Mandara and Chavana trademarks, among others, have been obtained in a number of countries throughout the world. We continue to apply for other trademark registrations in various countries.

While a number of the trademarks we use have been registered in the United States and other countries, the registrations of other trademarks that we use are pending. Recently, we have adopted the mark “OneSpaWorld” as the trade name of our maritime health and wellness business to reflect our position as a global provider of shipboard products and services.

We license “Mandara” for use by luxury destination resorts in certain Asian countries.

Sustainability and Social Responsibility

With a deep-seated devotion to the environment and the cultures we encounter and embrace, we strive for a better tomorrow by effecting positive change in the lives of stakeholders – our guests, employees, and the inhabitants of the destinations we visit and the locations where we operate and call home.

We believe that our impact on the environment, how we manage our relationships with our employees, our cruise and destination resort guests, our suppliers, and the communities where we operate, and the accountability of our leadership to our employees and our stockholders are all critically important to our business. Our company has undertaken a number of strategies to further these objectives, including programs to incorporate sustainability practices, improve data privacy and cybersecurity, increase employee diversity, ensure a respectful workplace, and invest in our communities. Our Board of Directors is responsible for promoting the long-term sustainable growth of the Company, including considering the social and environmental goals of the Company. See “Human Capital” for a more comprehensive description of our social responsibility initiatives.

With respect to environmental matters, we are collaborating with our third party product suppliers to introduce improved packaging solutions to reduce environmental impact. We have been implementing sustainability strategies by reducing paper usage and plastic water bottles, as well as recycling paper in the workplace, installing light sensors to reduce electricity consumption, and changing packaging materials from polystyrene to recyclable pillow packs. With respect to governance issues, we maintain policies

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with respect to ethical trading, confidential and non-public personal information, anti-fraud, anti-corruption, third party risk management, trade control compliance, data transfers, internal auditing services, global privacy, and global regulatory compliance.

Human Capital

As a pre-eminent global operator of health and wellness services, our people are essential to our operations and core to the long-term success of our Company. Our employees are responsible for upholding our purpose, integrity, and accountability, representing OneSpaWorld’s mission and values as a global health and wellness company. To attract and retain the best talent, we strive to embed a culture where employees can bring their whole selves to work.

 

Our Board of Directors directly oversees procedures and corporate culture which promotes and upholds the ethical conduct of the Company’s business, including adopting and monitoring compliance with the Company’s Code of Ethics, which, among other things, sets forth the Company’s policy of promoting high standards of integrity by and toward employees in the course of business dealings. The Compensation Committee of our Board is responsible for advising the Board with respect to the compensation philosophy, policies, and equity plans pertaining to our employees, intended to attract, engage, and retain talented personnel. The Audit Committee of our Board is responsible for establishing procedures for the treatment of anonymous employee complaints or concerns received by the Company, through the Company’s Ethics Hotline or otherwise. The Nominating and Governance Committee of our Board is responsible for developing, recommending to the Board, and reviewing on an ongoing basis the adequacy of the Company’s diversity and sustainability policies, as well as reviewing and recommending to the Board changes to the Company’s Code of Ethics.

 

During the first and second quarters of 2020, in response to the near cessation of our operations due to COVID-19, we took steps to mitigate the adverse impacts of the pandemic, including repatriating 3,220 of our cruise ship personnel to their homes around the world.

 

Our People. As a Company that provides health and wellness services and products, our employees are the bedrock of our cruise and resort guest experience. As of December 31, 2021, we had a total of 2,905 full-time employees. Of that number, 2,717 worked in health and wellness operations and 310 represented management and sales personnel and support staff, while 39 were involved in recruiting and training. We have one health and wellness center manager in each location and can have up to 83 total staff depending on the size of the center. As a global operation, we have a diverse team of employees who represent the locations and markets we serve and in which we operate. Approximately 369 of our employees were located in the United States. We believe our relationship with our employees is strong.

Diversity & Inclusion. Our Company achieves success by recruiting, training, supporting and resourcing employees from diverse demographic and socioeconomic populations across the globe, so as to best serve our cruise line and destination resort partners and their diverse global cruise line and destination resort base. We maintain an unwavering commitment to diversity and inclusion among our staff. OneSpaWorld is an equal opportunity employer, and we promote and celebrate diversity and inclusion in the workplace. We advertise U.S. corporate and destination resort spa positions on a human resources applicant tracking system, which provides visibility toward all applicants, including diverse candidates. As of December 31, 2021, our employees had the following attributes:

 

 

 

Female

 

 

 

 

Male

Employees

 

 

2,205

 

 

 

 

437

Manager Staff

 

189

 

 

 

 

71

Executive Officers

 

1

 

 

 

 

2

 

In order to successfully achieve our goals toward diversity and inclusion, we strive to educate employees, managers, and leadership on these essential topics. Among other things, we provide annual trainings on the following topics: culture of civility, anti-harassment best practices, cultivating a respectful workplace, anti-harassment crash course: steering clear of sexual harassment, and halting harassment: prevention basics for management.

Talent Attraction. Our continued success is dependent on our ability to attract qualified employees. Our goal in recruiting and training new employees is to have available a sufficient number of skilled personnel trained in our customer service philosophy. Our cruise line and destination resort staff are sourced from over 95 countries. We recruit prospective shipboard health and wellness center employees from geographies including Australia, the British Isles, Canada, the Caribbean, continental Europe, India, Indonesia, Mauritius, the Philippines, South Africa, South America, and Thailand, providing an ample pipeline of talent from a wide range of demographics.

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Talent Retention: Compensation and Benefits. We strive to provide competitive pay and benefits for our employees.

Shipboard spa employees typically are employed under nine month-long agreements with fixed terms. Our compensation arrangements include commissions received in connection with the provision of services and sales of products in our spas. We make available to all our shipboard employees comprehensive health and dental care, free of charge during the terms of their employment agreements, and provide long-term disability and death compensation, among other benefits. We provide our shipboard employees with transportation to their home countries free of charge following the completion of their employment terms. Our shipboard employees and their families and friends are entitled to discounts on the services and products we offer for sale, as well as personalized fitness and wellness programs. In recent years, we have improved staff retention, resulting in a more experienced staff across our fleet.

Employees at our destination resorts generally are employed without contracts, on an at-will basis, although most of our employees in Asia have one- or two-year contracts. Our U.S. corporate and destination resort spa employees are eligible to receive the following company benefits, some of which are Company sponsored, and some of which are voluntary: medical, dental, vision, 401(k) retirement plan, short term disability, long term disability, critical illness, flexible spending account, basic life insurance and basic accidental death and dismemberment, medical indemnity, off the job accident insurance, spouse life insurance and accidental death and dismemberment, child life insurance and accidental death and dismemberment. We provide an employee assistance program free of charge to our employees and members of their households, offering face-to-face mental health counseling sessions with a local provider, legal assistance, financial consultations, resources and referrals for childcare assistance and adoption, eldercare, pet care, and consultations with fraud resolution specialists intended to prevent identity theft.

Health and Safety. The health and safety of our employees remains our highest priority. During 2021, COVID-19 continued to pose a significant risk to our employees. We have undertaken a number of initiatives in connection with our reopening plan and our response to COVID-19, including the continuation of the availability of a remote work environment for our corporate employees. All staff returning to ships are required to complete training modules prior to returning to sea. We created a comprehensive manual entitled “Guidelines for Protection and Sanitization,” or “GPS,” which includes, among others, protocols for sanitization by service, modality and area, behavior, workplace controls, the use of personal protective equipment, social distancing, recognizing signs of COVID-19, and reporting procedures. As of the date of this report, more than 2,500 of our shipboard staff have successfully completed this training. In conjunction with corporate employees returning to our corporate office in Coral Gables, employees will be required to complete a training course regarding compliance with COVID-19 protocols, in alignment with CDC guidelines.

Culture and Ethics. We strive to bring our culture of ethical behavior to the forefront of our organization, and it is our values and mission that binds our business together. We visited over 1,200 global ports of call and operated 69 destination resorts in over 13 countries as of December 31, 2019, prior to the near cessation of our operations due to the COVID-19 pandemic. We have instituted best practices to ensure that we continue to operate to the highest standards, including requiring all our employees to familiarize themselves during the training with, and adhere strictly to, our Code of Ethics and other corporate policies.

Training and Development. Our business relies on the ever-changing needs and desires of our customer base. These changes require that our employees are armed with best-in-class training and development in emerging areas of health and wellness. We also operate in areas that are subject to regulation and licensing. To respond to these challenges, we have developed extensive training and licensing practices. Our efforts include training at our London Wellness Academy and our satellite training facilities in South Africa and the Philippines, ranging from two to six weeks depending on the profession and modality of each employee, onboard training for certain of our shipboard employees, and management training courses at our Coral Gables office. All our employees are required to complete sexual harassment training, and our shipboard employees also complete health and safety training upon boarding the vessels on which they serve. Certain shipboard employees also complete additional training on safe practices in providing our services, and training on cleaning and sanitization of our equipment and spa facilities. Our employees also receive training using our comprehensive “GPS” manual prior to returning to work.

We encourage our employees to progress through roles of increasing responsibility within our corporate structure during their tenures by providing numerous opportunities for development and training support. Most senior positions held by our Coral Gables and London Wellness Academy employees are occupied by individuals who began their careers as members of our shipboard spa teams. In our corporate office in Coral Gables, employees receive annual refresher and development training through the Company’s state of the art learning management system, and are required to review a variety of learning modules containing training content relevant to our globally diverse organization. As a substitute for our in-person training programs for existing and prospective staff, we have sought to limit our costs and our carbon footprint by offering eLearning modules for our

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shipboard staff, which we have integrated into our learning management system platform. The eLearning modules have also been an important component of our efforts to safely train our staff in a remote manner during the COVID-19 pandemic.

Succession Planning. The success of our business relies on the steady and experienced leadership of key employees. We continually strive to foster the personal and professional development of senior management and other critical roles throughout the organization. As a result, we have developed a strong group of leaders with lengthy tenures. The performance of our senior management team members is subject to ongoing monitoring and evaluation, intended to ensure efficient identification of potential successors and smooth transitions within the team.

Government Regulation

 

Our business is subject to certain international, U.S. federal, state and local laws, and regulations and policies in jurisdictions in which we operate. Such laws, regulations and policies impact areas of our business, including securities, anti-discrimination, anti-fraud, data protection and security. We are also subject to anti-corruption and bribery laws and government economic sanctions, including applicable regulations under the U.S. Treasury’s Office of Foreign Asset Control and the U.S. Foreign Corrupt Practices Act (“FCPA”). The FCPA and similar anti-corruption and bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or generating business.

 

Website Access to SEC Reports

 

Our website can be found at onespaworld.com. Information contained on our website is not part of this report.

 

We make available, free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as is reasonably practicable after we electronically file them with, or furnish them to, the Securities and Exchange Commission.

 

ITEM 1A. RISK FACTORS

 

An investment in our securities involves a high degree of risk. You should carefully consider the risks described below before making an investment decision. Our business, prospects, financial condition, or operating results could be harmed, and have been harmed, by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. The trading price of our securities could decline, and has declined, due to any of these risks, and, as a result, you may lose all or part of your investment.

 

Risks Related to Our Business

 

Actual or Threatened Epidemics or Pandemics may Have an Adverse Effect on our Business, Financial Condition and Results of Operation

 

The COVID-19 pandemic and measures taken in response to the pandemic have had, and may continue to have, an adverse impact on our business. Steps have been taken by various countries to advise citizens to avoid non-essential travel, to implement closures of non-essential operations, and to implement quarantines and lockdowns to contain the spread of the virus, which have had a dampening effect on the economy and global demand for travel. While the ongoing roll-out of vaccines across a number of countries is a promising milestone in global efforts to contain and eliminate COVID-19, a number of uncertainties remain, including whether any additional vaccines or vaccine booster shots will receive regulatory approval, the risk of differing interpretations and assessments by the scientific community during the peer review/publication process, widespread adoption of the vaccines by consumers, the availability of raw materials needed to manufacture vaccines in sufficient quantities, and challenges in the storage, distribution and administration of vaccines. Uncertainty remains as to when a sufficient number of individuals will be vaccinated, permitting travel restrictions to be lifted. New COVID-19 variants that have emerged in recent months have the potential to increase the lethality, have increased the spread of COVID-19, may reduce vaccine effectiveness, and may prolong the duration of the pandemic, materially negatively impacting our business performance, results of operations and financial condition, including liquidity.

In response to the COVID-19 pandemic, the U.S. Centers for Disease Control and Prevention (“CDC”) issued a Framework for Conditional Sailing Order on October 30, 2020, which outlines a phased approach for gradually permitting cruise ship passenger operations in U.S. waters, subject to certain conditions and guidelines. The Conditional Sailing Order and related measures, such as technical guidelines, currently operate as nonbinding recommendations for cruise lines arriving in or departing from a port in Florida, which most Florida-porting ships have chosen to voluntarily follow. On October 25, 2021, the CDC announced a temporary extension to the Framework for Conditional Sailing Order through January 15, 2022, due to the continued spread of the Delta variant. Following the expiration of this extension, the CDC recommends that cruise ships operating in U.S. waters choose to participate in the CDC’s COVID-19 Program for Cruise Ships. There can be no assurance as to when our cruise line partners will be able to receive conditional

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sailing certificates for additional ships or whether they can remain in compliance with the Conditional Sailing Order and their conditional sailing certificates, once obtained.

The COVID-19 pandemic has materially adversely impacted our business, operations, results of operations and financial condition, including liquidity, and is expected to continue to materially adversely impact our business, operations, results of operations and financial condition, including liquidity, in fiscal year 2022 and possibly thereafter. We cannot presently estimate the extent to which the pandemic will impact our business, which will depend on a number of factors, such as the duration and scope of the pandemic; the negative impact it has on global and regional economies and economic activity, including the duration and magnitude of its impact on unemployment rates and consumer discretionary spending; its short and longer-term impact on the demand for travel, transient and group business, and levels of consumer confidence; our ability to successfully navigate the impacts of the pandemic; actions governments, businesses and individuals take in response to the pandemic, including limiting or banning travel and cruises; and how quickly economies, travel and cruise activity, and demand for our services recover after the pandemic subsides. The COVID-19 pandemic also presents a significant threat to our employees’ well-being and morale, which has impacted employee productivity and may impact employee retention going forward.

To date we have incurred, and expect to continue to incur, significant costs caused by the COVID-19 pandemic. In light of the ongoing suspension of cruise voyages, the Company has taken steps to reduce expenses, including to date repatriating our shipboard staff furloughing certain destination resort spa personnel, capital expenditures and operating expenses, deferring payment of dividends declared and the suspension of our dividend program. Such steps, and further changes we may make in the future to reduce costs, may negatively impact guest loyalty, customer preferences, or our ability to attract and retain employees, destination resort partners or investors, and our reputation and market share may suffer as a result. Notwithstanding the mitigating actions we have undertaken, the Company continues to incur significant ongoing expenses. We may also incur additional COVID-19 related costs if we are subject to greater hygiene-related protocols in our services that are mandated by government authorities or other international authorities. In addition, the industry as a whole may be subject to enhanced health and hygiene requirements in attempts to counteract future outbreaks, which requirements may be costly and take a significant amount of time to implement.

COVID-19 has caused heightened volatility and disruptions in the global credit and financial markets, and this may adversely affect our ability to borrow and could increase our counterparty credit risks. Additionally, the outbreak of COVID-19 may have adverse negative impacts on restrictions in the agreements governing our indebtedness that require us to maintain minimum levels of liquidity and otherwise limit our flexibility in operating our business, including the significant portion of assets that are collateral under these agreements.

As a result of COVID-19, some credit agencies may downgrade our credit ratings in the future. If our credit ratings are downgraded in the future, or if general market conditions were to ascribe a higher risk to our credit rating levels, our industry, or our company, our access to capital and the cost of debt financing will be further negatively impacted. The interest rate we pay on our existing debt instruments is affected by our credit ratings. Accordingly, a downgrade may cause our cost of borrowing to further increase.

We Depend on Our Agreements with Cruise Lines and Destination Resort Health and Wellness Centers; if These Agreements Terminate, Our Business Would Be Harmed

A significant portion of our revenues are generated from our cruise ship health and wellness operations, which have been adversely impacted by the outbreak of COVID-19. In light of the current market conditions and the other impacts caused by COVID-19, our cruise line and destination resort spa agreements may not be renewed after their expiration date on similar terms or at all. Any renewals may cause further reductions in our margins, as the amounts we pay to cruise lines and land-based venues may increase upon entering into renewals of agreements.

In addition, these agreements provide for termination by the cruise lines with limited or no advance notice under certain circumstances, including, among other things, the withdrawal of a ship from the cruise trade, the sale or lease of a ship or our failure to achieve specified passenger service standards. Due to the impact of COVID-19, six vessels on which we operated health and wellness centers have been taken out of service permanently by our cruise line partners, and 20 vessels on which we operated health and wellness centers prior to the COVID-19 pandemic have been sold to other cruise line operators, including operators we currently serve. We are engaged in discussions with these cruise line operators regarding agreements to continue operation of our health and wellness centers aboard these ships; however, there can be no assurance that we will execute satisfactory agreements in the future. Termination or nonrenewal of cruise line agreements, either upon completion of their terms or prior thereto, could have a material adverse effect on our results of operations and financial condition. Some of our land-based destination resort health and wellness center agreements also provide for termination with limited advance notice under certain circumstances.

As a result of the consolidation of the cruise industry, the number of independent cruise lines has decreased in recent years, and this trend may continue. Also, some cruise lines have ceased operating and this may happen to other cruise lines in the future. As a result of these factors, a small number of cruise companies, all of which currently are our customers, dominate the cruise industry.

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We Depend on the Cruise Industry and Their Risks Are Risks to Us

The cruise industry has never before experienced a complete cessation of its operations. The public concern over the outbreak of the COVID-19 pandemic, coupled with a drop in demand for international travel and leisure, and restrictions on international travel and immigration, have adversely affected the demand for cruises. In addition, COVID-19 has caused and may continue to cause some cruise lines to declare bankruptcy or cause their lenders to declare a default, accelerate the related debt, or foreclose on collateral. Such bankruptcies, accelerations or foreclosures could, in some cases, result in the termination of our agreements with certain of our cruise line partners and eliminate our anticipated income and cash flows, which could negatively affect our results of operations. Cruise lines in bankruptcy may not have sufficient assets to pay us termination fees, other unpaid fees, or reimbursements we are owed under their agreements with us. Even if some cruise lines do not declare bankruptcy, they may be unable or unwilling to pay us amounts to which we are entitled on a timely basis or at all. Cruise lines compete for consumer disposable leisure time dollars with virtually all other vacation alternatives. Demand for cruises is dependent on the underlying economic strength of the countries from which cruise lines source their passengers. Economic changes such as unemployment, economic uncertainty, and the threat of a global recession reduce disposable income or consumer confidence in the countries from which our cruise line partners source their passengers and have affected the demand for vacations, including cruise vacations, which are discretionary purchases.

Despite the general historic trend of growth in the volume of cruise passengers prior to the outbreak of COVID-19, the impacts related to COVID-19 may have a material adverse effect on the number of future cruise passengers once voyages resume. A future resurgence of COVID-19, or the outbreak of another pandemic, could cause a cessation of cruise operations again, even after voyages resume.

According to CLIA, 51% of passengers in the global cruise industry were sourced from North America, our core market, from 2018 to 2020. Prior to the outbreak of COVID-19, there was also a growing number of passengers sourced from outside North America in markets such as Western Europe, Asia, Australasia and South America. A significant portion of the cruise industry’s growth is expected to come from expansion of markets outside of our core North American market. We believe that non-North American passengers spend less on our services and products than North American passengers.

Our health and wellness centers on ships operating in the North American market are currently our best performing centers, and there can be no assurance that we will be able to generate the same revenue performance in non-North American markets. Additionally, our cruise line partners dictate the itineraries and geographies where their ships sail, and they may change itineraries to be less favorable to our revenue performance.

Other recent trends are those of certain cruise lines reducing the number of cruises to certain long-standing destinations and replacing them with alternative exotic destinations, as well as extending the length of voyages. As the cruise industry continues to resume operations after its virtual cessation due to the COVID-19 pandemic, such replacements and extensions could result in cruises producing lower revenues per voyage than produced in prior years, which may impact our revenues.

Accidents and other incidents involving cruise ships can materially adversely affect the cruise industry, as well as our results of operations and financial condition. Among other things, accidents reduce our revenues and increase the costs of our maritime-related insurance. In addition, accidents can adversely affect consumer demand for cruise vacations.

Other risks to the cruise industry include unscheduled withdrawals of ships from service, delays in new ship introductions, environmental violations by cruise lines, and restricted access of cruise ships to environmentally sensitive regions, hurricanes and other adverse weather conditions and increases in fuel costs. For example, in the past, hurricanes have caused the withdrawal of ships that we served from service for use in hurricane relief efforts, as well as the temporary closing of cruise ports and the destruction of facilities. A number of cruise ships have experienced outbreaks of illnesses such as norovirus, E.coli, measles and COVID-19 that have affected, at times, hundreds of passengers on a ship.

Severe weather conditions, both at sea and at ports of embarkation, also could adversely affect the cruise industry. The cruise industry also relies to a significant extent on airlines to transport passengers to ports of embarkation. A drastic reduction in airline services, and travel and immigration related restrictions due to the impacts of COVID-19, have adversely affected us. In addition, any strikes or other disruptions of airline service, including those that could follow terrorist attacks or armed hostilities, could adversely affect the ability of cruise passengers or our shipboard staff to reach their ports of embarkation, or could cause cancellation of cruises.

Cruise ships have increasingly had, and are expected to continue to have, itineraries which provide for the ships to be in port during cruises. When cruise ships are in port, our revenues are adversely affected compared with our revenues when cruise ships are at sea.

Cruise ships periodically go into dry-dock for routine maintenance, repairs and refurbishment for periods ranging from one to three weeks. Cruise ships also may be taken out of service unexpectedly for non-routine maintenance and repairs as a result of damage from an accident or otherwise, such as the Oasis of the Seas and Carnival Horizon incidents in 2019 and 2021, respectively. A ship also may go out of service with respect to us if it is transferred to a cruise line we do not serve or if it is retired from service. While we

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attempt to plan appropriately for the scheduled removal from service of ships we serve, unexpected removals from service of ships we serve can hamper the efficient distribution of our shipboard personnel, in addition to causing unexpected reductions in our shipboard revenues.

The cruise lines’ capacity has grown in recent years and is expected to continue to grow over the next few years as new ships are introduced. In order to utilize the new capacity, it is likely that the cruise industry will need to increase its share of the overall vacation market. In order to increase that market share, cruise lines may be required to offer discounted fares to prospective passengers, which would have the potentially adverse effects on us described above.

We Are Required to Make Minimum Payments under Our Agreements and May Face Increasing Payments to Cruise Lines and Owners of Our Destination Resort Health and Wellness Centers

We are obligated to make minimum annual payments to certain cruise lines and owners of our land-based venues regardless of the amount of revenues we receive from customers. We may also be required to make such minimum annual payments under any future agreements into which we enter. Accordingly, we could be obligated to pay more in minimum payments than the amount we collect from customers. As of December 31, 2021, these payments were required by four of the agreements for our destination resort health and wellness centers.

As of December 31, 2021, we guaranteed total minimum payments to owners of our land-based venues of approximately $2.9 million in the aggregate for 2022. Upon resumption of cruising and as we renew or enter into new agreements with cruise lines and land-based venues, we may experience increases in such required payments. As of December 31, 2021, there were no minimum payments guarantee amounts to cruise lines.

We Depend on the Continued Viability of the Ships and Destination Resort Health and Wellness Centers We Serve

 

Our revenues from our shipboard guests and guests at our destination resort health and wellness centers can only be generated if the ships and land-based venues we serve are open for business and continue to operate. Historically, some smaller cruise lines we served have ceased operating for economic reasons. We cannot be assured of the continued viability of any of the land-based venues (including our ability to protect our investments in build-outs of health and wellness centers) or cruise lines that we serve, particularly in the event of recurrence of the more severe aspects of the economic slowdown experienced in certain prior years, which may occur due to the COVID-19 pandemic or other disruptions. To the extent that cruise lines or land-based venues we serve, or could potentially serve in the future, cease to operate all or a portion of their operations, our results of operations and financial condition could be adversely affected.

 

Increased Costs Could Adversely Impact our Financial Results

 

To date we have incurred, and expect to continue to incur, significant costs until COVID-19 is contained relating to transportation, including repatriation, of our staff and hygiene-related protocols in our services that are mandated by government authorities or other international authorities. In addition, we expect that the industry as a whole will be subject to enhanced health and hygiene requirements with respect to COVID-19 and to counteract future outbreaks, which requirements may be costly and take a significant amount of time to implement across our global fleet cruise operations.

 

The currently existing restrictions on air travel and immigration due to the impacts of COVID-19, coupled with government mandated social-distancing norms, could increase transportation costs in the future. In addition to the adverse effects described above, periods of higher fuel costs in the future can adversely affect us directly. We depend on commercial airlines for the transportation of our shipboard employees to and from the ships we serve and, as a result, we pay for a relatively large number of flights for these employees each year. During times of higher fuel costs, such as those experienced in certain prior years, airfares, including those applicable to the transportation of our employees, have been increased by the airlines we have utilized. Additionally, increased fuel costs could also add to the costs of delivery of our products to the ships we serve and other destinations in the future. Higher fuel charges also increase the cost to consumers of transportation to cruise ship destination ports and to venues where we operate our destination resort health and wellness centers, and also increase the cost of utilities at our destination resort health and wellness centers. Periods of increasing fuel costs would likely cause these transportation costs to correspondingly increase. Extended periods of increased airfares could adversely impact our results of operations and financial condition.

Increases in prices of other commodities utilized by us in our business could adversely affect us. For example, in certain prior years, as a result of increases in the cost of cotton, the cost to us of linens and uniforms utilized in our operations has increased. Our land-based health and wellness operations also have experienced an increase in the cost of electrical utilities. Increases in minimum wage obligations in jurisdictions where we employ personnel have also affected us directly and could adversely impact our results of operation and financial condition.

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We Depend on Our Key Officers and Qualified Employees

 

Our ability to mitigate the impacts of COVID-19 and our continued success will depend to a significant extent on our senior executive officers, including Leonard Fluxman, our Executive Chairman, President and Chief Executive Officer, and Stephen Lazarus, our Chief Financial Officer and Chief Operating Officer. The unanticipated loss of the services of either of these persons or other key management personnel, due to illness, resignation or otherwise could have a material adverse effect on our business.

Our future success after the COVID-19 pandemic subsides is dependent on our ability to recruit and retain personnel qualified to perform our services. Shipboard employees typically are employed pursuant to agreements with terms of nine months. Our land-based health and wellness employees generally are employed without contracts, on an at-will basis. Other providers of shipboard health and wellness services compete with us for shipboard personnel. We also compete with destination resort health and wellness centers and other employers for our shipboard and land-based health and wellness personnel. After the effects of COVID-19 are controlled, and after we resume our operations, we may not be able to assemble a sufficient number of employees possessing the requisite training and skills necessary to conduct our business. Our inability to attract a sufficient number of qualified personnel in the future to provide our services and products could adversely impact our results of operations and financial condition. In addition, due to the impacts of COVID-19, the immigration approval processes in the United States has experienced severe backlog and may in the future proceed at a slower pace than previously had been the case. Since many of our shipboard employees are not United States citizens, exacerbation of this trend of immigration restrictions caused by COVID-19 could adversely affect our ability to meet our shipboard staffing needs on a timely basis.

Almost all of our shipboard personnel come from jurisdictions outside the United States. Due to the restrictions on international travel and immigration caused by COVID-19, our ability to obtain non-United States shipboard employees in the future will be subject to regulations in certain countries from which we source a number of our employees and, in the case of one country, control by an employment company that acts on behalf of employees and potential employees from that country. In addition, in that country, we are required to deal with local employment companies to facilitate the hiring of employees. Our ability to obtain shipboard employees from those countries on economic terms that are acceptable to us may be hampered by our inability to enter into an acceptable agreement with the applicable local employment company.

In addition, the various jurisdictions where we operate our health and wellness centers have their own licensing or similar requirements applicable to our employees, which could affect our ability to open new health and wellness centers on a timely basis or adequately staff existing health and wellness centers. The ship we serve that is United States-based also is subject to United States labor law requirements that can result in delays in obtaining adequate staffing.

Possible Adverse Changes in United States or Foreign Tax Laws or Changes in Our Business Could Increase Our Taxes

 

Background

 

We are a Bahamas international business company (“IBC”) that owns, among other entities, OneSpaWorld (Bahamas) Limited (formerly known as Steiner Transocean Limited) (“OneSpaWorld (Bahamas)”), our principal subsidiary and a Bahamas IBC that conducts our shipboard operations, primarily outside United States waters (which constitutes most of our shipboard activities), and One Spa World LLC, a Florida limited liability company that performs administrative services in connection with our operations in exchange for fees from OneSpaWorld (Bahamas) and other subsidiaries.

 

We also own, directly or indirectly, the shares of additional subsidiaries organized in the United States, the United Kingdom and other taxable jurisdictions, as well as subsidiaries organized in jurisdictions that do not subject the subsidiaries to taxation.

Currently, we and our non-United States subsidiaries are not subject to Bahamas income tax or other (including United States federal) income tax, except as set forth below. Our United States subsidiaries are subject to United States federal income tax as a consolidated group at a regular corporate rate of 21%. Generally, any dividends paid by our United States holding company to its parent, are subject to a 30% United States withholding tax. Other than as described below, we believe that none of the income generated by our non-United States subsidiaries should be effectively connected with the conduct of a trade or business within the United States and, accordingly, that such income should not be subject to United States federal income tax.

A foreign corporation generally is subject to United States federal corporate income tax at a rate of 21% on its taxable income that is effectively connected with the conduct of a trade or business within the United States (“effectively connected income” or “ECI”). A foreign corporation also can be subject to a branch profits tax of 30% imposed on “dividend equivalent amounts” of its after-tax earnings that are ECI.

ECI may include any type of income from sources within the United States (“U.S.-source income”), but only limited types of income from sources without the United States (“foreign-source income”). OneSpaWorld (Bahamas) has three types of income: income from the provision of health and wellness services, income from the sales of health and wellness products and income from

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leasing (at rates determined on an arm’s length basis) our shipboard employees and space to a United States subsidiary that performs health and wellness services and sells health and wellness products while the ships are in United States waters and pays OneSpaWorld (Bahamas) the amounts referenced above (the “U.S. Waters Activities”).

We believe that most of OneSpaWorld (Bahamas)’s shipboard income should be treated as foreign-source income under the U.S. Treasury Department regulations for determining the source of such income (the “source rule regulations”). This belief is based on the following:

 

all of the functions performed, resources employed and risks assumed in connection with the performance of the above-mentioned services and sales (other than OneSpaWorld (Bahamas)’s involvement in the U.S. Waters Activities) occur outside of the United States; and

 

income to OneSpaWorld (Bahamas) from the U.S. Waters Activities is ECI, and thus subject to United States income taxation, but constitutes a small percentage of OneSpaWorld (Bahamas)’s total income.

To the extent that our belief about the source of OneSpaWorld (Bahamas)’s shipboard income is correct, such income would not be ECI because such income is income of a character (compensation for services, gains on sales of certain property, and rental income from the lease of tangible property) that cannot be treated as ECI unless it is treated as U.S.-source income. However, OneSpaWorld (Bahamas)’s shipboard income generated while in port in The Bahamas is subject to the payment of a 10% VAT payable to the Bahamas Department of Inland Revenue.

The Risks to OneSpaWorld

Under United States Treasury Department regulations, as of January 1, 2007, all or a portion of OneSpaWorld (Bahamas)’s income for periods commencing on or after that date could be subject to United States federal income tax at a rate of up to 35% with respect to income earned prior to January 1, 2018 and 21% with respect to income earned thereafter:

 

to the extent the income from OneSpaWorld (Bahamas)’s shipboard operations that OneSpaWorld believes are performed outside of United States territorial waters is considered by the Internal Revenue Service (“IRS”) to be attributable to functions performed, resources employed or risks assumed within the United States or its possessions or territorial waters;

 

to the extent the income from OneSpaWorld (Bahamas)’s sale of health and wellness products for use, consumption, or disposition in international waters is considered by the IRS to be attributable to functions performed, resources employed or risks assumed within the United States, its possessions or territorial waters; or

 

to the extent that passage of title or transfer of ownership of products sold by OneSpaWorld (Bahamas) for use, consumption or disposition outside international waters, takes place in the United States or a United States office materially participates in such sales.

If OneSpaWorld (Bahamas) were considered to be a controlled foreign corporation (“CFC”) for purposes of the source rule regulations, any of its shipboard income would be considered U.S.-source income and would be subject to United States federal income tax unless such income is attributable to functions performed, resources employed or risks assumed in a foreign country or countries.

A foreign corporation is a CFC if more than 50% of (i) the total combined voting power of all classes of stock entitled to vote or (ii) the total value of the stock of such corporation is owned or considered as owned by “United States shareholders” (“U.S. shareholders”) on any day during the taxable year of such corporation. A “U.S. Shareholder,” generally, means a “United States person” (“U.S. person”) who owns directly, indirectly or constructively at least 10% of the voting power or value of the stock of a foreign corporation. A “U.S. person” is a citizen or resident of the United States, a domestic partnership, a domestic corporation, any domestic estate or a trust over which a United States court is able to exercise administrative supervision and over which one or more U.S. persons have authority to control all substantial decisions.

Under certain “downward attribution” rules made applicable by a provision of Pub. L. No. 115-97, enacted December 22, 2017 (known as the “Tax Cuts and Jobs Act” (“TCJA”)), to determine the CFC status of a foreign corporate subsidiary of a foreign parent corporation that also has a U.S. subsidiary, the foreign subsidiary may in certain circumstances be treated as a CFC based solely on its brother-sister relationship to the U.S. subsidiary. However, on September 22, 2020, the Federal Register published an amendment to the source rule regulations (the “2020 amendment”), providing that for purposes of that regulation, the status of a foreign corporation as a CFC or not is determined without regard to the above-mentioned provision of the TCJA. The 2020 amendment applies to taxable years of foreign corporations ending on or after October 1, 2019. For taxable years of foreign corporations ending before October 1, 2019, a taxpayer may apply such provisions to the last taxable year of a foreign corporation beginning before January 1, 2018, and each

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subsequent taxable year of the foreign corporation, provided that the taxpayer and U.S. persons that are related (within the meaning of section 267 or 707) to the taxpayer consistently apply such provisions with respect to all foreign corporations.

Accordingly, solely for purposes of the source rule regulations, we believe that OneSpaWorld (Bahamas) should not be characterized as a CFC. This should allow us to treat most of our shipboard income, which is earned by a foreign corporation that would not be a CFC but for the TCJA provision referred to above, to be foreign source income to the same extent as income earned by a foreign corporation that is not a CFC.

If OneSpaWorld (Bahamas) is subject to United States federal income tax (at a rate of 21%) on its income that is ECI, it also would be subject to a branch profits tax of 30% on its annual dividend equivalent amount (a measure of its after-tax earnings that are considered to be withdrawn, from its United States business).

Certain non-United States jurisdictions may also assert that OneSpaWorld (Bahamas)’s income is subject to their income tax.

Some of our United Kingdom, Bahamas and United States subsidiaries provide goods and/or services to us and certain of our other subsidiaries. The United Kingdom or United States tax authorities may assert that some or all of these transactions do not contain arm’s length terms. In that event, income or deductions could be reallocated among our subsidiaries in a manner that could increase the United Kingdom or United States tax on us. This reallocation also could result in the imposition of interest and penalties.

We cannot assure you that the tax laws on which we have relied to minimize our income taxes will remain unchanged in the future.

Our land-based operations, the income from which is generally taxable, have significantly increased and we intend to consider land-based opportunities in the future (though we cannot assure you that we will be successful in finding appropriate opportunities). To the extent that we are able to effectively implement this strategy, the amount of our income that is subject to tax would increase.

The Success of Health and Wellness Centers Depends on the Hospitality Industry

 

We are dependent on the hospitality industry for the success of destination resort centers. The public concern over the COVID-19 pandemic, coupled with a drop in demand for international travel and leisure, and restrictions on international travel and immigration have adversely affected the hospitality industry. To the extent that consumers do not choose to stay at venues where we operate health and wellness centers, over which we have no control, our business, operations, results of operations and financial condition could be materially adversely affected.

 

The considerations described above regarding the effects of adverse economic conditions on the cruise industry apply similarly to the hospitality industry, including the destination resorts where we have operations. Periods of economic slowdown result in reduced destination resort occupancy rates and decreased spending by destination resort guests, including at the destination resorts where we operate health and wellness centers. The recurrence of challenging economic conditions, as well as instances of increased fuel costs, which have occurred in certain prior years, could result in lower destination resort occupancy, which would have a direct, adverse effect on the number of destination resort guests that purchase our health and wellness services and products at the venues in question. Accordingly, such lower occupancy rates at the destination resorts we serve could have a material adverse effect on our results of operations and financial condition.

The following are other risks related to the hospitality industry:

 

changes in the national, regional and local conditions (including major national or international terrorist attacks, armed hostilities, such as the recent invasion of Ukraine, or other significant adverse events, including an oversupply of hotel properties or a reduction in demand for hotel rooms);

 

the possible loss of funds expended for build-outs of health and wellness centers at venues that fail to open, underperform or close due to economic slowdowns or otherwise;

 

the attractiveness of the venues to consumers and competition from comparable venues in terms of, among other things, accessibility and cost;

 

the outbreaks of illnesses, such as the COVID-19 outbreak, or the perceived risk of such outbreaks, in locations where we operate land-based health and wellness centers or locations from which guests of such wellness centers are sourced;

 

weather conditions, including natural disasters, such as earthquakes, hurricanes, tsunamis and floods, which may be exacerbated due to climate change;

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possible labor unrest or changes in economics based on collective bargaining activities;

 

changes in ownership, maintenance or room rates of, or popular travel patterns and guest demographics at the venues we serve;

 

possible conversion of guest rooms at hotels to condominium units and the decrease in health and wellness center usage that often accompanies such conversions, and the related risk that condominium hotels are less likely to be suitable venues for our health and wellness centers;

 

reductions in destination resort occupancy during major renovations or as a result of damage or other causes;

 

acquisition by destination resort chains of health and wellness service providers to create captive “in-house” brands and development by destination resort chains of their own proprietary health and wellness service providers, reducing the opportunity for third-party health and wellness providers like us; and

 

the financial condition of the airline industry, which, as a result of the COVID-19 pandemic, resulted in an elimination of, or reduction in, airline service to locations where we operate destination resort facilities, which has resulted and could continue to result in fewer guests at those venues.

We Compete with Passenger Activity Alternatives

We compete with passenger activity alternatives on cruise ships and with competing providers of services and products similar to our services and products seeking agreements with cruise lines. Casinos, bars and a variety of shops are found on almost all of the ships served by us. In addition, ships dock in ports which provide opportunities for additional shopping as well as other activities that compete with us for passenger attention and disposable income, and cruise ships are increasingly offering itineraries providing for greater numbers of port days. Cruise ships also typically offer swimming pools and other recreational facilities and activities, as well as musical and other entertainment, all without additional charge to the passengers. Certain cruise lines we serve and have formerly served have engaged the services of third parties or their own personnel for the operation of the health and wellness centers for all or some of their ships. Additional cruise lines could take similar actions in the future. In addition, there are certain other entities offering services in the cruise industry similar to those provided by us and we may not be able to serve new cruise ships that come into service and that are not covered by our cruise line agreements.

Many of the land-based venues that we serve or may serve in the future offer recreational entertainment facilities and activities similar to those offered on cruise ships, often without additional charge to guests. A number of the hotels we serve also offer casino gambling. These activities and facilities compete with us for customer time and disposable income. Our destination resort health and wellness centers also compete with other health and wellness centers in their vicinities, as well as with other beauty, relaxation or other therapeutic alternatives. These include salons that offer these services at prices significantly lower than those charged by us. We believe, however, that the prices charged by us are appropriate for the quality of the experience we provide in our respective markets. In addition, we also compete, both for customers and for contracts with hotels, with health and wellness centers and beauty salons owned or operated by companies that have offered their destination resort health and wellness services longer than we have, some of which enjoy greater name recognition with customers and prospective customers than health and wellness centers operated by us. Also, a number of these health and wellness center operators may have greater resources than we do. Further, some hotel operators provide health and wellness services themselves. If we are unable to compete effectively in one or more areas of our operations, our results of operations and financial condition could be adversely affected.

Risks Relating to Non-U.S. Operations and Hostilities

The cruise lines we serve operate in waters and call on ports throughout the world and our destination resort health and wellness centers are located in a variety of countries. Operating internationally exposes us to a number of risks, including increased exposure to a wider range of regional and local economic conditions, volatile local political conditions, potential changes in duties and taxes, including changing and/or uncertain interpretations of existing tax laws and regulations, required compliance with additional laws and policies affecting cruising, vacation or maritime businesses or governing the operations of foreign-based companies, currency fluctuations, interest rate movements, difficulties in operating under local business environments, port quality and availability in certain regions, U.S. and global anti-bribery laws or regulations, imposition of trade barriers and restrictions on repatriation of earnings.

Operating globally also exposes us to numerous and sometimes conflicting legal, regulatory and tax requirements. In many parts of the world, including countries in which we operate, practices in the local business communities might not conform to international business standards. We must adhere to policies designed to promote legal and regulatory compliance as well as applicable laws and regulations. However, we might not be successful in ensuring that our employees, agents, representatives and other third parties with whom we associate throughout the world properly adhere to them. Failure by us, our employees or any of these third parties to adhere to our policies or applicable laws or regulations could result in penalties, sanctions, damage to our reputation and related costs which in turn could negatively affect our results of operations and cash flows.

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As a global operator, our business may also be impacted by changes in U.S. policy or priorities in areas such as trade, immigration and/or environmental or labor regulations, among others. Depending on the nature and scope of any such changes, they could impact our domestic and international business operations. Any such changes, and any international response to them, could potentially introduce new barriers to passenger or crew travel and/or cross border transactions, impact our guest experience and/or increase our operating costs.

The waters and countries in which we operate include geographic regions that, from time to time, experience political and civil unrest and armed hostilities. Political unrest in areas where we operate health and wellness centers also has adversely affected our operations and continued political unrest in the Middle East has adversely affected the travel industry in that region. The threat of additional attacks and of armed hostilities internationally, such as the hostilities in Eastern Europe and Ukraine, or locally, may cause prospective travelers to cancel their plans, including plans for cruise or land-based venue vacations. Weaker cruise industry and land-based venue performance could have a material adverse effect on our results of operations and financial condition.

Increased Severe Weather, Including as A Result of Climate Change, Can Disrupt Our Operations

 

Our operations may be impacted by adverse weather patterns or other natural disasters, such as hurricanes, earthquakes, floods, fires, tornados, tsunamis, typhoons and volcanic eruptions. Most scientists have concluded that increasing concentrations of greenhouse gases in the Earth’s atmosphere that contribute to climate change could have significant physical effects on weather conditions, such as increased frequency and severity of hurricanes, storms, droughts, floods, and other climatic events. It is possible that cruises we serve could be forced to alter itineraries or cancel a cruise or a series of cruises or tours due to these or other factors. Extreme weather events, such as hurricanes, floods and typhoons, may not only cause disruption, alteration, or cancellation of cruises and closures of destination resort health and wellness centers but may also adversely impact commercial airline flights and other transport or prevent certain individuals from electing to utilize our offerings altogether. In addition, these extreme weather conditions could result in increased wave and wind activity, which would make it more challenging to sail and dock ships and could cause sea/motion sickness among guests and crew on the ships we serve. These events could have an adverse impact on the safety and satisfaction of cruising and could have an adverse impact on our net revenue yields and profitability. Additionally, these extreme weather conditions could impact our ability to provide our cruise products and services as well as to obtain insurance coverage for operations in such areas at reasonable rates.

Risk of Early Termination of Land-Based Health and Wellness Center Agreements

 

A number of our land-based health and wellness center agreements provide that landlords may terminate the agreement prior to its expiration date (provided, in some cases, that we receive certain compensation with respect to our build-out expenses and earnings lost as a result of such termination). While we always attempt to negotiate the best deal we can in this regard, we may not be able to successfully negotiate a termination fee in any of our future agreements or that any amounts we would receive in connection with such termination accurately reflects the economic value of the assets we would be leaving behind as a result of such termination. In addition, in the event of certain terminations of an agreement with a land-based venue, such as by the venue operator after our breach of an agreement, or as a result of the bankruptcy of a venue, even if we have a provision in our agreement providing for a termination payment, we could receive no compensation with respect to build-out expenditures we have incurred.

 

We also attempt to obtain terms in our land-based health and wellness center agreements that protect us in the event that the lessor’s lender forecloses and takes over the property in question. However, we cannot always obtain such protective “non-disturbance” terms. In the event that the lender to a land-based venue owner under an agreement where no such non-disturbance term is included forecloses on that property, our agreement could be terminated prior to the expiration of its term. In such case, in addition to the loss of income from that health and wellness center, we could lose the residual value of any investment we made to build out that facility.

 

Delays in New Ship Introductions Could Slow Our Growth

 

Our growth depends, in part, on our serving new cruise ships brought into service. A number of cruise lines we serve have experienced in the past and recently, and could experience in the future, delays in bringing new ships into service. In addition, there is a limited number of shipyards in the world capable of constructing large cruise ships in accordance with the standards of major cruise lines. This also may contribute to delays in new ship construction. Such delays could slow our growth and have an adverse impact on our results of operations and financial condition.

Changes in and Compliance with Laws and Regulations Relating to Environment, Health, Safety, Security, Data Privacy and Protection, Tax and Anti-Corruption Under Which We Operate May Lead to Litigation, Enforcement Actions, Fines, or Penalties

 

We are subject to numerous international, national, state and local laws, regulations and treaties, including social issues, health and safety (including related to the COVID-19 pandemic), security, data privacy and protection, and tax, among other matters. Failure to comply with these laws, regulations, treaties and agreements has led and could lead to enforcement actions, fines, civil or criminal penalties or the assertion of litigation claims and damages. COVID-19 will increase regulatory and partner requirements exposing us

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to risks and uncertainties in connection with our ability to develop strategies to enhance our health and safety protocols to adapt to the current pandemic environments unique challenges once operations resume and to otherwise safely resume our operations when conditions allow. We will be required to coordinate and cooperate with the CDC, U.S. and other nation governments, and global public health authorities to take precautions to protect the health, safety and security of guests and shipboard personnel and implement certain precautions once operations resume in the future. New legislation, regulations or treaties, or changes thereto, could impact our operations and would likely subject us to increased compliance costs in the future. We could also be subject to litigation alleging non-compliance with the new legislation. In addition, training of crew may become more time consuming and may increase our operating costs due to increasing regulatory and other requirements.

 

Environmental laws and regulations or liabilities arising from past or future releases of, or exposure to, hazardous substances or vessel discharges, including ballast water and waste disposal, could materially adversely affect our business, profitability and financial condition. Some environmental groups have lobbied for more stringent regulation of cruise ships. Various agencies and regulatory organizations have enacted or are considering new regulations or policies, such as stricter emission limits to reduce greenhouse gas effects, which could adversely impact the cruise industry.

Our guest and employee relationships provide us with access to sensitive data. We are subject to laws and requirements related to the treatment and protection of such sensitive data. We may be subject to legal liability and reputational damage if we do not comply with data privacy and protection regulations. Various governments, agencies and regulatory organizations have enacted and are considering new regulations and implementation of rules for existing regulations. Additional requirements could negatively impact our ability to market cruises to consumers and increase our costs.

We are subject to the European Union (“EU”) General Data Protection Regulation (“GDPR”), which came into effect in May 2018 and imposes significant obligations to businesses that sell products or services to EU customers or otherwise control or process personal data of EU residents. Should we violate or not comply with the GDPR, or any other applicable laws or regulations, contractual requirements relating to data security and privacy, either intentionally or unintentionally, or through the acts of intermediaries, it could have a material adverse effect on our business, financial condition and results of operations, as well as subject us to significant fines, litigation, losses, third-party damages and other liabilities.

We are subject to the examination of our income tax returns by tax authorities in the jurisdictions where we operate. There can be no assurance that the outcome from these examinations will not adversely affect our profitability.

As budgetary constraints continue to adversely impact the jurisdictions in which we operate, increases in income or other taxes affecting our operations may be imposed. Some social activist groups have lobbied for more taxation on income generated by cruise companies. Certain groups have also generated negative publicity for us. In recent years, certain members of the U.S. Congress have proposed various forms of legislation that would result in higher taxation on income generated by cruise companies.

Our global operations subject us to potential liability under anti-corruption, economic sanctions, and other laws and regulations. The Foreign Corrupt Practices Act, the UK Bribery Act and other anti-corruption laws and regulations (“Anti-Corruption Laws”) prohibit corrupt payments by our employees, vendors, or agents. While we devote substantial resources to our global compliance programs and have implemented policies, training, and internal controls designed to reduce the risk of corrupt payments, our employees, vendors, or agents may violate our policies. Our failure to comply with Anti-Corruption Laws could result in significant fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions or limitations on the conduct of our business, and damage to our reputation. Operations outside the U.S. may also be affected by changes in economic sanctions, trade protection laws, policies, and other regulatory requirements affecting trade and investment. We may be subject to legal liability and reputational damage if we improperly sell goods or otherwise operate improperly in areas subject to economic sanctions such as Crimea, Iran, North Korea, Cuba, Sudan, and Syria, or if we improperly engage in business transactions with persons subject to economic sanctions.

These various international laws and regulations could lead and have led to enforcement actions, fines, civil or criminal penalties or the assertion of litigation claims and damages. In addition, improper conduct by our employees or agents could damage our reputation and lead to litigation or legal proceedings that could result in significant awards or settlements to plaintiffs and civil or criminal penalties, including substantial monetary fines. Such events could lead to an adverse impact on our financial condition or profitability, even if the monetary damage is mitigated by our insurance coverage.

As a result of ship or other incidents, litigation claims, enforcement actions and regulatory actions and investigations, including, without limitation, those arising from personal injury, loss of life, loss of or damage to personal property, business interruption losses or environmental damage to any affected coastal waters and the surrounding areas, may be asserted or brought against various parties, including us. The time and attention of our management may also be diverted in defending such claims, actions and investigations. We may also incur costs both in defending against any claims, actions and investigations and for any judgments, fines, or civil or criminal penalties if such claims, actions or investigations are adversely determined and not covered by our insurance policies.

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We Could be Subject to Governmental Investigations or Penalties, Legal Proceedings, Litigation, and Class Actions Related to the COVID-19 Pandemic that Could Adversely Impact our Reputation, Financial Condition, and Results of Operations

 

Legal proceedings or litigation against us related to the COVID-19 pandemic brought by our employees, customers, cruise line partners, resort partners, shareholders, creditors or others could lead to tangible adverse effects on our business, including damages payments, payments under settlement agreements and fines.

Disagreements with our cruise line or destination resort partners could also result in litigation. The nature of our responsibilities under our agreements with cruise line and destination resort partners enforce the standards required for our brands and may be subject to interpretation and will from time to time give rise to disagreements, which may include disagreements over the need for payments, reimbursements and other costs. Such disagreements may be more likely during difficult business environments, such as the one we have seen in recent months due to the adverse impacts of COVID-19. We seek to resolve any disagreements to develop and maintain positive relations with current and potential cruise line and destination resort partners, but we cannot provide assurance that we can always do so. Failure to resolve such disagreements may result in litigation in the future. If any such litigation results in an adverse judgment, settlement, or court order, we could suffer significant losses, our profits could be reduced, or our future ability to operate our business could be constrained.

While payments under some claims and lawsuits, or settlements of claims and lawsuits, may be covered by insurance such that the maximum amount of our liability, net of any insurance recoverable, could be typically limited to our self-insurance retention levels, the position that insurance companies will take with respect to claims related to COVID-19 is uncertain.

Product Liability and Other Potential Claims Could Adversely Affect Us

 

The nature and use of our products and services could give rise to liability if a customer were injured while receiving one of our services. Guests at our health and wellness centers could be injured, among other things, in connection with their use of our fitness equipment, sauna facilities or other facilities. If any of these events occurred, we could incur substantial litigation expense and be required to make payments in connection with settlements of claims or as a result of judgments against us.

 

We maintain insurance to cover a number of risks associated with our business. While we seek to obtain comprehensive insurance coverage at commercially reasonable rates, we cannot be certain that appropriate insurance will be available to us in the future on commercially reasonable terms or at all. Our insurance policies are subject to coverage limit, exclusions and deductible levels and are subject to non-renewal upon termination at the option of the applicable insurance company. Our inability to obtain insurance coverage at commercially reasonable rates for the potential liabilities that we face could have a material adverse effect on our results of operations and financial condition. In addition, in connection with insured claims, we bear the risks associated with the fact that insurers often control decisions relating to pre-trial settlement of claims and other significant aspects of claims and their decisions may prove to not be in our best interest in all cases.

We believe that our current coverage is adequate to protect us against most of the significant risks involved in the conduct of our business, but we self-insure or use higher deductibles for various risks. Accordingly, we are not protected against all risks (including failures by third-party service providers such as insurance brokers to fulfill their duties), which could result in unexpected increases in our expenses in the event of certain claims against us.

If the types of services we offer increase, the potential for claims against us also could increase. We self-insure potential claims regarding certain of our medi-spa services. High visibility claims also could cause us to receive adverse publicity and suffer a loss of sales, and, therefore, our results of operations and financial condition could be materially adversely affected in such cases. We are, and may in the future be, subject to other legal proceedings, including claims presented as class actions. Litigation is subject to many uncertainties, and we cannot predict the outcome of individual matters. It is reasonably possible that the final resolution of these matters could have a material adverse effect on our results of operations and financial condition.

Our Indebtedness Could Adversely Affect Our Financial Condition and Ability to Operate and We May Incur Additional Debt

 

As of December 31, 2021, we have $234.5 million of secured indebtedness under our First Lien Term Loan Facility and Second Lien Term Loan Facility, and our First Lien Revolving Facility (collectively, the “Credit Facilities”). Our debt level and the terms of our financing arrangements could adversely affect our financial condition and limit our ability to successfully implement our growth strategies. In addition, under the Credit Facilities, certain of our direct and indirect subsidiaries have granted the lenders a security interest in substantially all of their assets. Our ability to meet our debt service obligations will depend on our future performance, which will be affected by the other risk factors described herein. If we do not generate enough cash flow to pay our debt service obligations, we may be required to refinance all or part of our existing debt, sell our assets, borrow more money or raise equity. We may not be able to take any of these actions on a timely basis, on terms satisfactory to us, or at all.

 

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The Credit Facilities bear interest at variable rates. If market interest rates increase, variable rate debt will create higher debt service requirements, which could adversely affect our cash flow.

Our Credit Facilities Contain Financial and Other Covenants. The Failure to Comply with Such Covenants Could Have An Adverse Effect on Us

Our Credit Facilities contain certain financial covenants and a number of traditional negative covenants, including limitations on our ability to, among other things, incur and/or undertake asset sales and other dispositions, liens, indebtedness, certain acquisitions, and investments, consolidations, mergers, reorganizations and other fundamental changes, payment of dividends and other distributions to equity and warrant holders and prepayments of material subordinated debt, in each case, subject to customary exceptions. Any failure to comply with the restrictions of the Credit Facilities, including any failure to comply with certain financial covenants due to the negative effects of COVID-19 on our revenue and results of operations, may result in an event of default under the agreements. If an event of default occurs, the lenders under the Credit Facilities are entitled to take various actions, including the acceleration of amounts due under the Credit Facilities and all actions permitted to be taken by a secured creditor, subject to customary intercreditor provisions among the first and second lien secured parties.

Our First and Second Lien Term Facilities Are Tied to LIBOR

The London interbank offered rate (“LIBOR”), is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. Our current portfolio of debt and financial instruments currently tied to LIBOR consists of the Company’s First and Second Lien Term Facilities. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if at that time whether or not LIBOR will cease to exist, or if new methods of calculating LIBOR will be established such that it continues to exist after 2021 or if replacement conventions will be developed. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. Dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by Treasury securities (“SOFR”). SOFR is observed and backward-looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question. As such, the future of LIBOR at this time is uncertain. At this time, due to a lack of consensus as to what rate or rates may become accepted alternatives to LIBOR, it is impossible to predict the effect of any such alternatives on our liquidity. However, if LIBOR ceases to exist, we may need to renegotiate certain of our financing agreements that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established. As of December 31, 2021, we had $234.5 million in outstanding indebtedness tied to LIBOR.

We Restated Our Previously Issued Consolidated Financial Statements as of December 31, 2020 and 2019 and for the Year Ended December 31, 2020 (Successor), and the Period from March 20, 2019 to December 31, 2019 (Successor), Which May Lead to Additional Risks and Uncertainties, Including Loss of Investor Confidence and Negative Impacts on Our Share Price

On April 12, 2021, the SEC staff issued a public statement entitled “Staff Statement on Accounting and Reporting Considerations for Warrants issued by Special Purpose Acquisition Companies (“SPACs”)” (the “Statement”). On May 10, 2021, we amended our 2020 Form 10-K to restate previously issued consolidated financial statements as of December 31, 2020 and 2019 and for the year ended December 31, 2020 (Successor), and the Period from March 20, 2019 to December 31, 2019 (Successor) (the “Affected Periods”). The restatement related to accounting for warrants incorrectly as components of equity as opposed to liabilities. The restatement of the financial statements (the “Restatement”) had no impact on our liquidity, cash, cash equivalents, or adjusted EBITDA for the Affected Periods. We expect that we will recognize non-cash gains or losses due to the quarterly fair valuation of our Warrants and that such gains or losses could be material.

As a result of the foregoing matters, we may become subject to additional risks and uncertainties, including, among others, unanticipated costs for accounting and legal fees, the increased possibility of legal proceedings, shareholder lawsuits, governmental agency investigations, and inquiries by the Nasdaq Capital Market or other regulatory bodies, which could cause investors to lose confidence in our reported financial information and could subject our Company to civil or criminal penalties, shareholder class actions or derivative actions. We could face monetary judgments, penalties or other sanctions that could have a material adverse effect on our business, financial condition and results of operations and could cause our share price to decline. If any such actions occur, they may consume a significant amount of management’s time and attention and may result in additional legal, accounting, insurance and other costs. If we do not prevail in any such proceedings, we could be required to pay damages or settlement costs. In addition, the Restatement and related matters could impair our reputation. Each of these occurrences could have a material adverse effect on our business, financial condition, results of operations and share price.

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We Identified a Material Weakness in our Internal Control over Financial Reporting as of December 31, 2020; if we are Unable to Establish and Maintain an Effective System of Internal Control over Financial Reporting in the Future, we may not be able to Accurately Report our Financial Results, or do so in a Timely Manner, Which may Adversely Affect Investor Confidence in us and Materially Adversely Affect our Business and Operating Results.

Following the issuance of the SEC’s Statement, on April 30, 2021, our management and our audit committee concluded that, in light of the Statement, it was appropriate to restate our previously issued audited financial statements for the Affected Periods. See “—We Restated Our Previously Issued Consolidated Financial Statements as of December 31, 2020 and 2019 and for the Year Ended December 31, 2020 (Successor), and the Period from March 20, 2019 to December 31, 2019 (Successor), Which May Lead to Additional Risks and Uncertainties, Including Loss of Investor Confidence and Negative Impacts on Our Share Price.” As part of such process, our management and audit committee determined that our disclosure controls and procedures for the Affected Periods were not effective with respect to the classification of our Warrants as components of equity as opposed to liabilities, and that the foregoing arose as a result of a material weakness in our internal control over financial reporting.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented, or detected and corrected on a timely basis. Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. As of the date of the filing of this report, we have completed our remediation plan for the material weakness we identified in relation to the Restatement of our financial statements for the Affected Periods. While management believes that the remedial efforts have resolved the identified material weakness, there is no assurance that such remedial efforts will ultimately have the intended effects or that additional remedial actions will not be necessary.

If we identify any new material weakness in the future, any such newly identified material weakness could limit our ability to prevent or detect a misstatement of our accounts or disclosures that could result in a material misstatement of our annual or interim financial statements. In such case, we may be unable to maintain compliance with securities law requirements regarding accurate and timely filing of periodic reports and with applicable Nasdaq listing requirements, investors may lose confidence in our financial reporting, and our stock price may decline as a result. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to avoid potential future material weaknesses. Additionally, as a result of the material weakness we identified in our internal controls over financial reporting for the Affected Periods, the Restatement, the change in the accounting treatment of our Warrants, as well as other matters raised or that may in the future be raised by the SEC, we may in the future be exposed to litigation or other disputes concerning, among others, claims invoking the federal and state securities laws, contractual claims or other claims arising from the Restatement and the material weakness in our internal control over financial reporting and the preparation of our financial statements. Any such litigation or dispute, regardless of its outcome, could have a material adverse effect on our business, operations, financial condition, results of operations and share price.

If We Are Unable to Execute Our Growth Strategies, Including Our Ability to Offer and Integrate New Services and Products, Our Business Could Be Adversely Affected

 

The demands of consumers with respect to health and wellness services and products continue to evolve. Among other things, there is a continuing trend to add services at health and wellness centers similar to those traditionally provided in medical facilities, including services relating to skin care. If we are unable to identify and capture new audiences, our ability to successfully integrate additional services and products will be adversely affected. Our ability to provide certain additional services depends on our ability to find appropriate third parties with whom to work in connection with these services and, in certain cases, could be dependent on our ability to fund substantial costs. We cannot assure that we will be able to find such appropriate third parties or be able to fund such costs. We also cannot assure that we will be able to continue to expand our health and wellness services sufficiently to keep up with consumer demand. Accordingly, we may not be able to successfully implement our growth strategies or continue to maintain sales at our current rate, or at all. If we fail to implement our growth strategies, our revenue and profitability may be negatively impacted, which would adversely affect our business, financial condition and results of operations.

 

Our Business Could Be Adversely Affected if We Are Unable to Successfully Protect Our Trademarks or Obtain New Trademarks

 

The market for our services and products depends to a significant extent upon the value associated with our brand names. Although we take appropriate steps to protect our brand names, in the future, we may not be successful in asserting trademark protection in connection with our efforts to grow our business or otherwise due to the nature of certain of our marks or for other reasons. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. The costs required to protect our trademarks and trade names may be substantial. If other parties infringe on our intellectual property rights, the value of our brands in the marketplace may be diluted. In addition, any infringement of our intellectual property rights would likely result in a commitment of our time and resources to protect these rights through litigation or otherwise. One or more adverse judgments with respect to these intellectual property rights could negatively impact our ability to compete and could adversely affect our results of operations and financial condition.

 

We Are Subject to Currency Risk

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Fluctuations in currency exchange rates compared to the U.S. Dollar can impact our results of operations, most significantly because we pay for the administration of recruitment and training of our shipboard personnel in U.K. Pounds Sterling and Euros. Accordingly, while the relative strength of the U.S. Dollar has improved recently, renewed weakness of the U.S. Dollar against those currencies can adversely affect our results of operations, as has occurred in some recent years. To the extent that the U.K. Pound Sterling or the Euro is stronger than the U.S. Dollar, our results of operations and financial condition could be adversely affected.

 

We May Be Exposed to the Threat of Cyber Attacks and/or Data Breaches, which Could Cause Business Disruptions and Loss

 

Cyberattacks can vary in scope and intent from economically driven attacks to malicious attacks targeting our key operating systems with the intent to disrupt, disable or otherwise cripple our maritime and/or land-based operations. This can include any combination of phishing attacks, malware and/or viruses targeted at our key systems. The breadth and scope of this threat has grown over time, and the techniques and sophistication used to conduct cyberattacks, as well as the sources and targets of the attacks, change frequently. While we invest time, effort and capital resources to secure our key systems and networks, we cannot provide assurance that we will be successful in preventing or responding to all such attacks.

A successful cyberattack may target us directly, or may be the result of a third-party vendor’s inadequate care. In either scenario, we may suffer damage to our key systems and/or data that could interrupt our operations, adversely impact our reputation and brand and expose us to increased risks of governmental investigation, litigation and other liability, any of which could adversely affect our business. Furthermore, responding to such an attack and mitigating the risk of future attacks could result in additional operating and capital costs in systems technology, personnel, monitoring and other investments.

Even if we are fully compliant with legal and/or industry standards and any relevant contractual requirements, we still may not be able to prevent security breaches involving sensitive data and/or critical systems. Any breach, theft, loss, or fraudulent use of guest, employee, third-party or company data, could adversely impact our reputation and brand and our ability to retain or attract new customers, and expose us to risks of data loss, business disruption, governmental investigation, litigation and other liability, any of which could adversely affect our business. Significant capital investments and other expenditures could be required to remedy the problem and prevent future breaches, including costs associated with additional security technologies, personnel, experts and credit monitoring services for those whose data has been breached. Further, if we or our vendors experience significant data security breaches or fail to detect and appropriately respond to significant data security breaches, we could be exposed to government enforcement actions and private litigation.

Changes in Privacy Law Could Adversely Affect Our Ability to Market Our Services Effectively

 

Our ability to market our services effectively is an important component of our business. We rely on a variety of direct marketing techniques, including telemarketing, email marketing, and direct mail. Any further restrictions under laws such as the Telemarketing Sales Rule, the CAN-SPAM Act of 2003, the GDPR, and various United States state laws or new federal laws regarding marketing and solicitation, or international data protection laws that govern these activities, could adversely affect the continuing effectiveness of telemarketing, email, and postal mailing techniques and could force further changes in our marketing strategy. If this were to occur, we may be unable to develop adequate alternative marketing strategies, which could impact our ability to effectively market and sell our services.

 

Risks Related to Ownership of Our Securities

 

Steiner Leisure Owns a Significant Portion of Our Shares and Has Representation on Our Board; Steiner Leisure May Have Interests That Differ from Those of Other Shareholders

 

As of the date of this report, approximately 21% of our common shares are beneficially owned by Steiner Leisure. Two of our directors were nominated by Steiner Leisure, and as a result, Steiner Leisure may be able to significantly influence the outcome of matters submitted for director action, subject to our directors’ obligation to act in the interest of all of our shareholders, and for shareholder action, including the designation and appointment of the OneSpaWorld Board of Directors (and committees thereof) and approval of significant corporate transactions, including business combinations, consolidations and mergers. The influence of Steiner Leisure over our management could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could cause the market price of our common shares to decline or prevent our shareholders from realizing a premium over the market price for our common shares.

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Under the “Business Opportunities” section of our Third Amended and Restated Memorandum of Association and Second Amended and Restated Articles of Association (our “Articles”), among other things, we have renounced any interest or expectancy of us or our subsidiaries being offered an opportunity to participate in any potential transaction opportunities available to Steiner Leisure and certain of its affiliates and related parties, such parties have no obligation to communicate or offer such potential transaction opportunities to us, and such parties will have no duty to refrain from engaging in the same or similar businesses as us. Prospective investors in our common shares should consider that the interests of Steiner Leisure may differ from their interests in material respects.

 

If We Fail to Maintain an Effective System of Internal Control over Financial Reporting, We May Not Be Able to Accurately Report Our Financial Results or Prevent Fraud; as a Result, Shareholders Could Lose Confidence in Our Financial and Other Public Reporting, Which Is Likely to Negatively Affect Our Business and the Market Price of Our Common Shares

Effective internal control over financial reporting is necessary for us to provide reliable financial reports and prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in our implementation could cause us to fail to meet our reporting obligations. In addition, any testing conducted by us, or any testing conducted by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which is likely to negatively affect our business and the market price of our shares.

We are required to disclose changes made in our internal controls and procedures on a quarterly basis and our management is required to assess the effectiveness of these controls annually. However, for as long as we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. We could be an “emerging growth company” for up to five years following the date we became a public company, until 2024. In the event we satisfy certain requirements, including, without limitation, qualifying as a “large accelerated filer” due the aggregate market value of our common shares held by non-affiliates exceeding $700 million, our independent registered public accounting firm would be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.

The Market Price and Trading Volume of Our Common Shares Has Been and May Continue to Be Volatile

 

The market price and trading volume of our common shares may be volatile and could decline significantly, as has recently happened as a result of COVID-19 and related economic uncertainty. We cannot assure that the market price of our common shares will not fluctuate widely or decline significantly in the future in response to a number of factors, including, without limitation, the following:

 

 

the continuation and impact of the COVID-19 pandemic;

 

the realization of any of the risk factors presented in this Annual Report on Form 10-K;

 

actual or anticipated differences in our estimates, or in the estimates of analysts, for our revenues, results of operations, level of indebtedness, liquidity or financial condition;

 

performance and departures of key personnel;

 

failure to comply with the requirements of Nasdaq;

 

failure to comply with the Sarbanes-Oxley Act or other laws or regulations;

 

future issuances, sales or resales, or anticipated issuances, sales or resales, of our common shares, such as additional sales of common shares through the Company’s ATM Program;

 

publication of research reports about us, the cruise industry, or the hospitality industry generally;

 

the performance and market valuations of our cruise line partners and of companies in the travel leisure industry;

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broad disruptions in the financial markets, as have occurred as a result of COVID-19, including sudden disruptions in the credit markets;

 

speculation in the press or investment community with respect to the factors impacting our business, including the risk factors presented in this Annual Report on Form 10-K;

 

actual, potential or perceived operational and internal control, accounting or financial reporting issues; and

 

changes in accounting principles, policies and guidelines.

In the past, securities class-action litigation has been instituted against companies following periods of volatility in the market price of their shares. This type of litigation could result in substantial costs and divert our management’s attention and resources, materially adversely impacting our business, operations, results of operations, financial condition and liquidity.

If Securities or Industry Analysts Do Not Publish Research, Publish Inaccurate or Unfavorable Research or Cease Publishing Research About Us, Our Share Price and Trading Volume Could Decline Significantly

 

The market for our common shares will depend in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade their opinions about our business or our common shares, publish inaccurate or unfavorable research about us, or cease publishing about us regularly, demand for our common shares could decrease, which might cause our share price and trading volume to decline significantly.

 

Future Issuances of Debt Securities and/or Equity Securities May Adversely Affect Us, Including the Market Price of Our Common Shares, and May Be Dilutive to Our Existing Shareholders

 

In the future, we may incur debt and/or issue equity ranking senior to our common shares. Those securities will generally have priority upon liquidation. Such securities also may be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common shares. Because our decision to issue debt and/or equity in the future will depend, in part, on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, nature or success of our future capital raising efforts. As a result, future capital raising efforts may reduce the market price of our common shares and be dilutive to our existing shareholders.

 

You May Have Difficulty Enforcing Judgments Against Us

 

We are an international business company incorporated under the laws of the Commonwealth of The Bahamas. A substantial portion of our assets are located outside the United States. As a result, it may be difficult or impossible to:

 

 

effect service of process within the United States upon us; or

 

enforce, against us, court judgments obtained in U.S. courts, including judgments relating to U.S. federal securities laws.

It is unlikely that Bahamian courts would entertain original actions against Bahamian companies, their directors or officers predicated solely upon U.S. federal securities laws. The Bahamian courts may apply any rule of Bahamian law which is mandatory irrespective of the governing law and may refuse to apply a rule of such governing law of the relevant documents, if it is manifestly incompatible with the public policy of The Bahamas. Furthermore, judgments based upon any civil liability provisions of the U.S. federal securities laws are not directly enforceable in The Bahamas. Rather, a lawsuit must be brought in The Bahamas on any such judgment. The courts of The Bahamas would recognize a U.S. judgment as a valid judgment, and permit the same to provide the basis of a fresh action in The Bahamas and should give a judgment based thereon without there being a re-trial or reconsideration of the merits of the case provided that (i) the courts in the United States had proper jurisdiction under Bahamian conflict of law rules over the parties subject to such judgment, (ii) the judgment is for a debt or definite sum of money other than a sum payable in respect of taxes or charges of a like nature or in respect of a fine or penalty, (iii) the U.S. courts did not contravene the rules of natural justice of The Bahamas, (iv) the judgment was not obtained by fraud on the part of the party in whose favor the judgment was given or of the court pronouncing it, (v) the enforcement of such judgment would not be contrary to the public policy of The Bahamas, (vi) the correct procedures under the laws of The Bahamas are duly complied with, (vii) the judgment is not inconsistent with a prior Bahamian judgment in respect of the same matter and (viii) enforcement proceedings are instituted within six years after the date of such judgment.

Certain Provisions in Our Articles May Limit Shareholders’ Ability to Affect a Change in Management or Control

 

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Our Articles include certain provisions which may have the effect of delaying or preventing a future takeover or change in control of us that shareholders may consider to be in their best interests. Among other things, our Articles provide for a classified Board serving staggered terms of three years, super majority voting requirements with respect to certain significant transactions and restrictions on the acquisition of greater than 9.99% ownership without our Board’s approval. Our equity plans and our officers’ employment agreements provide certain rights to plan participants and those officers, respectively, in the event of a change in control of us. Additionally, with the 2020 Private Placement and the related Investment Agreement, our Articles were amended to create a new class of non-voting common shares (the “Non-Voting Common Shares”). The Non-Voting Common shares will automatically be converted into Voting Common Shares upon the occurrence of certain events as set forth in the Articles. Each Non-Voting Common Share will automatically convert into one Voting Common Share, upon the occurrence of a Qualified Transfer of such Non-Voting Common Share or with the prior consent of our Board of Directors. A “Qualified Transfer” means a transfer (x) to a third party that is not (1) an affiliate of such holder nor (2) a person whose ownership thereof would result in such shares being treated as constructively owned by such holder under Section 958(b) of the U.S. Tax Code, applicable Treasury Regulations and other official guidance (a Person described in this clause (x), an “Unrelated Person”), and (y) that is not otherwise prohibited under the Articles. This may dilute the voting power of the current common shareholders. In addition to the Non-Voting Shares, we have issued deferred shares and warrants as more fully described elsewhere in this report. These deferred shares and warrants may further reduce the control and voting power of a common shareholder.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

 

Our destination resort spas are operated under agreements with the destination resort operators or owners, as the case may be, of those venues. Our other facilities, including our warehouses, are leased from the owners of the venues where they are located. Our principal office is located in Nassau, The Bahamas, and we lease an office building in Coral Gables, Florida where certain administrative functions are located.

We believe that our existing facilities are adequate for our current and planned levels of operations and that alternative sites are readily available on competitive terms in the event that any of our material leases are not renewed.

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common shares are traded on The Nasdaq Capital Market under the symbol “OSW.” As of February 25, 2022, there were 26 registered holders of our common shares and one registered holder of non-voting common shares. In addition to our common shares that trade on Nasdaq, the Company has begun an ATM Program (more fully described herein) that permits, but does not require, the Company to sell common shares.

Dividends

We adopted a cash dividend program in November 2019, with an initial quarterly cash dividend payment of $0.04 per common share. However, as a result of the impact of the COVID-19 outbreak on our business, our Board of Directors re-evaluated our current dividend program and has determined, in order to increase our financial flexibility and reallocate our capital resources, to defer the previously authorized and declared quarterly dividend to be paid on May 29, 2020 and to temporarily suspend the dividend program until further notice.

Repurchases and Sales of Unregistered Securities

We have no recent repurchases of any securities or sales of any unregistered securities.

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Table of Contents

Stock Performance Graph

 

The following graph compares the change in the cumulative total shareholder return on our common shares against the cumulative total return (assuming reinvestment of dividends) of the Nasdaq Composite® (United States and Foreign) Index, and the Dow Jones U.S. Travel and Leisure Index for the period beginning January 1, 2021 and ending December 31, 2021.

 

As a result of the impact of the COVID-19 outbreak on our business, our Board of Directors re-evaluated our current dividend program and determined, in order to increase our financial flexibility and reallocate our capital resources, to temporarily suspend our dividend program until further notice.

 

The graph assumes that $100.00 was invested on January 4, 2021 in our common shares at a per share price of $9.67, the closing price on that date, and in each of the comparative indices. The share price performance on the following graph is not necessarily indicative of future share price performance.

 

COMPARISON OF CUMULATIVE TOTAL RETURN

Among OneSpaWorld Holdings Limited, the Nasdaq Composite Index, and the Dow Jones US Travel & Leisure Index

 

 

 

 

1/31

 

2/28

 

3/31

 

4/30

 

5/31

 

6/30

 

7/31

 

8/31

 

9/30

 

10/31

 

11/30

 

12/31

 

OneSpaWorld Holdings Limited

$

(73.63

)

$

57.23

 

$

289.03

 

$

254.86

 

$

207.45

 

$

355.85

 

$

(21.00

)

$

75.15

 

$

67.72

 

$

259.07

 

$

343.23

 

$

28.53

 

NASDAQ Composite

$

73.05

 

$

155.44

 

$

85.20

 

$

198.78

 

$

129.42

 

$

242.31

 

$

320.95

 

$

373.89

 

$

384.51

 

$

360.59

 

$

515.40

 

$

480.94

 

Dow Jones US Travel & Leisure

$

13.26

 

$

104.75

 

$

276.82

 

$

305.16

 

$

253.02

 

$

296.14

 

$

224.97

 

$

223.96

 

$

247.23

 

$

264.42

 

$

242.60

 

$

171.22

 

 

ITEM 6. SELECTED FINANCIAL DATA

The following tables contain selected historical financial data for the Company, derived from the audited consolidated financial statements of OSW Predecessor included elsewhere in this report. The information below should be read in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements of the Company, and the notes related thereto, included elsewhere in this report.

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Table of Contents

 

Successor

 

 

 

Predecessor

 

 

Year Ended December 31, 2021

 

Year Ended December 31, 2020

 

March 20, 2019 to December 31, 2019

 

 

 

January 1, 2019 to March 19, 2019

 

 

Year Ended December 31, 2018

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

$

115,945

 

$

93,682

 

$

339,793

 

 

 

$

91,280

 

 

$

410,927

 

Product Revenues

 

28,086

 

 

27,243

 

 

103,988

 

 

 

 

27,172

 

 

 

129,851

 

Total Revenues

 

144,031

 

 

120,925

 

 

443,781

 

 

 

 

118,452

 

 

 

540,778

 

COST OF REVENUES AND OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

108,939

 

 

107,258

 

 

292,844

 

 

 

 

76,836

 

 

 

352,382

 

Cost of products

 

26,646

 

 

31,976

 

 

90,353

 

 

 

 

23,957

 

 

 

110,793

 

Administrative

 

15,526

 

 

18,957

 

 

13,986

 

 

 

 

2,498

 

 

 

9,937

 

Salary, benefits and payroll taxes

 

28,151

 

 

20,138

 

 

32,300

 

 

 

 

29,349

 

 

 

15,624

 

Amortization of intangible assets

 

16,829

 

 

16,823

 

 

13,174

 

 

 

 

755

 

 

 

3,521

 

Goodwill and tradename intangible assets impairment

 

 

 

190,777

 

 

 

 

 

 

 

 

 

 

Total cost of revenues and operating expenses

 

196,091

 

 

385,929

 

 

442,657

 

 

 

 

133,395

 

 

 

492,257

 

(Loss) income from operations

 

(52,060

)

 

(265,004

)

 

1,124

 

 

 

 

(14,943

)

 

 

48,521

 

OTHER (EXPENSE) INCOME, NET

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense and warrant issuance costs

 

(13,488

)

 

(16,089

)

 

(13,522

)

 

 

 

(6,316

)

 

 

(34,099

)

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

(3,413

)

 

 

 

Interest income

 

55

 

 

30

 

 

43

 

 

 

 

 

 

 

238

 

Change in fair value of warrant liabilities

 

(2,600

)

 

(6,100

)

 

(19,700

)

 

 

 

 

 

 

171

 

Total other expense, net

 

(16,033

)

 

(22,159

)

 

(33,179

)

 

 

 

(9,729

)

 

 

(33,690

)

(Loss) income before income tax expense (benefit)

 

(68,093

)

 

(287,163

)

 

(32,055

)

 

 

 

(24,672

)

 

 

14,831

 

INCOME TAX EXPENSE (BENEFIT)

 

429

 

 

814

 

 

(120

)

 

 

 

109

 

 

 

1,088

 

NET (LOSS) INCOME

$

(68,522

)

$

(287,977

)

$

(31,935

)

 

 

$

(24,781

)

 

$

13,743

 

Adjusted EBITDA (1)

$

(18,946

)

$

(42,748

)

$

45,239

 

 

 

$

13,797

 

 

$

58,793

 

Unlevered After-Tax Free Cash Flow (1)

$

(21,974

)

$

(45,015

)

$

42,092

 

 

 

$

13,280

 

 

$

53,084

 

% Conversion

 

116.0

%

 

105.3

%

 

93.0

%

 

 

 

96.3

%

 

 

90.3

%

 

 

Successor

 

Predecessor

 

 

As of December 31, 2021

 

As of December 31, 2020

 

As of December 31, 2019

 

As of December 31, 2018

 

Balance Sheet Data (At Period End):

 

 

 

 

 

 

 

 

 

 

 

 

Working Capital (2)

$

4,249

 

$

1,659

 

$

25,389

 

$

22,419

 

Total Assets

 

688,868

 

 

702,279

 

 

923,669

 

 

272,659

 

Total Liabilities

 

394,964

 

 

381,451

 

 

333,201

 

 

400,242

 

Total Equity (Deficit)

 

293,904

 

 

320,828

 

 

590,468

 

 

(127,583)

 

 

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Table of Contents

 

 

(1)

We define Adjusted EBITDA as Net Income plus Provision for Income Taxes, Other Income, Noncontrolling Interest, Interest Expense and Warrant Issuance Costs, Change in Fair Value of Warrant Liabilities and Depreciation & Amortization, with adjustments for non-recurring items, related party transactions, contribution from the historical timetospa.com channel, purchase price accounting adjustments, discrepancies between cash and booked Provision for Income Taxes and non-cash contract expenses. We define Unlevered After-Tax Free Cash Flow as Adjusted EBITDA minus capital expenditures and cash taxes paid.

 

 

(2)

Working capital calculated as current assets less current liabilities, less cash and cash equivalents and restricted cash.

The following table reconciles Net (Loss) Income to Adjusted EBITDA and Unlevered After-Tax Free Cash Flow for the years ended December 31, 2021 and 2020 (Successor) and periods March 20, 2019 to December 31, 2019 (Successor) and January 1, 2019 to March 19,2019 (Predecessor):

 

 

Successor

 

 

 

Predecessor

 

(In thousands)

Year Ended December 31,

 

Year Ended December 31,

 

March 20, 2019 to December 31,

 

 

 

January 1, 2019 to March 19,

 

 

2021

 

2020

 

2019

 

 

 

2019

 

Net (Loss) Income

$

(68,522

)

$

(287,977

)

$

(31,935

)

 

 

$

(24,781

)

Provision (Benefit) for Income Taxes

 

429

 

 

814

 

 

(120

)

 

 

 

109

 

Interest Income

 

(55

)

 

(30

)

 

(43

)

 

 

 

 

Noncontrolling Interest (a)

 

 

 

 

 

(3,334

)

 

 

 

(678

)

Interest expense and warrant issuance costs

 

13,488

 

 

16,089

 

 

13,522

 

 

 

 

6,316

 

Loss on Extinguishment of Debt

 

 

 

 

 

 

 

 

 

3,413

 

Related Party Adjustments (b)

 

 

 

 

 

 

 

 

 

538

 

Goodwill and trade name impairment charges

 

 

 

190,777

 

 

 

 

 

 

 

Depreciation & Amortization

 

22,468

 

 

24,453

 

 

19,606

 

 

 

 

1,989

 

Change in Control Payments (c)

 

 

 

 

 

 

 

 

 

26,615

 

Stock-based Compensation

 

10,646

 

 

4,950

 

 

20,683

 

 

 

 

 

Business Combination Costs (d)

 

 

 

1,619

 

 

7,160

 

 

 

 

 

Addback for Non-Cash Prepaid Expenses (e)

 

 

 

457

 

 

 

 

 

 

276

 

Change in fair value of warrant liabilities

 

2,600

 

 

6,100

 

 

19,700

 

 

 

 

 

Adjusted EBITDA

$

(18,946

)

$

(42,748

)

$

45,239

 

 

 

$

13,797

 

Capital Expenditures

 

(2,868

)

 

(2,132

)

 

(2,909

)

 

 

 

(517

)

Cash Taxes (f)

 

(160

)

 

(135

)

 

(238

)

 

 

 

 

Unlevered After-Tax Free Cash Flow

$

(21,974

)

$

(45,015

)

$

42,092

 

 

 

 

13,280

 

% Conversion (g)

 

116.0

%

 

105.3

%

 

93.0

%

 

 

 

96.3

%

 

(a)

Noncontrolling Interest refers to amounts paid to a joint venture partner.

 

(b)

Related Party Adjustments refers to adjustments to reflect the impact of agreements with related parties for the full periods presented.

 

(c)

Change in control payments relates to amounts paid to OSW Predecessor executives upon consummation of the Business Combination.

 

(d)

Business Combination costs refers primarily to legal and advisory fees incurred by OneSpaWorld in connection with the Business Combination.

 

(e)

Addback for Non-Cash Prepaid Expenses refers to non-cash expenses incurred in connection with certain contracts.

 

(f)

Cash Taxes refers to cash taxes paid or payable.

 

(g)

Unlevered After-Tax Free Cash Flow Conversion is calculated as Adjusted EBITDA less Capital Expenditures and Provision for Income Taxes, divided by Adjusted EBITDA

Note Regarding Non-GAAP Financial Information

We believe that these non-GAAP measures, when reviewed in conjunction with GAAP financial measures, and not in isolation or as substitutes for analysis of our results of operations under GAAP, are useful to investors as they are widely used measures of performance and the adjustments we make to these non-GAAP measures provide investors further insight into our profitability and additional perspectives in comparing our performance to other companies and in comparing our performance over time on a consistent basis. Adjusted EBITDA and Unlevered After-Tax Free Cash Flow have limitations as profitability measures in that they do not include total amounts for interest expense and warrant issuance costs on our debt, change in fair value of warrant liabilities and provision for income taxes, and the effect of our expenditures for capital assets and certain intangible assets. In addition, all of these non-GAAP measures have limitations as profitability measures in that they do not include the impact of certain expenses related to items that are settled in cash. Because of these limitations, the Company relies primarily on its GAAP results.

In the future, we may incur expenses similar to those for which adjustments are made in calculating Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as a basis to infer that our future results will be unaffected by extraordinary, unusual or non-recurring items.

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Table of Contents

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The following discussion and analysis of our audited financial condition and results of operations should be read in conjunction with the information presented in “Selected Historical Financial Information” and our consolidated financial statements and the notes thereto included elsewhere in this report. In addition to historical information, the following discussion contains forward-looking statements, such as statements regarding our expectation for future performance, liquidity, and capital resources, that involve risks, uncertainties and assumptions that could cause actual results to differ materially from those contained in or implied by any forward-looking statements. Factors that could cause such differences include those identified below and those described in the sections entitled “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors.” We assume no obligation to update any of these forward-looking statements.

The information for the years ended December 31, 2021 and 2020 (Successor), the period from March 20, 2019, to December 31, 2019 (Successor) and the period from January 1, 2019 to March 19, 2019 (Predecessor) is derived from OSW Predecessor’s audited consolidated and combined financial statements and the notes thereto included elsewhere in this report.

Any reference to “OneSpaWorld” refers to OneSpaWorld Holdings Limited and our consolidated subsidiaries on a forward-looking basis or, as the context requires, to the historical results of OSW Predecessor. Any reference to “OSW Predecessor” refers to the entities comprising the “OneSpaWorld” business prior to the consummation of the Business Combination.

Overview

During 2021, we continued to execute our gradual resumption of our health and wellness centers operations on cruise ships and in destination resorts. As of December 31, 2021, 118 ships of our cruise line partners and 48 destination resort spas were operating as part of our gradual return to service. The extent of the effects of COVID-19 on our business are uncertain and will depend on future developments, including, but not limited to, the duration and continued severity of COVID-19 and the length of time it takes to return the company to profitability. We cannot fully predict the continuing impacts of the COVID-19 outbreak on the industry or on our business. Despite this uncertainty, we believe we have certain strengths that have positioned us as a leader in the hospitality-based health and wellness industry and to participate in the recovery of the cruise industry and the hospitality industry.

OneSpaWorld Holdings Limited (“OneSpaWorld,” the “Company,” “we,” “our, “us” and other similar terms refer to OneSpaWorld Holdings Limited and its consolidated subsidiaries) is the pre-eminent global operator of health and wellness centers onboard cruise ships and a leading operator of health and wellness centers at destination resorts worldwide. Our highly trained and experienced staff offered guests a comprehensive suite of premium health, fitness, beauty and wellness services and products onboard cruise ships and at destination resorts globally. We are the market leader at nearly 20x the size of our closest maritime competitor. Over the last 50 years, we have built our leading market position on our depth of staff expertise, broad and innovative service and product offerings, expansive global recruitment, training and logistics platform as well as decades-long relationships with cruise line and destination resort partners. Throughout our history, our mission has been simple: helping guests look and feel their best during and after their stay.

At our core, we are a global services company. We serve a critical role for our cruise line and destination resort partners, operating a complex and increasingly important aspect of our cruise line and destination resort partners’ overall guest experience. Decades of investment and know-how have allowed us to construct an unmatched global infrastructure to manage the complexity of our operations. We have consistently expanded our onboard offerings with innovative and leading-edge service and product introductions, and developed the powerful back-end recruiting, training and logistics platforms to manage our operational complexity, maintain our industry-leading quality standards, and maximize revenue and profitability per center. The combination of our renowned recruiting and training platform, deep proprietary labor pool, global logistics and supply chain infrastructure and proven health and wellness center and revenue management capabilities represents a significant competitive advantage that we believe is not economically feasible to replicate.

A significant portion of our revenues are generated from our cruise ship operations. Historically, we have been able to renew almost all of our cruise line agreements that expired or were scheduled to expire. In August 2021, we extended our current agreement with Azamara through May 2026.

We are unable to predict the course of COVID-19, but it has had, and we anticipate that it will continue to have, a material negative impact on our business performance, results of operations, financial condition and liquidity in 2022.

Matters Affecting Comparability

 

On March 19, 2019, we consummated the previously announced Business Combination.

 

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“OSW Predecessor” is comprised of the net assets and operations of (i) the following wholly-owned subsidiaries of Steiner Leisure: OneSpaWorld LLC, Steiner Spa Asia Limited, Steiner Spa Limited, and OneSpaWorld Marks Limited (formerly known as Steiner Marks Limited), (ii) the following respective indirect subsidiaries of Steiner Leisure: Mandara PSLV, LLC (subsequently dissolved), Mandara Spa (Hawaii), LLC, Florida Luxury Spa Group, LLC, Steiner Transocean U.S., Inc., Steiner Spa Resorts (Nevada), Inc., Steiner Spa Resorts (Connecticut), Inc., Steiner Resort Spas (California), Inc., OneSpaWorld Resort Spas (North Carolina), Inc. (formerly known as Steiner Resort Spas (North Carolina), Inc.), OSW SoHo LLC, OSW Distribution LLC, World of Wellness Training Limited (formerly known as Steiner Training Limited), STO Italy S.r.l., One Spa World LLC, Mandara Spa Services LLC, OneSpaWorld Limited, OneSpaWorld (Bahamas) Limited (formerly known as Steiner Transocean Limited), OneSpaWorld Medispa LLC, OneSpaWorld Medispa Limited, OneSpaWorld Medispa (Bahamas) Limited (formerly known as STO Medispa Limited), Mandara Spa (Cruise I), LLC, Mandara Spa (Cruise II), LLC, Steiner Transocean (II) Limited (subsequently dissolved), The Onboard Spa by Steiner (Shanghai) Co., Ltd. (subsequently dissolved), Mandara Spa LLC, Mandara Spa Puerto Rico, Inc., Mandara Spa (Guam), L.L.C. (subsequently dissolved), Mandara Spa (Bahamas) Limited, Mandara Spa Aruba N.V., Mandara Spa Polynesia Sarl, Mandara Spa Asia Limited, PT Mandara Spa Indonesia, Spa Services Asia Limited, Mandara Spa Palau, Mandara Spa (Malaysia) Sdn. Bhd., Mandara Spa Ventures International Sdn. Bhd., Spa Partners (South Asia) Limited, Mandara Spa (Maldives) PVT LTD, and Mandara Spa (Fiji) Limited, (iii) Medispa Limited, a majority-owned subsidiary of Steiner Leisure (the noncontrolling interest in which was subsequently purchased by OneSpaWorld), and (iv) the timetospa.com website owned by Elemis USA, Inc. (formerly known as Steiner Beauty Products, Inc.), subsequently transferred to OneSpaWorld.

At the closing of the Business Combination, OneSpaWorld became the ultimate parent company of Haymaker and OSW Predecessor. Unless the context otherwise requires, “we,” “us,” “our” and the “Company” refer to OneSpaWorld Holdings Limited and its subsidiaries.

Key Performance Indicators

In assessing the performance of our business, we consider several key performance indicators used by management. These key indicators include:

 

Ship Count. The number of ships, both on average during the period and at period end, on which we operate health and wellness centers. This is a key metric that impacts revenue and profitability.

 

Average Weekly Revenue Per Ship. A key indicator of productivity per ship. Revenue per ship can be affected by the various sizes of health and wellness centers and categories of ships on which we serve.

 

Average Revenue Per Shipboard Staff Per Day. We utilize this performance metric to assist in determining the productivity of our onboard staff, which we believe is a critical element of our operations.

 

Destination Resort Count. The number of destination resorts, both on average during the period and at period end, on which we operate the health and wellness centers. This is a key metric that impacts revenue and profitability.

 

Average Weekly Revenue Per Destination Resort Health and Wellness Center. A key indicator of productivity per destination resort health and wellness center. Revenue per destination resort health and wellness center in a period can be affected by the mix of U.S. and Caribbean and Asian centers for such period because U.S. and Caribbean centers are typically larger and produce substantially more revenues per center than Asian centers. Additionally, average weekly revenue can also be negatively impacted by renovations of our destination resort health and wellness centers.

Due to the impact of COVID-19 on our operations in 2021 and 2020, current and prior year data is not meaningful and not included.

Key Financial Definitions

Revenues. Revenues consist primarily of sales of services and sales of products to cruise ship passengers and destination resort guests. The following is a brief description of the components of our revenues:

 

Service revenues. Service revenues consist primarily of sales of health and wellness services, including a full range of massage treatments, facial treatments, nutritional/weight management consultations, teeth whitening, mindfulness services and medi-spa services to cruise ship passengers and destination resort guests. We bill our services at rates which inherently include an immaterial charge for products used in the rendering of such services, if applicable.

 

Product revenues. Product revenues consist primarily of sales of health and wellness products, such as facial skincare, body care, orthotics and detox supplements to cruise ship passengers, destination resort guests and timetospa.com customers.

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Cost of services. Cost of services consists primarily of an allocable portion of payments to cruise lines (which are derived as a percentage of service revenues or a minimum annual rent or a combination of both), an allocable portion of wages paid to shipboard employees, an allocable portion of staff-related shipboard expenses, costs related to recruitment and training of shipboard employees, wages paid directly to destination resort employees, payments to destination resort venue owners, the allocable cost of products consumed in the rendering of a service and health and wellness center depreciation. Cost of services has historically been highly variable; increases and decreases in cost of services are primarily attributable to a corresponding increase or decrease in service revenues. Cost of services has tended to remain consistent as a percentage of service revenues.

Cost of products. Cost of products consists primarily of the cost of products sold through our various methods of distribution, an allocable portion of wages paid to shipboard employees and an allocable portion of payments to cruise lines and destination resort partners (which are derived as a percentage of product revenues or a minimum annual rent or a combination of both). Cost of products has historically been highly variable, increases and decreases in cost of products are primarily attributable to a corresponding increase or decrease in product revenues and includes impairment of inventories. Cost of products has tended to remain consistent as a percentage of product revenues.

Administrative. Administrative expenses are comprised of expenses associated with corporate and administrative functions that support our business, including fees for professional services, insurance, headquarters rent and other general corporate expenses. We expect administrative expenses to increase due to additional legal, accounting, insurance and other expenses related to becoming a public company.

Salary, benefits and payroll taxes. Salary, benefits and payroll taxes are comprised of employee expenses associated with corporate and administrative functions that support our business, including fees for employee salaries, bonuses, stock based compensation, payroll taxes, pension/401(k) and other employee costs.

Amortization of intangible assets. Amortization of intangible assets are comprised of the amortization of intangible assets with definite useful lives (e.g. retail concession agreements, destination resort agreements, licensing agreements) and amortization expenses associated with the 2015 and 2019 Transactions.

Other income (expense), net. Other income (expense) consists of royalty income, interest income, interest expense and noncontrolling interest expense.

Provision for income taxes. Provision for income taxes includes current and deferred federal income tax expenses, as well as state and local income taxes. See “—Critical Accounting Policies—Income Taxes” included elsewhere in this Annual Report on Form 10-K.

Net income. Net income consists of income from operations less other income (expense) and provision for income taxes.

Revenue Drivers and Business Trends

Our revenues and financial performance are impacted by a multitude of factors, including, but not limited to:

 

The impact of COVID-19. Our health and wellness centers onboard cruise ships and in select destination resorts have been and continue to be negatively affected by the COVID-19 pandemic.

 

 

The number of ships and destination resorts in which we operate health and wellness centers. Revenue is impacted by net new ship growth, ships out of service, unanticipated dry-docks, ships prevented from sailing due to outbreaks of illnesses, such as the COVID-19 outbreak, and the number of destination resort health and wellness centers operating in each period.

 

 

The size and offerings of new health and wellness centers. We have focused our attention on the innovation and provision of higher value added and price point services such as medi-spa and advanced facial techniques, which require treatment rooms equipped with specific equipment and staff trained to perform these services. As our cruise line partners continue to invest in new ships with enhanced health and wellness centers that allow for more advanced treatment rooms and larger staff sizes, we are able to increase the availability of these services, driving an overall shift towards a more attractive service mix.

 

 

Expansion of value-added services and products across modalities in existing health and wellness centers. We continue to expand our higher value added and price point offerings in existing health and wellness centers, including introducing premium medi-spa services, resulting in higher guest spending.

 

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The mix of ship count across contemporary, premium, luxury and budget categories. Revenue generated per shipboard health and wellness center differs across contemporary, premium, luxury and budget ship categories due to the size of the health and wellness centers, services offered, guest demographics and guest spending patterns.

 

 

The mix of cruise geography and itinerary. Revenue generated per shipboard health and wellness center is influenced by each cruise itinerary including the number of sea versus port days, which impacts center utilization, as well as the geographic sailing region which may impact offerings of services and products to best address guest preferences.

 

 

Collaboration with cruise line partners, including targeted marketing and promotion initiatives, as well as implementation of proprietary technologies to increase center utilization via pre-booking and pre-payment. We are now directly marketing and distributing promotions to onboard passengers as a result of enhanced collaboration with select cruise line partners. We have also begun to implement proprietary pre-booking and pre-payment technology platforms that interface with our cruise line partners’ pre-cruise planning systems. These areas of increased collaboration with cruise line partners are resulting in higher revenue generation across our health and wellness centers.

 

 

The impact of weather. Our health and wellness centers onboard cruise ships and in select destination resorts may be negatively affected by hurricanes, which may be increasing in frequency and intensity due to climate change. The negative impact of hurricanes is highest during peak hurricane season from August to October.

 

 

Other risks and uncertainties. Our revenues and financial performance may be impacted by other risks and uncertainties, including, without limitation, those set forth under the section entitled “Risk Factors”.

The effect of each of these factors on our revenues and financial performance varies from period to period.

Results of Operations

Comparison of Results for the Years Ended December 31, 2021 and 2020

 

 

Successor

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in thousands)

Year Ended December 31, 2021

 

 

% of Total Revenue

 

 

Year Ended December 31, 2020

 

 

% of Total Revenue

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service revenues

$

115,945

 

 

 

80.5

%

 

$

93,682

 

 

 

77.5

%

Product revenues

 

28,086

 

 

 

19.5

%

 

 

27,243

 

 

 

22.5

%

Total revenues

 

144,031

 

 

 

100.0

%

 

 

120,925

 

 

 

100.0

%

COST OF REVENUES AND OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

108,939

 

 

 

75.6

%

 

 

107,258

 

 

 

88.7

%

Cost of products

 

26,646

 

 

 

18.5

%

 

 

31,976

 

 

 

26.4

%

Administrative

 

15,526

 

 

 

10.8

%

 

 

18,957

 

 

 

15.7

%

Salary, benefits and payroll taxes

 

28,151

 

 

 

19.5

%

 

 

20,138

 

 

 

16.7

%

Goodwill and tradename intangible assets impairment

 

 

 

 

0.0

%

 

 

190,777

 

 

 

157.8

%

Amortization of intangible assets

 

16,829

 

 

 

11.7

%

 

 

16,823

 

 

 

13.9

%

Total cost of revenues and operating expenses

 

196,091

 

 

 

136.1

%

 

 

385,929

 

 

 

319.1

%

Loss from operations

 

(52,060

)

 

 

-36.1

%

 

 

(265,004

)

 

 

-219.1

%

OTHER (EXPENSE) INCOME, NET

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense and warrant issuance costs

 

(13,488

)

 

 

-9.4

%

 

 

(16,089

)

 

 

-13.3

%

Interest income

 

55

 

 

 

0.0

%

 

 

30

 

 

 

0.0

%

Change in fair value of warrant liabilities

 

(2,600

)

 

 

-1.8

%

 

 

(6,100

)

 

 

-5.0

%

Total other expense, net

 

(16,033

)

 

 

-11.1

%

 

 

(22,159

)

 

 

-18.3

%

Loss before income tax expense (benefit)

 

(68,093

)

 

 

-47.3

%

 

 

(287,163

)

 

 

-237.5

%

INCOME TAX EXPENSE (BENEFIT)

 

429

 

 

 

0.3

%

 

 

814

 

 

 

0.7

%

NET LOSS

$

(68,522

)

 

 

-47.6

%

 

$

(287,977

)

 

 

-238.1

%

 

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Revenues. Revenues for the years ended December 31, 2021 and 2020 were $144.0 million and $120.9 million, respectively. Results in both 2021 and 2020 were substantially impacted by the COVID-19 pandemic, which resulted in the cancellation of all cruise ship voyages and closure of all destination resort health and wellness centers during mid-March 2020 through December 31, 2020. The twelve months ended December 31, 2021 revenues were derived primarily from the operations of health and wellness centers onboard ships having resumed voyages and our destination resort health and wellness centers having resumed operations primarily during the last two quarters of the year.

The break-down of revenue between service and product revenues was as follows:

 

Service revenues Service revenues for the year ended December 31, 2021 were $115.9 million, an increase of $22.2 million, or 24%, compared to $93.7 million for the year ended December 31, 2020. The year ended December 31, 2020 included revenues before COVID-19 was declared a pandemic on March 10, 2020. The year ended December 31, 2021 included revenues related to the resumption of service at our destination resort health and wellness centers and 118 of our health and wellness centers onboard ships which had resumed operation as of December 31, 2021, with the majority of those coming into service in the third quarter and fourth quarters.

 

 

Product revenues. Product revenues for the year ended December 31, 2021 were $28.1 million, a decrease of $0.9 million, or 3%, compared to $27.2 million for the year ended December 31, 2020. The year ended December 31, 2020 included revenues before COVID-19 was declared a pandemic on March 10, 2020. The year ended December 31, 2021 included product sales revenues related to the resumption of service at our destination resort health and wellness centers and 118 of our health and wellness centers onboard ships which had resumed operation as of December 31, 2021, with the majority of those coming into service in the third quarter and fourth quarters.

Cost of services. Cost of services for the year ended December 31, 2021 were $108.9 million, an increase of $1.6 million, or 2%, compared to $107.3 million for the year ended December 31, 2020. The increase was primarily attributable to the resumption of cruise line health and wellness center operations in the last two quarters of 2021 compared with our cruise line operations in the first quarter of 2020 prior to the onset of the COVID-19 pandemic.

Cost of products. Cost of products for the year ended December 31, 2021 were $26.6 million, a decrease of $5.4 million, or 17%, compared to $32.0 million for the year ended December 31, 2020. The decrease was attributable to a lower amount required in 2021 versus 2020 related to the decrease in inventory write-downs for the decline in the net realizable value of inventories, principally the result of excess, slow-moving, and expiration of inventories caused by the cessation of our cruise line partners’ operations and, consequently, our operations, due to the COVID-19 pandemic and a change in business mix.

Administrative. Administrative expenses for the year ended December 31, 2021 were $15.5 million, a decrease of $3.5 million or 18%, compared to $19.0 million for the year ended December 31, 2020. The decrease was primarily attributable to a reduction in costs of recruitment and training of onboard staff as a result of the COVID-19 pandemic, structural cost savings implemented by management and higher professional fees in 2020.

Salary, benefits and payroll taxes. Salary, benefits and payroll taxes for the year ended December 31, 2021 were $28.2 million, an increase of $8.1 million, or 40%, compared to $20.1 million for the year ended December 31, 2020. The increase was primarily attributable to non-cash stock-based compensation expense and by the measured increase in Corporate head count to account for the return to sailing.

Amortization of intangible assets. Amortization of intangible assets for the year ended December 31, 2021 and 2020 were both $16.8 million, respectively.

Goodwill and trade name impairment charges. Goodwill and trade name impairment charges for the year ended December 31, 2020 were $190.8 million. This was comprised of goodwill and trade name impairment charges of $190.1 million and $0.7 million, respectively.

Other (expense) , net. Other (expense), net includes interest expense and warrants issuance costs, interest income and changes in the fair value of the warrant liabilities. Interest expense and warrants issuance cost for the year ended December 31, 2021 were $13.5 million, a increase of $2.6 million, or 16%, compared to $16.1 million for the year ended December 31, 2020. The increase was primarily attributable to the $1.4 million warrant issuance costs during the year ended December 31, 2020. During the year ended December 31, 2021 the change in fair value of the outstanding warrants was a loss of $2.6 million compared to a loss of $6.1 million during the year ended December 31, 2020. The change in fair value of warrants is the result of changes in market prices deriving the value of the financial instruments.

Income tax expense (benefit). Income tax expenses for the year ended December 31, 2021 were $0.4 million, a decrease of $0.4 million, or 47%, compared to $0.8 million for the year ended December 31, 2020. The decrease was driven by an increase in the 2020 valuation allowance offset by higher income in taxable jurisdictions in the year ended December 31, 2021.

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Net loss. Net loss for the years ended December 31, 2021 was $68.5 million, a decrease in net loss of $219.5 million, or 76%, compared to a net loss of $288.0 million for the year ended December 31, 2020. The decrease in the net loss principally resulted from the non-recurring $190.8 million goodwill and tradename intangible asset impairment charge recorded in 2020 period and the resumption of operations in the last two quarters of 2021.

 

Comparison of Results for the Years Ended December 31, 2020 and 2019

The following tables present operations for two periods, Predecessor and Successor, which relate to the periods preceding and the periods succeeding the Business Combination, respectively. References to the “Successor 2019 Period” in the discussion below refer to the period from March 20, 2019 to December 31, 2019. References to the “Predecessor 2019 Period” in the discussion below refers to the period from January 1, 2019 to March 19, 2019.

 

Successor

 

 

 

Predecessor

 

 

Consolidated

 

 

 

Combined

 

($ in thousands)

Year ended December 31, 2020

 

% of Total Revenue

 

March 20, 2019 to December 31, 2019

 

% of Total Revenue

 

 

 

January 1, 2019 to March 19, 2019

 

% of Total Revenue

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service revenues

$

93,682

 

 

77.5

%

$

339,793

 

 

76.6

%

 

 

$

91,280

 

 

77.1

%

Product revenues

 

27,243

 

 

22.5

%

 

103,988

 

 

23.4

%

 

 

 

27,172

 

 

22.9

%

Total revenues

 

120,925

 

 

100.0

%

 

443,781

 

 

100.0

%

 

 

 

118,452

 

 

100.0

%

COST OF REVENUES AND OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

107,258

 

 

88.7

%

 

292,844

 

 

66.0

%

 

 

 

76,836

 

 

64.9

%

Cost of products

 

31,976

 

 

26.4

%

 

90,353

 

 

20.4

%

 

 

 

23,957

 

 

20.2

%

Administrative

 

18,957

 

 

15.7

%

 

13,986

 

 

3.2

%

 

 

 

2,498

 

 

2.1

%

Salary, benefits and payroll taxes

 

20,138

 

 

16.7

%

 

32,300

 

 

7.3

%

 

 

 

29,349

 

 

24.8

%

Amortization of intangible assets

 

16,823

 

 

13.9

%

 

13,174

 

 

3.0

%

 

 

 

755

 

 

0.6

%

Goodwill and tradename intangible assets impairment

 

190,777

 

 

157.8

%

 

 

 

0.0

%

 

 

 

 

 

0.0

%

Total cost of revenues and operating expenses

 

385,929

 

 

319.1

%

 

442,657

 

 

99.7

%

 

 

 

133,395

 

 

112.6

%

Loss from operations

 

(265,004

)

 

-219.1

%

 

1,124

 

 

0.3

%

 

 

 

(14,943

)

 

-12.6

%

OTHER (EXPENSE) INCOME, NET

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense and warrant issuance costs

 

(16,089

)

 

-13.3

%

 

(13,522

)

 

-3.0

%

 

 

 

(6,316

)

 

-5.3

%

Loss on extinguishment of debt

 

 

 

0.0

%

 

 

 

0.0

%

 

 

 

(3,413

)

 

0.0

%

Interest income

 

30

 

 

0.1

%

 

43

 

 

0.0

%

 

 

 

 

 

0.0

%

Change in fair value of warrant liabilities

 

(6,100

)

 

-5.0

%

 

(19,700

)

 

-4.4

%

 

 

 

 

 

0.0

%

Total other expense, net

 

(22,159

)

 

-18.3

%

 

(33,179

)

 

-7.5

%

 

 

 

(9,729

)

 

-8.2

%

(Loss) income before income tax expense (benefit)

 

(287,163

)

 

-237.5

%

 

(32,055

)

 

-7.2

%

 

 

 

(24,672

)

 

-20.8

%

INCOME TAX EXPENSE (BENEFIT)

 

814

 

 

0.7

%

 

(120

)

 

0.0

%

 

 

 

109

 

 

0.1

%

NET (LOSS) INCOME

 

(287,977

)

 

-238.1

%

 

(31,935

)

 

-7.2

%

 

 

 

(24,781

)

 

-20.9

%

Net income attributable to noncontrolling interest

 

-

 

 

0.0

%

 

3,334

 

 

0.8

%

 

 

 

678

 

 

0.6

%

NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS AND PARENT, RESPECTIVELY

$

(287,977

)

 

-238.1

%

$

(35,269

)

 

-7.9

%

 

 

$

(25,459

)

 

-21.5

%

 

Revenues. Revenues for the year ended December 31, 2020, Successor 2019 Period and Predecessor 2019 Period were $120.9 million, $443.8 million and $118.5 million, respectively. The decrease was driven by the COVID-19 pandemic, which resulted in the cancellation of most cruise ship voyages and the closure of many destination resort health and wellness centers where we operate during mid-March 2020 through December 31, 2020. The break-down of revenue between service and product revenues was as follows:

 

Service revenues Service Revenues for the year ended December 31, 2020, the Successor 2019 Period and Predecessor 2019 Period were $93.7 million, $339.8 million and $91.3 million, respectively.

Product revenues. Product revenues for the year ended December 31, 2020, the Successor 2019 Period and Predecessor 2019 Period were $27.2 million, $104.0 million and $27.2 million, respectively.

 

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Cost of services. Cost of services for the year ended December 31, 2020, Successor 2019 Period and Predecessor 2019 Period were $107.3 million, $292.8 million, and $76.8 million, respectively. The decrease for the year ended December 31, 2020 compared to the combined Successor 2019 Period and Predecessor 2019 Period was $262.4 million, or 71%. The decrease was primarily attributable to the impact of the COVID-19 pandemic.

 

Cost of products. Cost of products for the year ended December 31, 2020, Successor 2019 Period and Predecessor 2019 Period were $32.0 million, $90.4 million and $24.0 million, respectively. The decrease was attributable to a lower amount required in 2021 versus 2020 related to the decrease in inventory write-downs for the decline in the net realizable value of inventories, principally the result of excess, slow-moving, and expiration of inventories caused by the cessation of our cruise line partners’ operations and, consequently, our operations, due to the COVID-19 pandemic and a change in business mix.

 

Administrative. Administrative expenses for the year ended December 31, 2020, the Successor 2019 Period and Predecessor 2019 Period were $19.0 million, $14.0 million, and $2.5 million, respectively. The year ended December 31, 2020 included a full year of public company cost and higher legal expenses. The Successor 2019 Period and Predecessor 2019 Period had expenses incurred in connection with the Business Combination and costs associated with being a public company.

 

Salary, benefits and payroll taxes. Salary, benefits and payroll taxes for the year ended December 31, 2020, the Successor 2019 Period and Predecessor 2019 Period were $20.1 million, $32.3 million, and $29.3 million, respectively. The decrease for the year ended December 31, 2020 compared to the combined Successor 2019 Period and Predecessor 2019 Period was $41.5 million, or 67%. The decrease was driven by $20.7 million related to stock options that fully vested upon grant to certain directors and executives in the Successor 2019 Period and $26.6 million in change in control payments pursuant to agreements entered into in 2016 that were earned upon consummation of the Business Combination for services rendered prior to the Business Combination in the Predecessor 2019 Period. The year ended December 31, 2020 had $5.0 million of non-cash stock-based compensation expense and included management’s actions to preserve liquidity due to the COVID-19 pandemic by enacting salary reductions, furloughs and terminations, which reduced salary expense for the period.

 

Amortization of intangible assets. Amortization of intangible assets for the year ended December 31, 2020, the Successor 2019 Period and Predecessor 2019 Period were $16.8 million, $13.2 million, and $0.8 million, respectively. The increase for the year ended December 31, 2020 compared to the combined Successor 2019 Period and Predecessor 2019 Period was $2.9 million, or 21%. The increase was a result of the new basis of intangible assets identified in the Business Combination.

 

Other income (expense), net. Other income (expense) for the year ended December 31, 2020, the Successor 2019 Period and Predecessor 2019 Period were $(22.2) million, $(33.2) million, and $(9.7) million, respectively. The decrease for the year ended December 31, 2020 compared to the combined Successor 2019 Period and Predecessor 2019 Period was $20.8 million, or 48%. The decrease was attributable primarily to the $13.6 million change in fair value of warrant liabilities and the fact that the 2019 Predecessor Period included extinguishment of debt associated with the payoff of the pre-existing debt by the Parent of the Company’s predecessor.

 

Income tax expense (benefit). Income tax expense (benefit) for the year ended December 31, 2020, the Successor 2019 Period and Predecessor 2019 Period were $0.8 million, $(0.1) million, and $0.1 million, respectively. The increase for the year ended December 31, 2020 compared to the combined Successor 2019 Period and Predecessor 2019 Period was $0.8 million. The increase was driven primarily by the increase in valuation allowance related to the Company’s beginning-of-year deferred tax assets that are not realizable during the year ended December 31, 2020.

 

Net income. Net (loss) income for the year ended December 31, 2020, the Successor 2019 Period and Predecessor 2019 Period were $(288.0) million, $(31.9) million, and $(24.8) million, respectively. The decrease for the year ended December 31, 2020 compared to the combined Successor 2019 Period and Predecessor 2019 Period was $231.3 million, or 408%. The decrease was as a result of $190.8 million in goodwill and trade name impairment charges recognized during the three months ended March 31, 2020, the $13.6 million change in fair value of warrant liabilities and the impact of the COVID-19 pandemic in the year ended December 31, 2020, partially offset by $20.7 million in expenses related to stock-based compensation during the Successor 2019 Period, and $26.6 million in change in control payments earned upon consummation of the Business Combination during the Predecessor 2019 Period.

Liquidity and Capital Resources

Overview

Due to the impact of COVID-19, we have taken prudently aggressive actions to increase our financial flexibility. We have increased financial flexibility by securing and reallocating capital resources, including: (i) eliminating all non-essential operating and capital expenditures, (ii) withdrawing the Company dividend program until further notice, (iii) deferring payment of a dividend declared on February 26, 2020 until approved by the Board of Directors, (iv) the completion of the 2020 Private Placement on June 12, 2020; (v) borrowing $7 million, net, on our revolving credit facility, leaving $13 million available and undrawn; and (vi) entering into an agreement to allow for the Company to operate its ATM Program, which permits the Company to sell, from time to time,

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Table of Contents

common shares up to an aggregate offering price of $50.0 million. We have historically funded our operations with cash flow from operations, except prior to March 19, 2019 with respect to certain expenses and operating costs that had been paid in the Predecessor Periods prior to the Business Combination by Steiner Leisure on our behalf, and, when needed, with borrowings under our credit facility. Steiner Leisure has paid on our behalf expenses associated with the allocation of Parent corporate overhead and costs associated with the purchase of products from related parties and forgiven by Steiner Leisure. Historical operating cash flows exclude OSW Predecessor’s expenses and operating costs paid by Steiner Leisure on our behalf. Consequently, our combined historical cash flows may not be indicative of cash flows had we been a separate stand-alone entity, or of our future cash flows.

The ATM Program described above is an At-The-Market Offering Sales Agreement with Stifel Nicolaus & Company, entered into on December 7, 2020. Under the ATM Program, we may offer and sell, from time to time, common shares having an aggregate offering price of up to $50.0 million (the “ATM Shares”). Any ATM Shares sold under the ATM Program will be issued pursuant to the Company’s registration statement on Form S-3 (File No. 333-239628), which was declared effective by the SEC on July 22, 2020, the base prospectus filed as part of such registration statement, and the prospectus supplement, dated December 7, 2020 and filed by the Company with the SEC. During the year ended December 31, 2020, we issued and sold an aggregate of 1.3 million common shares at an average price of $9.18 per share for aggregate net proceeds of $11.1 million, which were net of equity issuance costs of $0.6 million. During the year ended December 31, 2021, we issued and sold an aggregate of 2.6 million common shares at an average price of $10.88 per share for aggregate net proceeds of $27.5 million, which were net of equity issuance costs of $0.9 million.

Our principal uses for liquidity have been debt service and working capital. We expect that as our cruise line partners resume operations, we will have increased costs related to redeployment of employees to sailing locations and other costs associated with resuming our operations.

Taking into account the costs described above and our current resources, we have concluded that we will have sufficient liquidity to satisfy our obligations over the next twelve months and comply with all debt covenants as required by our debt agreements.

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Table of Contents

Cash Flows

The following table shows summary cash flow information for the years ended December 31, 2021, December 31, 2020, periods from March 20, 2019 to December 31, 2019 (Successor) and January 1, 2019 to March 19, 2019 (Predecessor).

 

 

Successor

 

Predecessor

 

 

Consolidated

 

Combined

 

 

Year Ended December 31,

 

Year Ended December 31,

 

March 20,2019 to December 31,

 

January 1, 2019 to March 19,

 

(in thousands)

2021

 

2020

 

2019

 

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(68,522

)

$

(287,977

)

 

(31,935

)

$

(24,781

)

Depreciation and amortization

 

22,468

 

 

24,453

 

 

19,606

 

 

1,989

 

Goodwill and trade name impairment charges

 

 

 

190,777

 

 

 

 

 

Stock-based compensation

 

10,646

 

 

4,950

 

 

20,683

 

 

 

Amortization of deferred financing costs

 

1,026

 

 

1,026

 

 

841

 

 

213

 

Warrant issuance costs

 

 

 

1,386

 

 

 

 

 

Change in fair value of warrant liabilities

 

2,600

 

 

6,100

 

 

19,700

 

 

 

Provision for doubtful accounts

 

453

 

 

172

 

 

 

 

8

 

Inventories impairment charges

 

3,977

 

 

6,000

 

 

 

 

 

Loss from write-offs of property and equipment

 

177

 

 

90

 

 

 

 

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

3,413

 

Deferred income taxes

 

89

 

 

1,575

 

 

(643

)

 

 

Change in working capital

 

(8,018

)

 

14,898

 

 

(31,426

)

 

22,891

 

Net cash (used in) provided by operating activities

 

(35,104

)

 

(36,550

)

 

(3,174

)

 

3,733

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(2,868

)

 

(2,132

)

 

(2,909

)

 

(517

)

Acquisition of OSW Predecessor, net of cash acquired

 

 

 

 

 

(676,453

)

 

 

Net cash used in investing activities

 

(2,868

)

 

(2,132

)

 

(679,362

)

 

(517

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from the issuance of common shares

 

 

 

 

 

122,510

 

 

 

Net proceeds from Haymaker and private placement investors

 

 

 

 

 

349,390

 

 

 

Proceeds from 2020 private placement, net of issuance costs paid

 

 

 

68,602

 

 

 

 

 

Proceeds from At-the Market Equity Offering, net of issuance costs paid

 

27,474

 

 

11,090

 

 

 

 

 

Proceeds from the term loan and revolver facilities

 

 

 

20,000

 

 

245,900

 

 

 

Repayment on term loan and revolver facilities

 

 

 

(13,000

)

 

(18,442

)

 

 

Dividend paid on common stock

 

 

 

(2,445

)

 

 

 

 

Purchase of public warrants

 

 

 

(879

)

 

 

 

 

Proceeds from conversion of public warrants into common shares

 

 

 

 

 

11

 

 

 

Payment of deferred financing costs

 

 

 

 

 

(6,892

)

 

 

Proceeds from amounts due from related party

 

 

 

 

 

3,187

 

 

 

Net distributions to Parent and its affiliates (1)

 

 

 

 

 

 

 

(4,262

)

Distribution to noncontrolling interest

 

 

 

(4,011

)

 

(834

)

 

(267

)

Cash paid to acquire noncontrolling interest

 

 

 

(10,810

)

 

 

 

 

Net cash provided by (used in) financing activities

 

27,474

 

 

68,547

 

 

694,830

 

 

(4,529

)

Effect of exchange rate changes on cash

 

(117

)

 

(280

)

 

(205

)

 

649

 

Net (decrease) increase in cash and cash equivalents and restricted cash

 

(10,615

)

 

29,585

 

 

12,089

 

 

(664

)

Cash and cash equivalents and restricted cash, Beginning of period

 

43,448

 

 

13,863

 

 

1,774

 

 

15,302

 

Cash and cash equivalents and restricted cash, End of period

$

32,833

 

$

43,448

 

$

13,863

 

$

14,638

 

Comparison of Results for the Years Ended December 31, 2021 and 2020

Operating activities. Our net cash used in operating activities for the year ended December 31, 2021 and 2020, were $(35.1) million and $(36.6) million, respectively. For the year ended December 31, 2021, the Company incurred a cash flow deficit from operations principally due to the Net Loss for the period caused by the negative impact of the COVID-19 pandemic on revenue generation on cruise ships, while the Company continued to incur substantial operating expenses to prepare for and execute the resumption of operations on cruise ships and in destination resorts occurring in 2021.

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Investing activities. Our net cash used in investing activities for the year ended December 31, 2021 and 2020 were $(2.9) million and $(2.1) million, respectively. In the years ended December 31, 2021 and 2020, the Company incurred low capital expenditures due to the COVID-19 pandemic and eliminating all non-essential capital expenditures. The $0.8 million increase in 2021 primarily resulted in capital expenditures for return to service onboard vessels during the latter part of 2021.

Financing activities. Our net cash provided by financing activities for the year ended December 31, 2021 and 2020 were $27.5 million and $68.5 million, respectively. For the year ended December 31, 2021, the Company sold 2.6 million common shares under the ATM Program, resulting in $27.5 million in net proceeds. In the year ended December 31, 2020, the Company closed the 2020 Private Placement ($68.6 million proceeds through December 31, 2020, net of issuance costs paid), paid $2.4 million in dividends on common stock, purchased the 40% noncontrolling interest of Medispa Limited for $12.3 million in a combination of $10.8 million in cash and 98,753 shares of the Company’s common stock at a share price of $15.26, and borrowed a net $7.0 million under the First Lien Revolving Facility due to COVID-19.

Comparison of Results for the Years Ended December 31, 2020 to the Periods from March 20, 2019 to December 31, 2019 (Successor) and January 1, 2019 to March 19, 2019 (Predecessor)

 

Operating activities. Our net cash (used in) provided by operating activities for the year ended December 31, 2020, Successor 2019 Period, and the Predecessor 2019 Period were $(36.5) million, $(3.2) million and $3.7 million, respectively. In the year ended December 31, 2020, the Company ceased meaningful revenue generation at the end of the first quarter, while incurring significant costs related to the housing and repatriation costs of Company personnel onboard cruise ships, as well as costs incurred in preparation for cruise ship layups. Subsequently, the Company continued to pay repatriation costs and corporate expenses leading to a cash deficit. Also, in 2020 the Company included a $6.0 million charge for the write down of inventory that is likely to expire as a result of the extended pause in operations caused by the COVID-19 pandemic. In the Successor 2019 Period, the Company incurred stock-based compensation payments of $20.7 million related to stock options to certain directors and executives. In the Predecessor 2019 Period, the Company incurred change of control payments of $26.6 million payable upon consummation of the Business Combination.

Investing activities. Investing activities for the year ended December 31, 2020, the Successor 2019 period, and the Predecessor 2019 period were $(2.1) million, $(679.4) million and $(0.5) million, respectively. In the Successor 2019 Period, cash payments of $676.5 million were made to consummate the Business Combination.

Financing activities. Financing activities for the year ended December 31, 2020, the Successor 2019 period, and the Predecessor 2019 period were $68.5 million, $694.8 million and $(4.5) million, respectively. In the year ended December 31, 2020, the Company closed the 2020 Private Placement ($68.6 million proceeds, net of issuance costs paid), through the ATM Program, issued and sold 1.3 million shares of common stock for an average price of $9.18, for a total of $11.7 million, paid $2.4 million in dividends on common stock, and purchased the 40% noncontrolling interest of Medispa Limited for $12.3 million in a combination of $10.8 million in cash and 98,753 shares of the Company’s common stock at a share price of $15.26. In the Successor 2019 period, financing activities of $122.5 million, $349.4 million and $245.9 million, related to proceeds from the issuance of common shares, Haymaker cash contributions, and proceeds related to the term loan and revolver facilities, net of repayments, respectively, were undertaken in connection with the Business Combination.

Seasonality

 

A significant portion of our revenues are generated onboard cruise ships. Certain cruise lines, and, as a result, we have experienced varying degrees of seasonality as the demand for cruises is stronger in the Northern Hemisphere during the summer months and during holidays. Accordingly, the third quarter and holiday periods generally result in the highest revenue yields for us. Further, cruises and destination resorts have been negatively affected by the frequency and intensity of hurricanes. The negative impact of hurricanes in the Northern Hemisphere is highest during peak hurricane season from August to October.

 

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). We have identified the policies outlined below as critical to our business operations and an understanding of our results of operations and that require the most difficult, subjective and complex judgments. This discussion is not intended to be a comprehensive description of all accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management’s judgment in their application. The impact on our business operations and any associated risks related to these policies is discussed under results of operations, below, where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other significant accounting policies, please see Note 2 in the Notes to the Consolidated Financial Statements. Note that our preparation of our consolidated financial statements included in this Annual Report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our

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financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will be consistent with those estimates. Our consolidated financial statements include the assets, liabilities, revenues and expenses specifically related to our operations. We believe the assumptions and allocations underlying the accompanying consolidated financial statements and notes to the consolidated financial statements are reasonable, appropriate, and consistently applied for the periods presented.

Revenue Recognition. We recognize revenues when customers obtain control of goods and services promised by the Company. The amount of revenue recognized is based on the amount that reflects the consideration that is expected to be received in exchange for those respective goods and services. Amounts recognized are gross of commissions to cruise line or destination resort partners, which typically withhold commissions from customer payments. We have elected to present sales taxes on a net basis and, as such, sales taxes are excluded from revenue. Revenue is reported net of discounts and net of any estimated refund liability, which is determined based on historical experience. We also issue gift cards for future goods or services; revenue is recognized when they are redeemed; we also recognize revenue for breakage based on past experience for gift card amounts we expect to go unredeemed.

Prior to adoption of Accounting Standard Codification (“ASC”) Topic 606, Revenues from Contracts with Customers, as discussed in Revenue Recognition section in Note 2, Summary of Significant accounting policies to our consolidated financial statements, we recognized revenues earned as services are provided and as products are sold, following legacy accounting guidance under ASC Topic 605, Revenue Recognition. Generally, this led to recognition that is consistent with our new policy. Under legacy guidance, we had also elected to recognize revenue on a net-of-tax basis, which is similar to our election under ASC Topic 606. For gift card breakage, the Company uses the redemption recognition method for recognizing breakage related to certain gift certificates for which it has sufficient historical information; this pattern is relatively consistent with our recognition pattern under ASC Topic 606.

Cost of Revenues. We make certain assumptions to allocate cost of revenues which includes:

 

Cost of services. Cost of services consists primarily of the cost of product consumed in the rendering of a service, an allocable portion of wages paid to shipboard employees, an allocable portion of payments to cruise lines (which are derived as a percentage of service revenues or a minimum annual rent or a combination of both), an allocable portion of staff-related shipboard expenses, costs related to recruitment and training of shipboard employees, wages paid directly to destination resort employees, payments to destination resort venue owners, and health and wellness facility depreciation.

 

 

Cost of products. Cost of products consists primarily of the cost of products sold through our various methods of distribution, an allocable portion of wages paid to shipboard employees, an allocable portion of payments to cruise lines and destination resort partners (which are derived as a percentage of product revenues or a minimum annual rent or a combination of both). Cost of products includes the cost of products sold through various methods of distribution.

Cost of revenues may be affected by, among other things, sales mix, production levels, exchange rates, changes in supplier prices and discounts, purchasing and manufacturing efficiencies, tariffs, duties, freight and inventory costs, including impairment charges to reduce inventory to net realizable value, and increases in fuel costs. Certain cruise line and destination resort health and wellness center agreements provide for increases in the percentages of services and products revenues and/or, as the case may be, the amount of minimum annual payments over the terms of those agreements. These payments may also be increased under new agreements with cruise lines and destination resort health and wellness center owners that replace expiring agreements.

Inventories. Inventories, consisting principally of personal care products, are stated at the lower of cost, as determined on a first-in, first-out basis, or market. All inventory balances are comprised of finished goods used in beauty and health and wellness services or held for resale for sale to customers. Inventory reserve is recorded to write down the cost of inventory to the estimated net realizable value. The Company’s evaluation of net realizable value requires judgment and is based on specific assumptions. The establishment of inventory reserves involves the estimate of the amount of inventories that will be used in health and wellness services on cruises when they return to sailing, which is uncertain and dependent on our cruise line partners and their customers who use our services. During the years ended December 31, 2021 and 2020 (Successor), we recorded inventory impairment charges of $4.0 million (of which approximately $2.0 million was recorded in the three months ended December 31, 2021) and $6.0 million, respectively, for the decline in the net realizable value of inventories, which is included in Cost of products in the accompanying consolidated statement of operations. This loss principally is the result of excess, slow-moving, expiration of products and damaged inventories held at our Maritime segment caused by the cessation of our cruise line partners’ operations and, consequently, our Maritime segment operations, due to the COVID 19 pandemic. The establishment of inventory reserves involves estimating the amount of inventories that will be sold at or used in health and wellness services on cruises when they return to sailing, which is uncertain and dependent on our cruise line partners and its customers that use our services and purchase our products

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Goodwill and Indefinite-Lived Intangible Assets. Goodwill represents the excess of cost over the fair value of net tangible and identifiable intangible assets acquired. The Company has two operating segments: (1) Maritime and (2) Destination Resorts. The Maritime and Destination Resorts operating segments each have associated goodwill, and each has been determined to be a reporting unit.

Goodwill and other intangible assets with indefinite useful lives are not amortized, but rather, are tested for impairment at least annually, each October or, more frequently, when events or circumstances dictate an interim test is necessary. We review goodwill for impairment at the reporting unit level annually or, when events or circumstances dictate, more frequently. The impairment review for goodwill consists of a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount, and if necessary, a two-step goodwill impairment test. Factors to consider when performing the qualitative assessment primarily include general economic conditions and changes in forecasted operating results. If the qualitative assessment demonstrates that it is more-likely-than-not that the estimated fair value of the reporting unit exceeds its carrying value, it is not necessary to perform the goodwill impairment test. We may elect to bypass the qualitative assessment and proceed directly to step one, for any reporting unit, in any period. The Company can resume the qualitative assessment for any reporting unit in any subsequent period. When performing the goodwill impairment test, if the fair value of the reporting unit exceeds its carrying value, no write-down of goodwill is required. As amended by ASU No. 2017-04, Intangibles- Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment, if the fair value of the reporting unit is less than the carrying value of its net assets, an impairment is recognized based on the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to such reporting unit. As a result of the effect of COVID-19 on our expected future operating cash flows and our evaluation of the economic and market conditions, and its impact on the Company’s common share price, we concluded it is more likely than not that goodwill was impaired, and performed, including work performed by third-party valuation specialists, interim impairment tests as of March 31, 2020. As a result, we concluded that the goodwill associated with our reporting units was fully impaired. We recognized goodwill impairment charges of approximately $190 million during the year ended December 31, 2020. Significant assumptions used in the income approach included the estimated future net annual cash flows for each reporting unit and the discount rate.

Long-Lived Assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate, based on estimated future cash flows, that the carrying amount of these assets may not be fully recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset (asset group) to future undiscounted cash flows expected to be generated by the asset (asset group). An asset group is the lowest level of assets and liabilities for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. When estimating future cash flows, the Company considers:

 

only the future cash flows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset (asset group);

 

potential events and changes in circumstance affecting key estimates and assumptions; and

 

the existing service potential of the asset (asset group) at the date tested.

If an asset (asset group) is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset (asset group) exceeds our fair value. When determining the fair value of the asset (asset group), we consider the highest and best use of the assets from a market-participant perspective. The fair value measurement is generally determined through the use of independent third-party appraisals or an expected present value technique, both of which may include a discounted cash flow approach, which reflects assumptions of what market participants would utilize to price the asset (asset group).

Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Assets to be abandoned, or from which no further benefit is expected, are written down to zero at the time that the determination is made and the assets are removed entirely from service.

As a result of the effect of COVID-19 on our expected future operating cash flows and our evaluation of the economic and market conditions, and its impact on the Company’s common share price, interim impairment evaluation of our trade name indefinite-lived intangible asset was performed as of March 31, 2020 and determined that the estimated fair value of one of our trade names was less than carrying value. As a result, we recognized an impairment charge of $0.7 million during the year ended December 31, 2020. As of October 1, 2021 and 2020, we performed our annual trade name indefinite-lived intangible asset impairment quantitative test and determined there was no incremental impairment. The trade name was valued through application of the relief from royalty method. Under this method, a royalty rate is applied to the revenues associated with the trade name to capture value associated with use of the name as if licensed. The resulting royalty savings are then discounted to present fair value at rates reflective of the risk and return expectations of the interests to derive its fair value as of the impairment testing date.

Recently Issued Accounting Pronouncements

Refer to Note 2 to the Consolidated Financial Statements in this report for a discussion of recent accounting pronouncements.

Inflation and Economic Conditions

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We do not believe that inflation has had a material adverse effect on our revenues or results of operations. However, public demand for activities, including cruises, is influenced by general economic conditions, including inflation, global health epidemics/pandemics and customer preferences. Periods of economic softness could have a material adverse effect on the cruise industry and hospitality industry upon which we are dependent. Such a slowdown could adversely affect our results of operations and financial condition. The COVID-19 pandemic has negatively impacted our business, operations, results of operations and financial condition in 2021. Recurrence of the more severe aspects of the recent adverse economic conditions, including a further escalation of the COVID-19 outbreak, as well as periods of inflation, interest rate increases, and fuel price increases, could have a material adverse effect on our results of operations and financial condition during the period of such recurrence. Weakness in the U.S. Dollar compared to the U.K. Pound Sterling and the Euro also could have a material adverse effect on our results of operations and financial condition.

U.S. Tax Reform and Recent Tax Legislation

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020 in response to the COVID-19 pandemic and includes certain business and economic provisions. As a result, the Company has deferred $421,356 in payroll taxes and expects to benefit from the Employer Retention Credit. Additionally, the Consolidated Appropriations Act (“CAA”), enacted on December 27, 2020, which extended and modified certain provisions under the CARES Act, introduced new relief provisions, and extended or made permanent certain tax provisions set to expire after December 31, 2020 through 2021. The expected outcome is not expected to be material to the Company’s consolidated financial statements. The Company is continuing to analyze the impact of this recent legislation.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates.

Concentration of credit risk. Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. We maintain cash and cash equivalents with high quality financial institutions. As of December 31, 2021, none of the destination resort spas we served represented greater than 10% of our accounts receivable. As of December 31, 2020 and 2019, respectively, three of the cruise lines we served represented greater than 10% of our accounts receivable. We do not normally require collateral or other security to support normal credit sales. We control credit risk through credit approvals, credit limits, and monitoring procedures.

Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts. We record an allowance for doubtful accounts with respect to accounts receivable using historical collection experience, and generally an account receivable balance is written off once it is determined to be uncollectible. We review the historical collection experience and consider other facts and circumstances and adjust the calculation to record an allowance for doubtful accounts as appropriate. If our current collection trends were to differ significantly from historic collection experience, we would make a corresponding adjustment to the allowance. The allowance for doubtful accounts was $0.5 million and $0.01 million as of December 31, 2021 and 2020, respectively. Bad debt expense is included within administrative operating expenses in the consolidated and combined statements of operations and was $0.1 million and $0.0 million for the years ended December 31, 2021 and 2020, respectively.

Interest rate risk. We are subject to interest rate risk in connection with borrowing based on a variable interest rate. Derivative financial instruments, such as interest rate swap agreements and interest rate cap agreements, may be used for the purpose of managing fluctuating interest rate exposures that exist from our variable rate debt obligations that are expected to remain outstanding. Interest rate changes do not affect the market value of such debt, but could impact the amount of our interest payments, and accordingly, our future earnings and cash flows, assuming other factors are held constant.

Our policy is to manage interest rate risk through the use of a combination of fixed and floating rate debt and interest rate derivatives based upon market conditions. Our objective in managing the exposure to interest rate changes is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we have used interest rate swaps to manage net exposure to interest rate changes to our borrowings. These swaps are typically entered into with a group of financial institutions with investment grade credit ratings, thereby reducing the risk of credit loss. A hypothetical 10% change in our interest rate would change our results of operations by approximately $1.0 million.

Foreign currency risk. The fluctuation in currency exchange rates is not a significant risk for us, as most of our revenues are earned and expenses are incurred in U.S. Dollars.

While our revenues and expenses are primarily represented by U.S. Dollars, they also are represented by various other currencies, primarily the U.K. Pound Sterling and the Euro. Accordingly, we face the risk of fluctuations in non-U.S. currencies compared to U.S. Dollars. We manage this currency risk by monitoring fluctuations in foreign currencies and, when exchange rates are appropriate, purchasing amounts of those foreign currencies. We have mitigated the risk relating to fluctuations in the U.K. Pound Sterling and the Euro through the structuring of intercompany debt. If such mitigation proves ineffective, a hypothetical 10%

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change in the aggregate exchange rate exposure of the U.K. Pound Sterling and the Euro to the U.S. Dollar would change our results of operations by approximately $0.million.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Consolidated Financial Statements and the Notes thereto, together with the report thereon of Ernst & Young LLP dated March 4, 2022 are filed as part of this report, beginning on page F-l.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file with the SEC is recorded, processed, summarized and reported within applicable time periods. We carried out an evaluation, under the supervision, and with the participation, of, our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2021 and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding such required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management, with the participation of our chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2021. There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. However, due to COVID-19 related restrictions, the Company was not able to complete the annual physical counts of inventory on all vessels as is typically done. The Company was able to gain access to certain vessels, and in these instances, we completed counts of individual SKUs. Given the limited access to certain vessels, alternative procedures were performed, including analytics by vessels, communication with cruise line partners on the safeguarding and condition of inventory, and overall detailed analysis of inventory condition, consisting of review of excess, slow-moving, expiration of products, and damaged inventories. The Company completed the annual physical counts on substantially all of the 118 vessels that had returned to service as of December 31, 2021. Our management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information required by this Item 10 is contained under the caption “Corporate Governance” in our Proxy Statement for our 2022 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the year ended December 31, 2021 (the 2022 Proxy Statement) and is incorporated herein by reference.

 

ITEM 11. EXECUTIVE COMPENSATION

Information required by this Item 11 is contained under the captions “Compensation of Directors and Executive Officers” and “Corporate Governance” in the 2022 Proxy Statement and is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

Information required by this Item 12 is contained under the caption “Stock Ownership of Certain Beneficial Owners and Management” in the 2022 Proxy Statement and is incorporated herein by reference.

Information required by this Item 13 is contained under the caption “Corporate Governance” in the 2022 Proxy Statement and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information required by this Item 14 is contained under the caption “Proposals to be Voted On —Proposal 2: Ratification of Independent Registered Public Accounting Firm” in the 2022 Proxy Statement and is incorporated herein by reference.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) (1) Financial Statements

The following report and Consolidated Financial Statements are filed as part of this report beginning on page F-l, pursuant to Item 8.

Audited Consolidated Financial Statements for OneSpaWorld Limited and Subsidiaries

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2021 and 2020.

Consolidated Statements of Operations for the years ended December 31, 2021 and 2020 (Successor), for the period from March 20, 2019 to December 31, 2019 (Successor) and for the period from January 1, 2019 to March 19, 2019 (Predecessor).

Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2021 and 2020 (Successor), for the period from March 20, 2019 to December 31, 2019 (Successor) and for the period from January 1, 2019 to March 19, 2019 (Predecessor).

Consolidated Statements of Equity (Deficit) for the years ended December 31, 2021 and 2020 (Successor), for the period from March 20, 2019 to December 31, 2019 (Successor) and for the period from January 1, 2019 to March 19, 2019 (Predecessor).

Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020 (Successor), for the period from March 20, 2019 to December 31, 2019 (Successor) and for the period from January 1, 2019 to March 19, 2019 (Predecessor).

Notes to Consolidated Financial Statements

(2) Financial Statement Schedules

Financial statement schedules have been omitted since they are either not required, not applicable or the information is otherwise included.

(3) Exhibit Listing

Please see list of the exhibits at 15(b), below.

(b) The following is a list of all exhibits filed as a part of this report.

50


Table of Contents

 

Document

Exhibit

Number

 

Exhibit Description

 

 

 

  2.1

 

Business Combination Agreement, dated as of November 1, 2018, by and among Steiner Leisure, Steiner US, Nemo UK, Steiner UK, SMS, the Seller Representative, Haymaker, OneSpaWorld, Dory US Merger Sub, Dory Foreign Holding Company, Dory Intermediate and Dory US Holding Company (incorporated by reference to Amendment No. 4 to Form S-4 filed on February 14, 2019).

 

 

  3.1

 

Amended and Restated Memorandum of Association and Articles of Association OneSpaWorld Holdings Limited (incorporated by reference to Exhibit 3.1 to Form 8-K filed on March 25, 2019).

 

 

 

  3.2

 

Third Amended and Restated Memorandum of Association and Second Amended and Restated Articles of Association of OneSpaWorld Holdings Limited (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated June 10, 2020, filed on June 15, 2020)

 

 

 

  4.1*

 

Description of Registered Securities.

 

 

10.1

 

First Lien Credit Agreement, by and among OneSpaWorld Holdings Limited, Dory Intermediate LLC, Dory Acquisition Sub, Inc., the lenders party thereto and Goldman Sachs Lending Partners LLC, as the Administrative Agent and as the Collateral Agent (incorporated by reference to Exhibit 10.1 to Form 8-K filed on March 25, 2019).

 

 

10.2

 

Second Lien Credit Agreement, by and among OneSpaWorld Holdings Limited, Dory Intermediate LLC, the lenders party thereto and Cortland Capital Market Services LLC, as the Administrative Agent and as the Collateral Agent (incorporated by reference to Exhibit 10.2 to Form 8-K filed on March 25, 2019).

 

 

10.3

 

Registration Rights Agreement, by and among OneSpaWorld Holdings Limited, Steiner Leisure Limited, Haymaker Sponsor, LLC and, solely for the purpose of certain provisions thereof, Haymaker Acquisition Corp. (incorporated by reference to Exhibit 10.3 to Form 8-K filed on March 25, 2019).

 

 

10.4

 

Amended and Restated Warrant Agreement, by and between OneSpaWorld Holdings Limited and Continental Stock Transfer & Trust Company (incorporated by reference to Exhibit 10.5 to Form 8-K filed on March 25, 2019).

 

 

10.5

 

Form of Indemnity Agreement (incorporated by reference to Exhibit 10.7 to Amendment No. 2 to Registration Statement on Form S-4 filed on January 22, 2019).

 

 

 

10.6†

 

2019 Equity Incentive Plan (incorporated by reference to Exhibit 10.6 to Form 8-K filed on March 25, 2019).

 

 

10.7

 

Sponsor Support Agreement, dated as of November 1, 2018, among Haymaker Sponsor, Haymaker, OneSpaWorld, and Steiner Leisure (incorporated by reference to Exhibit 10.4 to Amendment No. 2 to Registration Statement on Form S-4 filed on January 22, 2019).

 

 

10.8

 

Amendment No. 1 to Sponsor Support Agreement, dated as of January 7, 2019, by and among Haymaker Sponsor, Haymaker, OneSpaWorld and Steiner Leisure (incorporated by reference to Exhibit 10.5 to Amendment No. 2 to Registration Statement on Form S-4 filed on January 22, 2019).

 

 

10.9

 

Director Designation Agreement, by and among OneSpaWorld Holdings Limited, Haymaker Sponsor, LLC and Steiner Leisure Limited (incorporated by reference to Exhibit 10.2 to Amendment No. 2 to Registration Statement on Form S-4 filed on January 22, 2019)

 

 

10.10†

 

Employment and Severance Agreement, dated as of November 1, 2018, by and between OneSpaWorld Holdings Limited and Leonard Fluxman (incorporated by reference to Exhibit 10.9 to Registration Statement on Form S-4 filed on November 13, 2018).

 

 

10.11†

 

Employment and Severance Agreement, dated as of November 1, 2018, by and between OneSpaWorld Holdings Limited and Stephen B. Lazarus (incorporated by reference to Exhibit 10.11 to Registration Statement on Form S-4 filed on November 13, 2018).

 

 

10.12†

 

Employment Agreement, dated October 13, 2020, between OneSpaWorld Holdings Limited and Susan Bonner (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated October 13,2020, filed October 14, 2020)

 

 

 

 

 

51


Table of Contents

Document

Exhibit

Number

 

Exhibit Description

 

 

 

10.13

 

 Form of OneSpaWorld Holdings Limited October 2020 Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 dated and filed October 13, 2020).

 

 

 

10.14†

 

Form of OneSpaWorld Holdings Limited October 2020 Performance Stock Unit Award Agreement (incorporated by reference to Exhibit 99.2 to the Company's Registration Statement on Form S-8 dated and filed October 13, 2020).

 

 

 

10.15*†

 

Form of OneSpaWorld Holdings Limited December 2021 Performance Stock Unit Award Agreement for 2021 Awards.

 

 

 

21.1*

 

Subsidiaries of OneSpaWorld Holdings Limited.

 

 

 

23.1*

 

Consent of Ernst & Young LLP.

 

 

 

31.1*

 

Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934.

 

 

 

31.2*

 

Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934.

 

 

 

32.1*

 

Section 1350 Certification of Principal Executive Officer.

 

 

 

32.2*

 

Section 1350 Certification of Principal Financial Officer.

 

 

 

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 Document

 

 

 

104

 

The cover page from the Company’s form 10-k for year ended December 31, 2021, has been formatted in Inline XBRL.

 

*

Filed herewith.

Indicates a management contract or compensatory plan.

52


Table of Contents

 

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.

 

 

 

 

ONESPAWORLD HOLDINGS LIMITED

 

 

By:

 

/s/ Stephen B. Lazarus

 

 

Name: Stephen B. Lazarus

 

 

Title: Chief Financial Officer and Chief

Operating Officer

Date:

 

March 4, 2022

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

 

 

 

 

 

Name

 

Position

 

Date

 

 

 

 

 

/s/ Leonard Fluxman

Leonard Fluxman

 

Executive Chairman, President, Chief Executive Officer and Director (Principal Executive Officer)

 

March 4, 2022

 

 

 

 

 

/s/ Stephen B. Lazarus

Stephen B. Lazarus

 

Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer)

 

March 4, 2022

 

 

 

 

 

/s/ Steven J. Heyer

Steven J. Heyer

 

Lead Director

 

March 4, 2022

 

 

 

 

 

/s/ Maryam Banikarim

Maryam Banikarim

 

Director

 

March 4, 2022

 

 

 

 

 

/s/ Glenn J. Fusfield

Glenn J. Fusfield

 

Director

 

March 4, 2022

 

 

 

 

 

/s/ Adam Hasiba

Adam Hasiba

 

Director

 

March 4, 2022

 

 

 

 

 

/s/ Andrew R. Heyer

Andrew R. Heyer

 

Director

 

March 4, 2022

 

 

 

 

 

/s/ Marc Magliacano

Marc Magliacano

 

Director

 

March 4, 2022

 

 

 

 

 

/s/ Walter F. McLallen

Walter F. McLallen

 

Director

 

March 4, 2022

 

 

 

 

 

/s/ Stephen W. Powell

Stephen W. Powell

 

Director

 

March 4, 2022

 

 

 

 

 

/s/ Jeffrey E. Stiefler

Jeffrey E. Stiefler

 

Director

 

March 4, 2022

 

53


Table of Contents

 

Index to Consolidated Financial Statements

 

Page Number

 

 

Audited Consolidated Financial Statements for OneSpaWorld Holdings Limited and Subsidiaries

 

Report of Independent Registered Public Accounting Firm (PCAOB ID:42)

F-2

Consolidated Balance Sheets

F-3

Consolidated and Combined Statements of Operations

F-4

Consolidated and Combined Statements of Comprehensive (Loss) Income

F-5

Consolidated and Combined Statements of Equity (Deficit)

F-6

Consolidated and Combined Statements of Cash Flows

F-7

Notes to the Consolidated and Combined Financial Statements

F-9

 

 

54


Table of Contents

 

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of OneSpaWorld Holdings Limited

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of OneSpaWorld Holdings Limited and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated and combined statements of operations, comprehensive (loss) income, equity (deficit) and cash flows for each of the two years in the period ended December 31, 2021, for the period from March 20, 2019 through December 31, 2019 (Successor), and for the period from January 1, 2019 through March 19, 2019 (Predecessor), and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, for the period from March 20, 2019 through December 31, 2019 (Successor), and for the period from January 1, 2019 through March 19, 2019 (Predecessor), in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s 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 financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Ernst & Young LLP

 

We have served as the Company’s auditor since 2018.

 

Miami, Florida

March 4, 2022

 

 

F-2


Table of Contents

 

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

As of December 31,

 

ASSETS

 

2021

 

 

 

2020

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

  Cash and cash equivalents

 

$

30,937

 

 

 

$

41,552

 

  Restricted cash

 

 

1,896

 

 

 

 

1,896

 

  Accounts receivable, net

 

 

19,480

 

 

 

 

2,994

 

  Inventories, net

 

 

29,483

 

 

 

 

27,200

 

  Prepaid expenses

 

 

6,574

 

 

 

 

6,950

 

  Other current assets

 

 

577

 

 

 

 

1,590

 

  Total current assets

 

 

88,947

 

 

 

 

82,182

 

Property and equipment, net

 

 

14,107

 

 

 

 

17,056

 

Intangible assets, net

 

 

582,290

 

 

 

 

599,114

 

OTHER ASSETS:

 

 

 

 

 

 

 

 

 

  Deferred tax assets

 

 

70

 

 

 

 

98

 

  Other non-current assets

 

 

3,454

 

 

 

 

3,829

 

  Total other assets

 

 

3,524

 

 

 

 

3,927

 

  Total assets

 

$

688,868

 

 

 

$

702,279

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

15,846

 

 

 

$

8,601

 

Accrued expenses

 

 

32,232

 

 

 

 

25,761

 

Current portion of long-term debt

 

 

1,776

 

 

 

 

 

Other current liabilities

 

 

2,011

 

 

 

 

2,713

 

  Total current liabilities

 

 

51,865

 

 

 

 

37,075

 

Deferred rent

 

 

341

 

 

 

 

283

 

Income tax contingency

 

 

4,129

 

 

 

 

4,392

 

Warrant liabilities

 

 

107,300

 

 

 

 

104,700

 

Other long-term liabilities

 

 

2,646

 

 

 

 

5,568

 

Long-term debt, net

 

 

228,683

 

 

 

 

229,433

 

  Total liabilities

 

 

394,964

 

 

 

 

381,451

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

 

Voting common stock, $0.0001 par value; 225,000,000 shares authorized, 78,422,887 shares issued and outstanding at December 31, 2021 and 69,292,596 shares issued and outstanding at December 31, 2020

 

 

8

 

 

 

 

7

 

Non-voting common stock, $0.0001 par value; 25,000,000 shares authorized, 13,421,914 shares issued and outstanding at December 31, 2021 and 17,185,500 shares issued and outstanding at December 31, 2020

 

 

1

 

 

 

 

2

 

Additional paid-in capital

 

 

687,660

 

 

 

 

649,540

 

Accumulated deficit

 

 

(391,768

)

 

 

 

(323,246

)

Accumulated other comprehensive loss

 

 

(1,997

)

 

 

 

(5,475

)

        Total shareholders' equity

 

 

293,904

 

 

 

 

320,828

 

  Total liabilities and shareholders' equity

 

$

688,868

 

 

 

$

702,279

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-3


Table of Contents

 

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

Successor

 

 

 

Predecessor

 

 

Consolidated

 

 

 

Combined

 

 

Year Ended December 31, 2021

 

 

Year Ended December 31, 2020

 

 

March 20, 2019 to December 31, 2019

 

 

 

January 1, 2019 to March 19, 2019

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service revenues

$

115,945

 

 

$

93,682

 

 

$

339,793

 

 

 

$

91,280

 

Product revenues

 

28,086

 

 

 

27,243

 

 

 

103,988

 

 

 

 

27,172

 

Total revenues

 

144,031

 

 

 

120,925

 

 

 

443,781

 

 

 

 

118,452

 

COST OF REVENUES AND OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

108,939

 

 

 

107,258

 

 

 

292,844

 

 

 

 

76,836

 

Cost of products

 

26,646

 

 

 

31,976

 

 

 

90,353

 

 

 

 

23,957

 

Administrative

 

15,526

 

 

 

18,957

 

 

 

13,986

 

 

 

 

2,498

 

Salary, benefits and payroll taxes

 

28,151

 

 

 

20,138

 

 

 

32,300

 

 

 

 

29,349

 

Amortization of intangible assets

 

16,829

 

 

 

16,823

 

 

 

13,174

 

 

 

 

755

 

Goodwill and tradename intangible assets impairment

 

-

 

 

 

190,777

 

 

 

 

 

 

 

 

Total cost of revenues and operating expenses

 

196,091

 

 

 

385,929

 

 

 

442,657

 

 

 

 

133,395

 

(Loss) income from operations

 

(52,060

)

 

 

(265,004

)

 

 

1,124

 

 

 

 

(14,943

)

OTHER (EXPENSE) INCOME, NET

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense and warrant issuance costs

 

(13,488

)

 

 

(16,089

)

 

 

(13,522

)

 

 

 

(6,316

)

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

 

 

(3,413

)

Interest and other income

 

55

 

 

 

30

 

 

 

43

 

 

 

 

 

Change in fair value of warrant liabilities

 

(2,600

)

 

 

(6,100

)

 

 

(19,700

)

 

 

 

 

Total other expense, net

 

(16,033

)

 

 

(22,159

)

 

 

(33,179

)

 

 

 

(9,729

)

Loss before income tax expense (benefit)

 

(68,093

)

 

 

(287,163

)

 

 

(32,055

)

 

 

 

(24,672

)

INCOME TAX EXPENSE (BENEFIT)

 

429

 

 

 

814

 

 

 

(120

)

 

 

 

109

 

NET LOSS

 

(68,522

)

 

 

(287,977

)

 

 

(31,935

)

 

 

 

(24,781

)

Net income attributable to noncontrolling interest

 

 

 

 

 

 

 

3,334

 

 

 

 

678

 

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS AND PARENT, RESPECTIVELY

$

(68,522

)

 

$

(287,977

)

 

$

(35,269

)

 

 

$

(25,459

)

NET LOSS PER VOTING AND NON-VOTING SHARE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic and diluted

$

(0.76

)

 

$

(3.87

)

 

$

(0.58

)

 

 

 

 

 

WEIGHTED-AVERAGE SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic and diluted

 

90,134

 

 

 

74,359

 

 

 

61,118

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated and combined financial statements.

 

F-4


Table of Contents

 

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

 

 

 

 

 

 

 

 

Successor

 

 

 

Predecessor

 

Consolidated

 

 

 

Combined

 

Year Ended December 31, 2021

 

 

Year Ended December 31, 2020

 

 

March 20, 2019 to December 31, 2019

 

 

 

January 1, 2019 to March 19, 2019

 

 

Net loss

$

(68,522

)

 

$

(287,977

)

 

$

(31,935

)

 

 

$

(24,781

)

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation loss

 

(113

)

 

 

(377

)

 

 

(183

)

 

 

 

(165

)

 

   Cash flows hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on derivative

 

1,684

 

 

 

(7,215

)

 

 

1,109

 

 

 

 

 

 

Amount realized and reclassified into earnings

 

1,907

 

 

 

1,398

 

 

 

(207

)

 

 

 

 

 

Total other comprehensive income (loss), net of tax

 

3,478

 

 

 

(6,194

)

 

 

719

 

 

 

 

(165

)

 

Comprehensive loss

 

(65,044

)

 

 

(294,171

)

 

 

(31,216

)

 

 

 

(24,946

)

 

Comprehensive income attributable to noncontrolling interest

 

 

 

 

 

 

 

3,334

 

 

 

 

678

 

 

Comprehensive loss attributable to common shareholders and Parent, respectively

$

(65,044

)

 

$

(294,171

)

 

$

(34,550

)

 

 

$

(25,624

)

 

 

The accompanying notes are an integral part of the consolidated and combined financial statements.

 

 

F-5


Table of Contents

 

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY (DEFICIT)

(in thousands, except share data)

Predecessor:

Combined

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Parent Investment

 

Accumulated Other Comprehensive Loss

 

Total Parent's Equity (Deficit)

 

Noncontrolling Interest

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, December 31, 2018

$

(130,520

)

$

(649

)

$

(131,169

)

$

3,586

 

$

(127,583

)

Net Loss

 

(25,459

)

 

-

 

 

(25,459

)

 

678

 

 

(24,781

)

Distributions to noncontrolling interest

 

-

 

 

-

 

 

-

 

 

(267

)

 

(267

)

Net contributions from Parent and its affiliates

 

351,802

 

 

-

 

 

351,802

 

 

-

 

 

351,802

 

Foreign currency translation loss

 

-

 

 

(165

)

 

(165

)

 

-

 

 

(165

)

BALANCE, March 19, 2019

$

195,823

 

$

(814

)

$

195,009

 

$

3,997

 

$

199,006

 

 

Successor:

 

 

 

 

 

 

 

 

Consolidated

 

 

 

Issued Common Voting Shares

 

 

Issued Common Non-Voting Shares

 

 

Voting and Non-Voting Common Stock

 

 

Additional Paid-in Capital

 

 

Accumulated Other Comprehensive Loss

 

 

Accumulated Deficit

 

 

Total OneSpaWorld Shareholders’ Equity

 

 

Noncontrolling Interest

 

 

Total

 

BALANCE, March 20, 2019 (1)

 

 

61,118

 

 

 

 

 

 

6

 

 

$

627,960

 

 

$

 

 

$

 

 

$

627,966

 

 

$

5,624

 

 

$

633,590

 

Immaterial correction of an error

 

 

 

 

 

 

 

 

 

 

 

(29,321

)

 

 

 

 

 

 

 

 

(29,321

)

 

 

 

 

 

(29,321

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(35,269

)

 

 

(35,269

)

 

 

3,334

 

 

 

(31,935

)

Conversion of public warrants into common shares

 

 

1

 

 

 

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

11

 

 

 

 

 

 

11

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

(2,445

)

 

 

 

 

 

 

 

 

(2,445

)

 

 

 

 

 

(2,445

)

Distributions to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(834

)

 

 

(834

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

20,683

 

 

 

 

 

 

 

 

 

20,683

 

 

 

 

 

 

20,683

 

Foreign currency translation loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(183

)

 

 

 

 

 

(183

)

 

 

 

 

 

(183

)

Unrealized gain on derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

902

 

 

 

 

 

 

902

 

 

 

 

 

 

902

 

BALANCE, December 31, 2019

 

 

61,119

 

 

 

 

 

 

6

 

 

 

616,888

 

 

 

719

 

 

 

(35,269

)

 

 

582,344

 

 

 

8,124

 

 

 

590,468

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(287,977

)

 

 

(287,977

)

 

 

 

 

 

(287,977

)

2020 Private Placement, net of issuance costs

 

 

6,564

 

 

 

17,186

 

 

 

3

 

 

 

53,404

 

 

 

 

 

 

 

 

 

53,407

 

 

 

 

 

 

53,407

 

Reclassification of public warrants to liabilities

 

 

 

 

 

 

 

 

 

 

 

(26,500

)

 

 

 

 

 

 

 

 

(26,500

)

 

 

 

 

 

(26,500

)

At-the- Market Equity Offering, net of issuance costs

 

 

1,259

 

 

 

 

 

 

 

 

 

10,823

 

 

 

 

 

 

 

 

 

10,823

 

 

 

 

 

 

10,823

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

4,950

 

 

 

 

 

 

 

 

 

4,950

 

 

 

 

 

 

4,950

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(377

)

 

 

 

 

 

(377

)

 

 

 

 

 

(377

)

Common shares issued under equity incentive plan

 

 

251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrecognized loss on derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,817

)

 

 

 

 

 

(5,817

)

 

 

 

 

 

(5,817

)

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

(2,449

)

 

 

 

 

 

 

 

 

(2,449

)

 

 

 

 

 

(2,449

)

Distributions to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,011

)

 

 

(4,011

)

Purchase of noncontrolling interest

 

 

99

 

 

 

 

 

 

 

 

 

(6,697

)

 

 

 

 

 

 

 

 

(6,697

)

 

 

(4,113

)

 

 

(10,810

)

Purchase of public warrants

 

 

 

 

 

 

 

 

 

 

 

(879

)

 

 

 

 

 

 

 

 

(879

)

 

 

 

 

 

(879

)

BALANCE, December 31, 2020

 

 

69,292

 

 

 

17,186

 

 

 

9

 

 

 

649,540

 

 

 

(5,475

)

 

 

(323,246

)

 

 

320,828

 

 

 

 

 

 

320,828

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(68,522

)

 

 

(68,522

)

 

 

 

 

 

(68,522

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

10,646

 

 

 

 

 

 

 

 

 

10,646

 

 

 

 

 

 

10,646

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(113

)

 

 

 

 

 

(113

)

 

 

 

 

 

(113

)

Unrecognized gain on derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,591

 

 

 

 

 

 

3,591

 

 

 

 

 

 

3,591

 

At-The Market Equity Offering, net of issuance costs

 

 

2,614

 

 

 

 

 

 

 

 

 

27,474

 

 

 

 

 

 

 

 

 

27,474

 

 

 

 

 

 

27,474

 

Common shares issued under equity incentive plan

 

 

1,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of deferred shares into common shares

 

 

1,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of non-voting common shares into voting common shares

 

 

3,764

 

 

 

(3,764

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of public warrants into common shares

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, December 31, 2021

 

 

78,423

 

 

 

13,422

 

 

$

9

 

 

$

687,660

 

 

$

(1,997

)

 

$

(391,768

)

 

$

293,904

 

 

$

 

 

$

293,904

 

 

(1)

Initial equity balances of the Successor reflect the equity of the accounting acquirer, Haymaker Acquisition Corp., and the issuance of common stock, warrants and cash contributed by Haymaker in connection with the acquisition of OSW Predecessor.

The accompanying notes are an integral part of the consolidated and combined financial statements.

 

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Table of Contents

 

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(in thousands)

 

Successor

 

 

 

Predecessor

 

 

Consolidated

 

 

 

Combined

 

 

Year Ended December 31, 2021

 

 

Year Ended December 31, 2020

 

March 20, 2019 to December 31, 2019

 

 

 

January 1, 2019 to March 19, 2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(68,522

)

 

$

(287,977

)

$

(31,935

)

 

 

$

(24,781

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

22,468

 

 

 

24,453

 

 

19,606

 

 

 

 

1,989

 

Goodwill and trade name impairment charges

 

 

 

 

190,777

 

 

 

 

 

 

 

Stock-based compensation

 

10,646

 

 

 

4,950

 

 

20,683

 

 

 

 

 

Amortization of deferred financing costs

 

1,026

 

 

 

1,026

 

 

841

 

 

 

 

213

 

Warrant issuance costs

 

 

 

 

1,386

 

 

 

 

 

 

 

Change in fair value of warrant liabilities

 

2,600

 

 

 

6,100

 

 

19,700

 

 

 

 

 

Provision for doubtful accounts

 

453

 

 

 

172

 

 

 

 

 

 

8

 

Inventories impairment charges

 

3,977

 

 

 

6,000

 

 

 

 

 

 

 

Loss from write-offs of property and equipment

 

177

 

 

 

90

 

 

 

 

 

 

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

 

3,413

 

Deferred income taxes

 

89

 

 

 

1,575

 

 

(643

)

 

 

 

 

Changes in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(16,939

)

 

 

27,347

 

 

(6,840

)

 

 

 

1,671

 

Inventories

 

(6,260

)

 

 

2,866

 

 

352

 

 

 

 

(406

)

Prepaid expenses

 

376

 

 

 

705

 

 

(1,714

)

 

 

 

1,073

 

Other current assets

 

1,013

 

 

 

725

 

 

(776

)

 

 

 

213

 

Other non-current assets

 

375

 

 

 

(2,974

)

 

(854

)

 

 

 

(1,003

)

Accounts payable

 

7,245

 

 

 

(14,836

)

 

7,529

 

 

 

 

8,313

 

Accounts payable – related parties

 

 

 

 

 

 

 

 

 

 

(6,553

)

Accrued expenses

 

6,471

 

 

 

1,538

 

 

(30,078

)

 

 

 

19,792

 

Other current liabilities

 

(94

)

 

 

(139

)

 

317

 

 

 

 

(288

)

Income taxes payable

 

 

 

 

(900

)

 

409

 

 

 

 

42

 

Income tax contingency

 

(263

)

 

 

443

 

 

69

 

 

 

 

 

Deferred rent

 

58

 

 

 

123

 

 

160

 

 

 

 

37

 

Net cash (used in) provided by operating activities

 

(35,104

)

 

 

(36,550

)

 

(3,174

)

 

 

 

3,733

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(2,868

)

 

 

(2,132

)

 

(2,909

)

 

 

 

(517

)

Acquisition of OSW Predecessor, net of cash acquired

 

 

 

 

 

 

(676,453

)

 

 

 

 

Net cash used in investing activities

 

(2,868

)

 

 

(2,132

)

 

(679,362

)

 

 

 

(517

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from the issuance of common shares

 

 

 

 

 

 

122,510

 

 

 

 

 

Net proceeds from Haymaker and private placement investors

 

 

 

 

 

 

349,390

 

 

 

 

 

Proceeds from 2020 private placement, net of issuance costs paid

 

 

 

 

68,602

 

 

 

 

 

 

 

Proceeds from At-the Market Equity Offering, net of issuance costs paid

 

27,474

 

 

 

11,090

 

 

 

 

 

 

 

Proceeds from the term loan and revolver facilities

 

 

 

 

20,000

 

 

245,900

 

 

 

 

 

Dividend paid on common stock

 

 

 

 

(2,445

)

 

 

 

 

 

 

Purchase of public warrants

 

 

 

 

(879

)

 

 

 

 

 

 

Proceeds from conversion of public warrants into common shares

 

 

 

 

 

 

11

 

 

 

 

 

Payment of deferred financing costs

 

 

 

 

 

 

(6,892

)

 

 

 

 

Repayment on term loan and revolver facilities

 

 

 

 

(13,000

)

 

(18,442

)

 

 

 

 

Proceeds from amounts due from related party

 

 

 

 

 

 

3,187

 

 

 

 

 

Net distributions to Parent and its affiliates

 

 

 

 

 

 

 

 

 

 

(4,262

)

Distributions to noncontrolling interest

 

 

 

 

(4,011

)

 

(834

)

 

 

 

(267

)

Cash paid to acquire noncontrolling interest

 

 

 

 

(10,810

)

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

27,474

 

 

 

68,547

 

 

694,830

 

 

 

 

(4,529

)

Effect of exchange rate changes on cash

 

(117

)

 

 

(280

)

 

(205

)

 

 

 

649

 

Net (decrease) increase in cash and cash equivalents and restricted cash

 

(10,615

)

 

 

29,585

 

 

12,089

 

 

 

 

(664

)

Cash and cash equivalents and restricted cash, Beginning of period

 

43,448

 

 

 

13,863

 

 

1,774

 

 

 

 

15,302

 

Cash and cash equivalents and restricted cash, End of period

$

32,833

 

 

$

43,448

 

$

13,863

 

 

 

$

14,638

 

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Table of Contents

 

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)

(in thousands)

 

 

 

 

 

 

 

Successor

 

 

 

Predecessor

 

Consolidated

 

 

 

Combined

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Year Ended December 31, 2021

 

 

Year Ended December 31, 2020

 

 

March 20, 2019 to December 31, 2019

 

 

 

January 1, 2019 to March 19, 2019

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes

$

160

 

 

$

115

 

 

$

409

 

 

 

$

73

 

 

Interest

$

12,567

 

 

$

11,730

 

 

$

12,347

 

 

 

$

 

 

Non-cash transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity consideration paid in connection with the Business Combination

$

 

 

$

 

 

$

167,300

 

 

 

$

 

 

Initial measurement of warrants accounted for as a liability

$

 

 

$

16,200

 

 

$

36,200

 

 

 

$

 

 

Unpaid declared dividends

$

 

 

$

2,449

 

 

$

2,445

 

 

 

$

 

 

Common stock issued to purchase noncontrolling

interest

$

 

 

$

1,507

 

 

$

 

 

 

$

 

 

2020 Private Placement issuance cost accrued

$

 

 

$

381

 

 

$

 

 

 

$

 

 

At-the Market Equity Offering issuance cost accrued

$

 

 

$

267

 

 

$

 

 

 

$

 

 

Repayment of long-term debt by Parent on behalf of the company

$

 

 

$

 

 

$

 

 

 

$

351,482

 

 

The accompanying notes are an integral part of the consolidated and combined financial statements.

F-8


Table of Contents

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

DECEMBER 31, 2021

1. Organization

OneSpaWorld Holdings Limited (“OneSpaWorld”, the “Company”, “we”, “us”, “our”) is an international business company incorporated under the laws of the Commonwealth of The Bahamas. OneSpaWorld is a global provider and innovator in the fields of health and wellness, fitness and beauty. In facilities on cruise ships and in land-based destination resorts, the Company strives to create a relaxing and therapeutic environment where guests can receive health and wellness, fitness and beauty services and experiences of the highest quality. The Company’s services include traditional and alternative massage, body care and skin care treatments, fitness, acupuncture, and medi-spa treatments. The Company also sells premium quality health and wellness, fitness and beauty products at its facilities and through its timetospa.com website. The predominant business, based on revenues, is sales of services and products on cruise ships and in land-based destination resorts, followed by sales of products through the timetospa.com website.

On March 19, 2019 (the “Business Combination Date”), OneSpaWorld consummated a business combination pursuant to a Business Combination Agreement, dated as of November 1, 2018 (as amended on January 7, 2019, by Amendment No. 1 to the Business Combination Agreement), by and among Steiner Leisure Limited (“Steiner Leisure,” “Steiner,” or “Parent”), Steiner U.S. Holdings, Inc., Nemo (UK) Holdco, Ltd., Steiner UK Limited, Steiner Management Services, LLC, Haymaker Acquisition Corp. (“Haymaker”), OneSpaWorld, Dory US Merger Sub, LLC, Dory Acquisition Sub, Limited, Dory Intermediate LLC, and Dory Acquisition Sub, Inc. (the “Business Combination”), in which Haymaker acquired from Steiner the operating business known as OSW Predecessor (“OSW”). Prior to the consummation of the Business Combination, OneSpaWorld was a wholly-owned subsidiary of Steiner Leisure. On the Business Combination Date, OneSpaWorld became the ultimate parent company of the Haymaker and OSW company.

Haymaker, a special purpose acquisition company (“SPAC”), was organized as a blank check company incorporated in Delaware on April 27, 2017 and was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. On October 27, 2017, Haymaker consummated an initial public offering (“IPO”) of its Class A common shares (the “Haymaker Class A Shares”), generating gross proceeds of approximately $300,000,000. The net proceeds from the IPO were subsequently placed in a trust account for the intended purpose of being applied toward consummating a business combination.

 

OSW Predecessor” is comprised of the net assets and operations of (i) the following wholly-owned subsidiaries of Steiner Leisure: OneSpaWorld LLC, Steiner Spa Asia Limited, Steiner Spa Limited, and OneSpaWorld Marks Limited (formerly known as Steiner Marks Limited), (ii) the following respective indirect subsidiaries of Steiner Leisure: Mandara PSLV, LLC (subsequently dissolved), Mandara Spa (Hawaii), LLC, Florida Luxury Spa Group, LLC, Steiner Transocean U.S., Inc., Steiner Spa Resorts (Nevada), Inc., Steiner Spa Resorts (Connecticut), Inc., Steiner Resort Spas (California), Inc., OneSpaWorld Resort Spas (North Carolina), Inc. (formerly known as Steiner Resort Spas (North Carolina), Inc.), OSW SoHo LLC, OSW Distribution LLC, World of Wellness Training Limited (formerly known as Steiner Training Limited), STO Italy S.r.l., One Spa World LLC, Mandara Spa Services LLC, OneSpaWorld Limited, OneSpaWorld (Bahamas) Limited (formerly known as Steiner Transocean Limited), OneSpaWorld Medispa LLC, OneSpaWorld Medispa Limited, OneSpaWorld Medispa (Bahamas) Limited (formerly known as STO Medispa Limited), Mandara Spa (Cruise I), LLC, Mandara Spa (Cruise II), LLC, Steiner Transocean (II) Limited (subsequently dissolved), The Onboard Spa by Steiner (Shanghai) Co., Ltd. (subsequently dissolved), Mandara Spa LLC, Mandara Spa Puerto Rico, Inc., Mandara Spa (Guam), L.L.C. (subsequently dissolved), Mandara Spa (Bahamas) Limited, Mandara Spa Aruba N.V., Mandara Spa Polynesia Sarl, Mandara Spa Asia Limited, PT Mandara Spa Indonesia, Spa Services Asia Limited, Mandara Spa Palau, Mandara Spa (Malaysia) Sdn. Bhd., Mandara Spa Ventures International Sdn. Bhd., Spa Partners (South Asia) Limited, Mandara Spa (Maldives) PVT LTD, and Mandara Spa (Fiji) Limited, (iii) Medispa Limited, a majority-owned subsidiary of Steiner Leisure (the noncontrolling interest in which was subsequently purchased by OneSpaWorld), and (iv) the timetospa.com website owned by Elemis USA, Inc. (formerly known as Steiner Beauty Products, Inc.), subsequently transferred to OneSpaWorld.

As of December 31, 2019, the Company had a 60% controlling interest and a third party had a 40% noncontrolling interest of Medispa Limited, a Bahamian entity that is a subsidiary of the Company. On February 14, 2020, the Company purchased the 40% noncontrolling interest and as a result, since this date we became the sole owners of this entity. See “Note 11 – “Noncontrolling Interest” for further details.

Impact of Coronavirus (COVID-19) – Liquidity and Management’s Plans

In the face of the global impact of COVID-19, our cruise line partners paused their guest cruise operations and the majority of our land based destination resort spas temporarily closed in mid-March 2020. During 2021, we continued to execute our resumption of spa

F-9


Table of Contents

operations onboard cruise ships and in destination resorts in a phased manner. As of February 25, 2022, our health and wellness centers on 105 ships of our cruise line partners and 48 land based destination resort spas were operating as part of our gradual return to service. The extent of the effects of COVID-19 on our business are uncertain and will depend on future developments, including, but not limited to, the duration and continued severity of COVID-19 and the length of time it takes to return the company to profitability. The ongoing effects of COVID-19 have had, and will continue to have, a material negative impact on our financial results and liquidity.

 

The estimation of our future liquidity requirements includes numerous assumptions that are subject to various risks and uncertainties. We cannot make assurances that our assumptions used to estimate our liquidity requirements will be realized as assumed or may not change because of the unprecedented environment we are experiencing due to COVID-19. We have made reasonable estimates and judgments of the impact of COVID-19 within our financial statements and there may be material changes to those estimates in future periods. We have implemented a number of proactive measures to mitigate the financial and operational impacts of COVID-19, including completing a private placement and various capital market transactions, reduction of capital expenditures and operating expenses, borrowing on our revolving credit facility, deferring payment of dividends declared and the suspension of our dividend program. To the extent necessary, we will continue to pursue other opportunities to improve our liquidity.

Based on the actions the Company has taken as described above, our assumptions regarding the impact of COVID 19, our current resources, our current operations, vessels expected to return to sailing, destination resort spas expected to reopen, and our assumptions regarding the expected performance of our health and wellness operation onboard vessels and in destination resorts, we have concluded that we will have sufficient liquidity to satisfy our obligations over the next 12 months and comply with all debt covenants as required by our debt agreements. Management cannot predict the magnitude and duration of the negative impact from the COVID-19 pandemic; new events beyond management’s control may have incrementally material adverse impact on the Company’s results of operations, financial position and liquidity.

2. Summary of Significant Accounting Policies

Basis of Presentation, Principles of Consolidation and Principles Combination

Successor:

The accompanying consolidated financial statements as of and for the years ended December 31, 2021, 2020 and for the period from March 20, 2019 to December 31, 2019, include the consolidated balance sheet and statements of operations, comprehensive (loss) income, equity, and cash flows of OneSpaWorld. All significant intercompany items and transactions have been eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted pursuant to the SEC’s rules and regulations. However, management believes that the disclosures contained herein are adequate to make the information presented not misleading. In the opinion of management, the consolidated financial statements reflect all adjustments (which are of a normal recurring nature) necessary to present fairly our financial position, results of operations and cash flows.

The preparation of consolidated and combined financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Predecessor:

The combined OSW financial statements (the “OSW financial statements”) include the accounts of the wholly-owned and indirect subsidiaries of Steiner Leisure listed in Note 1 and include the accounts of a company majority-owned by OneSpaWorld Medispa (Bahamas) Limited, in which OneSpaWorld (Bahamas) Limited, the 100% owner of OneSpaWorld Medispa (Bahamas) Limited, had a controlling interest. The OSW combined financial statements also include the accounts and results of operations associated with the timetospa.com website owned by Elemis USA, Inc. until March 1, 2019. The OSW financial statements do not represent the financial position and results of operations of a legal entity but rather a combination of entities under common control of Steiner Leisure that have been “carved out” of the Steiner Leisure consolidated financial statements and reflect significant assumptions and allocations. All significant intercompany transactions and balances have been eliminated in combination. The accompanying OSW combined financial statements may not be indicative of what they would have been had OSW actually been a separate stand-alone entity.

 

The accompanying OSW financial statements include the equity, revenues and expenses specifically related to OSW’s operations. Until December 31, 2019, OSW received services and support from various functions performed by Steiner Leisure and costs associated with these functions had been allocated to OSW. These allocations were necessary to reflect all of the costs of doing business and include costs related to certain Steiner Leisure corporate functions, including, but not limited to, senior management, legal, human resources, finance, IT and other shared services that had been allocated to OSW based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis determined by an estimate of the percentage of time Steiner Leisure

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employees devoted to OSW, as compared to total time available or by the headcount of employees at Steiner Leisure corporate headquarters that are fully dedicated to the OSW entities in relation to the total employee headcount. These allocated costs are reflected in salaries and payroll taxes and administrative expenses in the accompanying OSW combined statements of operations. Management considers these allocations to be a reasonable reflection of the utilization of services by or benefit provided to OSW. However, the allocations may not be indicative of the actual expenses that would have been incurred had OSW operated as an independent, stand-alone entity.

The net effect of the settlement of transactions between OSW, Steiner Leisure, and other affiliates of Steiner Leisure are reflected in the accompanying combined statements of cash flows as a financing activity.

Certain expenses and operating costs were paid by Steiner Leisure on behalf of OSW. The Parent has paid on behalf of OSW expenses associated with the allocation of Steiner Leisure corporate overhead and costs associated with the purchase of products from related parties. Operating cash flows for the predecessor periods exclude OSW expenses and operating costs paid by Steiner Leisure on behalf of OSW. Consequently, OSW’s historical cash flows may not be indicative of cash flows had OSW actually been a separate stand-alone entity or future cash flows of OSW.

As of December 31, 2018, OSW had assumed long-term debt of the Parent. Such debt was paid-off by the Parent on behalf of OSW during the Predecessor period from January 1, 2019 to March 19, 2019.

Management believes the assumptions and allocations underlying the accompanying OSW combined financial statements and notes to the OSW combined financial statements are reasonable, appropriate and consistently applied for the periods presented. Management believes the accompanying OSW financial statements reflect all costs of doing business.

The accompanying OSW combined financial statements have been prepared in conformity with U.S. GAAP.

Restatement

On May 10, 2021, the Company amended its 2020 Form 10-K (“Form 10-K/A”) to restate previously issued consolidated financial statements as of December 31, 2020 and 2019 and for the year ended December 31, 2020 (Successor), and the Period from March 20, 2019 to December 31, 2019 (Successor). The restatement related to accounting for warrants incorrectly as components of equity as opposed to liabilities. Refer to the Form 10-K/A filed on May 10, 2021 for additional information regarding the restatement.

Emerging Growth Company

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”). As modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), the Company 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, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemption from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

Further, section 102(b) 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 Securities Act) are required to comply with new or revised financial accounting standards. The JOBS Act provides that an emerging growth 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 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 a non-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.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less at the date of purchase to be cash equivalents. The Company maintains its cash and cash equivalents with reputable major financial institutions. Deposits with these banks exceed the Federal Deposit Insurance Corporation insurance limits or similar limits in foreign jurisdictions. While the Company monitors daily the cash balances in its operating accounts and adjusts the balances as appropriate, these balances could be impacted if one or more of the financial institutions with which the Company deposits funds fails or is subject to other

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adverse conditions in the financial or credit markets. To date, the Company has experienced no loss or lack of access to invested cash or cash equivalents; however, it can provide no assurance that access to invested cash and cash equivalents will not be impacted by adverse conditions in the financial and credit markets.

Restricted Cash

These balances include amounts held in escrow accounts, as a result of a legal proceeding related to a tax assessment. The following table reconciles cash, cash equivalents and restricted cash reported in our consolidated balance sheet as of December 31, 2021 and 2020, to the total amount presented in our consolidated statements of cash flows for years ended December 31, 2021 and 2020 (in thousands):

 

 

 

As of December 31,

 

 

 

2021

 

 

 

 

2020

 

Cash and cash equivalents

 

$

30,937

 

 

 

 

$

41,552

 

Restricted cash

 

 

1,896

 

 

 

 

 

1,896

 

Total cash and restricted cash in the consolidated statement of cash flows

 

$

32,833

 

 

 

 

$

43,448

 

 

Inventories

Inventories, consisting principally of personal care products, are stated at the lower of cost, as determined on a first-in, first-out basis, or market. All inventory balances are comprised of finished goods used in beauty and health and wellness services or held for resale for sale to customers. Inventory reserve is recorded to write down the cost of inventory to the estimated market value. During the years ended December 31, 2021 and 2020 (Successor), we recorded inventory impairment charges of $4.0 million (of which approximately $2.0 million was recorded in the three months ended December 31, 2021) and $6.0 million, respectively, for the decline in the net realizable value of inventories, which is included in Cost of products in the accompanying consolidated statement of operations. This impairment loss principally is the result of excess, slow-moving, expiration of products and damaged inventories held at our Maritime segment caused by the cessation of our cruise line partners operations and, consequently, our Maritime segment operations due to the COVID 19 pandemic. The establishment of inventory reserves involves estimating the amount of inventories that will be sold at or used in health and wellness services on cruises when they return to sailing, which is uncertain and dependent on our cruise line partners and its customers that use our services and purchase our products. No inventory reserve was recorded during the periods from March 20, 2019 to December 31, 2019 (Successor) and from January 1, 2019 to March 19, 2019 (Predecessor). the activity in the Company’s inventory reserve for the years ended December 31, 2021 and 2020 (Successor) is summarized as follows (in thousands):

 

 

2021

 

 

2020

 

Beginning balance

$

(6,000

)

 

$

-

 

Impairment charges

 

(3,977

)

 

 

(6,000

)

Write-offs

 

4,107

 

 

 

-

 

Ending balance

$

(5,870

)

 

$

(6,000

)

 

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization. Expenditures for maintenance and repairs, which do not add to the value of the related assets or materially extend their original lives, are expensed as incurred. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized in a straight-line basis over the shorter of the terms of the respective leases and the estimated useful lives of the respective assets.

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Impairment of Long-Lived Assets Other than Goodwill and Indefinite-Lived Intangible Assets

The Company reviews long-lived assets including property and equipment and intangible assets with finite lives for impairment whenever events or changes in circumstances indicate, based on estimated future cash flows, that the carrying amount of these assets may not be fully recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset (asset group) to future undiscounted cash flows expected to be generated by the asset (asset group). An asset group is the lowest level of assets and liabilities for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. When estimating future cash flows, the Company considers:

 

only the future cash flows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset group;

 

potential events and changes in circumstance affecting key estimates and assumptions; and

 

the existing service potential of the asset (asset group) at the date tested.

If an asset (asset group) is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset (asset group) exceeds its fair value. When determining the fair value of the asset (asset group), the Company considers the highest and best use of the assets from a market-participant perspective. The fair value measurement is generally determined through the use of independent third-party appraisals or an expected present value technique, both of which may include a discounted cash flow approach, which reflects assumptions of what market participants would utilize to price the asset (asset group).

Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Assets to be abandoned, or from which no further benefit is expected, are written down to zero at the time that the determination is made, and the assets are removed entirely from service.

Goodwill and Indefinite-Lived Intangible Assets

 

Goodwill represents the excess of cost over the fair value of net tangible and identifiable intangible assets acquired. The Company has two operating segments: (1) Maritime and (2) Destination Resorts. The Maritime and Destination Resorts operating segments each have associated goodwill, and each has been determined to be a reporting unit. The Company reviews goodwill for impairment at the reporting unit level annually each October or, more frequently, when events or circumstances dictate an interim test is necessary. The impairment review for goodwill consists of a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount, and if necessary, a goodwill impairment test. Factors to consider when performing the qualitative assessment primarily include general economic conditions and changes in forecasted operating results. If the qualitative assessment demonstrates that it is more-likely-than-not that the estimated fair value of the reporting unit exceeds its carrying value, it is not necessary to perform the goodwill impairment test. The Company may elect to bypass the qualitative assessment and proceed directly to the Goodwill impairment test, for any reporting unit, in any period. The Company can resume the qualitative assessment for any reporting unit in any subsequent period. When performing the goodwill impairment test, the fair value of the reporting unit is determined and compared to the carrying value of the net assets allocated to the reporting unit. If the fair value of the reporting unit exceeds its carrying value, no further analysis or write-down of goodwill is required. As amended by ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment, if the fair value of the reporting unit is less than the carrying value of its net assets, an impairment is recognized based on the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to such reporting unit.

Trade name represents our Identifiable intangible asset not subject to amortization and is assessed for impairment using a similar process used to evaluate goodwill as described above. The impairment review for trade name also allows us to first assess qualitative factors to determine whether it is necessary to perform a more detailed quantitative trade name impairment test. We would perform the quantitative test if our qualitative assessment determined it was more-likely-than-not that the trade name is impaired. We may also elect to bypass the qualitative assessment and proceed directly to the quantitative test. Our trade name would be considered impaired if its carrying value exceeds their estimated fair value.

 

No impairment was recorded for the year ended December 31, 2021. During the year ended December 31, 2020, we recognized a goodwill and trade name impairment charges of $190.1 million and $0.7 million, respectively, based on the interim impairment tests performed as of March 31, 2020. No impairment was recorded for the year ended December 31, 2021. See Note 5 – “Goodwill and Intangible Assets” and “Note 16 – “Fair Value Measurement and Derivatives” for further details.

 

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Definite-Lived Intangible Assets

The Company amortizes intangible assets with definite lives on a straight-line basis over their estimated useful lives. Definite-Lived Intangible Assets include the contracts with cruise lines and leases with hotels and resorts. Contracts with cruise lines are generally renewed every five years. The Company has the intent and ability to renew such contracts over the estimated useful lives of the assets. Costs incurred to renew contracts are capitalized and amortized to cost of revenues and operating expenses over the term of the contract.

Lease agreements with destination resorts in which the Company operates are generally renewed every ten years. The Company has the intent and ability to renew such contracts.

Revenue Recognition

Revenue is recognized when customers obtain control of goods and services promised by the Company. The amount of revenue recognized is based on the amount that reflects the consideration that is expected to be received in exchange for those respective goods and services. Amounts recognized are gross of commissions to cruise line or destination resort partners, which typically withhold commissions from customer payments. The Company has elected to present sales taxes on a net basis and, as such, sales taxes are excluded from revenue. Revenue is reported net of discounts and net of any estimated refund liability, which is determined based on historical experience. The Company also issues gift cards for future goods or services; revenue is recognized when they are redeemed; we also recognize revenue for breakage based on past experience for gift card amounts we expect to go unredeemed.

Prior to adoption of Accounting Standard Codification (“ASC”) 606, Revenues from Contracts with Customers, the Company recognized revenues earned as services are provided and as products are sold, following legacy accounting guidance under ASC Topic 605, Revenue Recognition. Generally, this led to recognition that is consistent with our new policy. Under legacy guidance, we had also elected to recognize revenue on a net-of-tax basis, which is similar to our election under ASC Topic 606. For gift card breakage, the Company uses the redemption recognition method for recognizing breakage related to certain gift certificates for which it has sufficient historical information; this pattern is relatively consistent with our recognition pattern under ASC Topic 606.

Cost of Revenues

Cost of services consists primarily of the cost of product consumed in the rendering of a service, an allocable portion of wages paid to shipboard employees, an allocable portion of payments to cruise lines (which are derived as a percentage of service revenues or a minimum annual rent or a combination of both), an allocable portion of staff-related shipboard expenses, costs related to recruitment and training of shipboard employees, wages paid directly to destination resort employees, payments to destination resort venue owners, and health and wellness facility depreciation.

Cost of products consists primarily of the cost of products sold through the Company’s various methods of distribution, an allocable portion of wages paid to shipboard employees, an allocable portion of payments to cruise lines (which are derived as a percentage of product revenues or a minimum annual rent or a combination of both), and an allocable portion of staff-related shipboard expenses.

Costs incurred to renew long-term contracts are capitalized and amortized to cost of services over the term of the contract.

Shipping and Handling

Shipping and handling costs associated with inbound freight are capitalized to inventories and relieved through cost of sales as inventories are sold. Shipping and handling costs associated with the delivery of products are included in administrative expenses. The shipping and handling costs included in administrative expenses in the accompanying consolidated statements of operations for the years ended December 31, 2021, 2020 (Successor), for the period from March 20, 2019 through December 31, 2019 (Successor) and for the period from January 1, 2019 through March 19, 2019 (Predecessor) were $0.04 million, $0.04 million, $0.04 million and $0.01 million, respectively.

 

Lease Concessions (Successor)

In April 2020, the FASB issued guidance allowing entities to make a policy election whether to account for lease concessions related to the COVID-19 pandemic as lease modifications. The election applies to any lessor-provided lease concession related to the impact of the COVID-19 pandemic, provided the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee.

Most of our destination resorts agreements require the payment of rent based on a percentage of our revenues with others having fixed rent. We have received lease concessions from certain destination resorts where a fixed rent is required, in the form of rent deferrals

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and forgiveness during the year ended December 31, 2020. We have elected not to account for these rent concessions as lease modifications. The recognition of these rent concessions did not have a material impact on our consolidated financial statements as of December 31, 2020. No lease concessions were received during the year ended December 31, 2021.

Advertising

Substantially all of the Company’s advertising costs are charged to expense as incurred, except costs that result in tangible assets, such as brochures, which are recorded as prepaid expenses and charged to expense as consumed. Advertising expenses included in cost of revenues and operating expenses in the accompanying consolidated statements of operations for the years ended December 31, 2021, 2020 (Successor), for the period from March 20, 2019 through December 31, 2019 (Successor) and for the period from January 1, 2019 through March 19, 2019 (Predecessor) were $1.5 million, $2.4 million, $2.5 million and $0.5 million, respectively.

Share-Based Compensation

The Company recognizes expense for our share-based compensation awards using a fair-value-based method. Share-based compensation expense is recognized over the requisite service period for awards that are based on a service period and not contingent upon any future performance. We elected to treat shared-based awards with only service conditions and graded vesting features as a single award and recognize stock-based compensation expense on a straight-line basis. Share-based awards with performance and graded vesting features are expensed using the accelerated attribution method. We recognize forfeitures as they occur rather than estimating them over the life of the award. See Note 10 – “Stock Based Compensation” for further details.

Debt Issuance Costs

Debt issuance costs related to a recognized debt liability are presented in the consolidated balance sheets as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. These deferred issuance costs are amortized over the term of the loan agreement. The amortization of deferred financing fees is included in interest expense, net in the consolidated statements of operations.

Warrant Accounting

We account for common stock warrants in accordance with applicable guidance provide in ASC Topic 815 as either liability or equity instruments depending on the specific terms of the warrant agreement. We evaluated the warrants under this guidance and concluded that they do not meet the criteria to be classified in shareholders’ equity in all periods presented. Accordingly, the warrants are classified as a liability at fair value on the Company’s consolidated balance sheets at December 31, 2021 and 2020. The change in the fair value of such liability in each period is recognized as a gain or loss in the Company’s consolidated statements of operations and comprehensive (loss) income.

Income Taxes

Successor and Predecessor:

 

As part of the process of preparing the consolidated and combined financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating the Company’s actual current income tax exposure together with an assessment of temporary differences resulting from differing treatment of items for tax purposes and accounting purposes, respectively. These differences result in deferred income tax assets and liabilities which are included in the accompanying consolidated balance sheet as of December 31, 2021 and 2020. Deferred taxes are recorded using the currently enacted tax rates that applied in the periods that the differences are expected to reverse. The Company must then assess the likelihood that its deferred income tax assets will be recovered from future taxable income and, to the extent that the Company believes that recovery is not likely, the Company must establish a valuation allowance. With respect to acquired deferred tax assets, changes within the measurement period, under ASC Topic 805, Business Combinations, that result from new information about facts and circumstances that existed at the acquisition date shall be recognized through a corresponding adjustment to goodwill. Subsequent to the measurement period, all other changes shall be reported as a reduction or increase to income tax expense in the Company’s consolidated and combined statement of operations for the years ended December 31, 2021, 2020 (Successor), for the period from March 20, 2019 through December 31, 2019 (Successor) and for the period from January 1, 2019 to March 19, 2019 (Predecessor).

The Company believes a large percentage of its shipboard service’s income is foreign-source income, not effectively connected to a business it conducts in the U.S. and, therefore, not subject to U.S. income taxation.

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The Company recognizes interest and penalties within the provision for income taxes in the consolidated statements of operations. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued, therefore, will be reduced and reflected as a reduction of the overall income tax provision.

The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount of benefit, determined on a cumulative probability basis, which is more than 50% likely of being realized upon ultimate settlement.

Predecessor:

The Company’s United States (“U.S.”) entities, other than those that are domiciled in U.S. territories, file their U.S. tax return as part of a consolidated tax filing group, while the Company’s entities that are domiciled in U.S. territories file specific returns. In addition, the Company’s foreign entities file income tax returns in their respective countries of incorporation, where required. For the purposes of these financial statements, the Company is accounting for income taxes under the separate return method of accounting. This method requires the allocation of current and deferred taxes to the Company as if it were a separate taxpayer. Under this method, the resulting portion of current income taxes payable that is not actually owed to the tax authorities is written-off through equity. Deferred income taxes are recognized based upon the tax consequences of “temporary differences” by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Deferred income tax provisions and benefits are based on the changes to the asset or liability from period to period. A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not that the deferred tax assets will not be realized. The majority of the Company’s income is generated outside of the U.S.

Earnings (Loss) Per Share (Successor)

Basic (loss) earnings per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average number of diluted shares, as calculated under the treasury stock method, which includes the potential effect of dilutive common stock equivalents, such as options and warrants to purchase common shares, and contingently issuable shares. If the entity reports a net loss, rather than net income for the period, the computation of diluted loss per share excludes the effect of dilutive common stock equivalents, as their effect would be anti-dilutive.

As discussed in Note 9 – “Equity”, the Company has two classes of common stock, Voting and Non-Voting. Shares of Non-Voting common stock are in all respects identical to and treated equally with shares of Voting common stock except for the absence of voting rights. Basic (loss) income per share is computed by dividing net (loss) income by the weighted average number of Voting and Non-Voting common shares outstanding for the period. Diluted (loss) income per share is computed by dividing net income by the weighted average number of diluted Voting and Non-voting common shares, as calculated under the treasury stock method, which includes the potential effect of dilutive common stock equivalents, such as options and warrants to purchase Voting and Non-Voting common shares. If the entity reports a net loss, rather than net income for the period, the computation of diluted loss per share excludes the effect of dilutive common stock equivalents, as their effect would be anti-dilutive. The Company has not presented (loss) income per share under the two-class method, because the (loss) income per share are the same for both Voting and Non-Voting common stock since they are entitled to the same liquidation and dividend rights.

The following table provides details underlying OneSpaWorld’s loss per basic and diluted share calculation (in thousands, except per share data):

 

 

Successor

 

 

Year Ended December 31, 2021

 

 

Year Ended December 31, 2020

 

 

March 20, 2019 to December 31, 2019

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to OneSpaWorld (a)

$

(68,522

)

 

$

(287,977

)

 

$

(35,269

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares issued and outstanding - basic and diluted (b)

 

90,134

 

 

 

74,359

 

 

 

61,118

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share:

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

$

(0.76

)

 

$

(3.87

)

 

$

(0.58

)

 

(a) Calculated as total net loss less amounts attributable to noncontrolling interest.

(b) Potential common shares under the treasury stock method were antidilutive because the Company reported a net loss in this period and the effect of the change in the fair value of warrants was antidilutive. Consequently, the Company did not have any adjustments in this period between basic and diluted loss per share related to stock options, warrants, deferred shares and restricted stock.

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The table below presents the number of antidilutive potential common shares that are not considered in the calculation of diluted loss per share for the years ended December 31, 2021 and 2020 and for the period from March 20, 2019 to December 31, 2019 (in thousands):

 

 

Successor

 

 

Year Ended December 31, 2021

 

 

Year Ended December 31, 2020

 

 

March 20, 2019 to December 31, 2019

 

Common share warrants (a)

 

29,145

 

 

 

26,974

 

 

 

24,500

 

Deferred shares

 

-

 

 

 

3,840

 

 

 

6,600

 

Employee stock options

 

-

 

 

 

4,376

 

 

 

4,455

 

Restricted share units

 

1,499

 

 

 

702

 

 

 

33

 

Performance share units

 

1,227

 

 

 

589

 

 

 

-

 

 

 

31,871

 

 

 

36,481

 

 

 

35,588

 

 

 

(a)

Includes all Public, Sponsor and 2020 PIPE Warrants.

Foreign Currency Transactions

For currency exchange rate purposes, assets and liabilities of the Company’s foreign subsidiaries are translated at the rate of exchange in effect at the balance sheet date. Equity and other items are translated at historical rates, and income and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustments are reflected in the accumulated other comprehensive loss caption of the Company’s balance sheets. Foreign currency gains and losses resulting from transactions, including intercompany transactions, are included in results of operations. The transaction gains (losses) included in the administrative expenses caption of the consolidated statements of operations for the years ended December 31, 2021, 2020 (Successor), for the period from March 20, 2019 to December 31, 2019 (Successor) and for the period from January 1, 2019 to March 31, 2019 (Predecessor) were ($0.2) million, $(0.07) million, $(0.2) million and $0.5 million, respectively.

Fair Value Measurements

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy.

The three levels of inputs used to measure fair value are as follows:

 

Level 1—Value is based on quoted prices in active markets for identical assets and liabilities.

 

Level 2—Value is based on observable inputs other than quoted prices included in Level 1. This includes dealer and broker quotations, bid prices, quoted prices for similar assets and liabilities in active markets, or other inputs that are observable or can be corroborated by observable market data.

 

Level 3—Value is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Derivative Instruments and Hedging Activities

The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. Gains and losses on derivatives that are designated as cash flow hedges are recorded as a component of Accumulated other comprehensive loss until the underlying hedged transactions are recognized in earnings.

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Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates. Significant estimates include the valuation of certain assets acquired in the Business Combination, assessment of net realizable value of inventories, the recovery of long-lived assets, goodwill and other intangible assets, the determination of deferred income taxes including valuation allowances, the useful lives of definite-lived intangible assets, the fair value of warrants, contingencies and property and equipment.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company maintains cash and cash equivalents with high quality financial institutions. As of December 31, 2021, and 2020, the Company had three cruise companies that represented greater than 10% of accounts receivable. The Company does not normally require collateral or other security to support normal credit sales. The Company controls credit risk through credit approvals, credit limits, and monitoring procedures.

Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts. The Company records an allowance for doubtful accounts with respect to accounts receivable using historical collection experience, and generally, an account receivable balance is written off once it is determined to be uncollectible. The Company reviews the historical collection experience and considers other facts and circumstances and adjusts the calculation to record an allowance for doubtful accounts as appropriate. If the Company’s current collection trends were to differ significantly from historic collection experience, the Company would make a corresponding adjustment to the allowance. The allowance for doubtful accounts was $0.5 million and $0.044 million as of December 31, 2021 and December 31, 2020, respectively. For the years ended December 31, 2021 and 2020, allowance for doubtful account expense amounted to $0.5 million and $0.2 million, respectively. Allowance for doubtful accounts expense is included within administrative operating expenses in the accompanying consolidated and combined statements of operations and is not material for the period from March 20, 2019 to December 31, 2019 (Successor) and for the period from January 1, 2019 to March 19, 2019, (Predecessor).

The activity in the Company’s allowance for doubtful accounts for the years ended December 31, 2021 and 2020 (Successor) is summarized as follows (in thousands):

 

 

2021

 

 

2020

 

Beginning balance

$

(44

)

 

$

(10

)

Provision for doubtful accounts

 

(453

)

 

 

(172

)

Write-offs

 

-

 

 

 

138

 

Ending balance

$

(497

)

 

$

(44

)

 

Accounting for Business Combinations

In accordance with ASC Topic 805, Business Combinations, when accounting for business combinations, the Company is required to recognize the assets acquired, liabilities assumed, contractual contingencies, noncontrolling interests and contingent consideration at their fair value as of the acquisition date.

The purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets and/or pre-acquisition contingencies, all of which ultimately affect the fair value of goodwill established as of the acquisition date. Goodwill acquired in business combinations is assigned to the reporting unit(s) expected to benefit from the combination as of the acquisition date and is then subsequently tested for impairment at least annually.

As part of the Company’s accounting for business combinations, the Company is required to determine the useful lives of identifiable intangible assets recognized separately from goodwill. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the acquired business. An intangible asset with a finite useful life shall be amortized; an intangible asset with an indefinite useful life shall not be amortized. The Company bases the estimate of the useful life of an intangible asset on an analysis of all pertinent factors, including but not limited to the expected use of the asset, the expected useful life of another asset or a group of assets to which the useful life of the intangible asset may relate, any legal, regulatory, or contractual provisions that may limit the useful life, the Company’s own historical experience in renewing or extending similar arrangements, consistent with the Company’s intended use of the asset, regardless of whether those arrangements have explicit renewal or extension provisions, the effects of obsolescence, demand, competition, and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the asset. If no legal, regulatory, contractual,

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competitive, economic, or other factors limit the useful life of an intangible asset to the reporting entity, the useful life of the asset shall be considered to be indefinite. The term indefinite does not mean the same as infinite or indeterminate. The useful life of an intangible asset is indefinite if that life extends beyond the foreseeable horizon—that is, there is no foreseeable limit on the period of time over which it is expected to contribute to the cash flows of the acquired business.

Although the Company believes the assumptions and estimates it has made have been reasonable and appropriate, such assumptions and estimates are based in part on historical experience and information obtained from the management of the acquired entity and are inherently uncertain. Examples of critical estimates in accounting for acquisitions include, but are not limited to, the future expected cash flows from sales of products and services, and related contracts and agreements, and discount and long-term growth rates. Unanticipated events and circumstances may occur which could affect the accuracy or validity of the Company’s assumptions, estimates or actual results.

Recent Accounting Pronouncements

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements that are of significance, or potential significance, to the Company. The following summary of recent accounting pronouncements is not intended to be an exhaustive description of the respective pronouncement.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) to increase transparency and comparability among organizations by recognizing rights and obligations resulting from leases as lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The update requires lessees to recognize for all leases with a term of 12 months or more at the commencement date: (a) a lease liability or a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and (b) a right-of-use asset or a lessee’s right to use or control the use of a specified asset for the lease term. Under the update, lessor accounting remains largely unchanged. The update requires a modified retrospective transition approach for leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements and do not require any transition accounting for leases that expire before the earliest comparative period presented. In June 2020, the FASB issued guidance (ASU 2020-05) that defers the effective dates of the lease standard (ASU 2016-02) for entities that have not yet issued financial statements adopting the standard. The update is effective retrospectively for annual periods beginning after December 15, 2021, and interim periods beginning after December 15, 2022, with early adoption permitted. We intend to elect the optional transition method, which allows entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company continues to evaluate the effect that the update will have on the Company’s consolidated financial statements. The Company is in the process of starting its initial scoping review to identify a complete population of leases to be recorded on the consolidated balance sheet as a lease obligation and right of use asset. The Company expects that the update will have a material effect on our consolidated balance sheets due to the recognition of operating lease assets and operating lease liabilities primarily related to the destination resort agreements and office space which will result in a balance sheet presentation that is not comparable to the prior period in the first year of adoption. The Company is currently assessing the expected impact of the future adoption of this guidance.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326).” This ASU amends the FASB’s guidance on the impairment of financial instruments. The ASU adds to U.S. GAAP an impairment model (known as the current expected credit losses model) that is based on an expected losses model rather than an incurred losses model. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The ASU is also intended to reduce the complexity of U.S. GAAP by decreasing the number of impairment models that entities use to account for debt instruments. In November 2019, the FASB issued guidance (ASU 2019-10) that defers the effective dates of the Financial Instruments—Credit Losses standard for entities that have not yet issued financial statements adopting the standard. The update is effective for annual periods beginning after December 15, 2022, and interim periods beginning after December 15, 2022, with early adoption permitted. The Company is currently assessing the expected impact of the future adoption of this guidance.

In March 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides practical expedients and exception for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The FASB also issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope in January 2021, which adds implementation guidance to clarify which optional expedients in Topic 848 may be applied to derivative instruments that do not reference LIBOR or a reference rate that is expected to be discontinued, but that are being modified as a result of the discounting transition. The ASUs may be applied through December 31, 2022 and is applicable to our interest rate swap contract and hedging relationship that reference LIBOR. The Company is currently assessing the expected impact of the future adoption of this guidance, that is, the eventual replacement of the LIBOR benchmark interest rate on its consolidated financial statements.

In August 2020, The FASB issued ASU No. 2020-06, Debt with Conversion and Other Options and Derivative and Hedging - Contracts in Entity's Own Equity, which simplifies the accounting for convertible instruments. This guidance eliminates certain models that require separate accounting for embedded conversion features, in certain cases. Additionally, among other changes, the guidance eliminates certain of the conditions for equity classification for contracts in an entity’s own equity. The guidance also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include

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the effect of share settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. This guidance is required to be adopted by us in the first quarter of 2023 and must be applied using either a modified or full retrospective approach. The Company is currently assessing the expected impact of the future adoption of this guidance.

3. Business Combination

As discussed in Note 1, Organization, on March 19, 2019, OneSpaWorld consummated a business combination. The Business Combination was accounted for using the acquisition method of accounting in accordance with FASB ASC 805. Haymaker was deemed to be the accounting acquirer and OSW the accounting acquiree. As a result of applying pushdown accounting, the post-Business Combination financial statements of OneSpaWorld reflect the new basis of accounting for OSW.

The Company’s purchase price allocation was final as of December 31, 2019. Measurement period adjustments were applied retrospectively to the Business Combination Date. Goodwill of $174.2 million and $15.9 million was assigned to the Maritime and Destination Resorts reporting units, respectively, based on expected benefits from the combination as of the Business Combination Date. See “Note 5” for further information regarding the changes in the carrying amount of goodwill for each unit.  

 

The following information represents the unaudited supplemental pro forma results of the Company’s consolidated statement of operations as if the Business Combination occurred on January 1, 2019, after giving effect to certain adjustments, including depreciation and amortization of the assets acquired and liabilities assumed based on their estimated fair values and changes in interest expense resulting from changes in debt (in thousands) (unaudited):

 

 

 

Year Ended December 31, 2019

 

Revenues

 

$

562,233

 

Net Loss

 

$

(45,989

)

 

 The pro forma information does not purport to be indicative of what the Company’s results of operations would have been if the Business Combination had in fact occurred at the beginning of the period presented and is not intended to be a projection of the Company’s future results of operations. Financial information prior to the Business Combination Date is referred to as “Predecessor” company information, which reflects the financial statements of OSW prepared using OSW’s previous basis of accounting. The financial information beginning March 20, 2019 is referred to as “Successor” company information and reflects the consolidated financial statements of OneSpaWorld, including the financial statement effects of recording fair value adjustments and the capital structure resulting from the Business Combination. Black lines have been drawn to separate the Successor’s financial information from that of the Predecessor since their financial statements are not comparable as a result of the application of acquisition accounting and the Company’s capital structure resulting from the Business Combination.

4. Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands, except useful life):

 

 

 

 

As of December 31,

 

 

Useful Life in years

 

2021

 

 

 

2020

 

Furniture and fixtures

5 – 7

 

$

4,733

 

 

 

$

4,106

 

Computers and equipment

3 – 8

 

 

9,214

 

 

 

 

7,659

 

Leasehold improvements

Shorter of remaining lease term or useful life

 

 

17,166

 

 

 

 

19,376

 

 

 

 

 

31,113

 

 

 

 

31,141

 

Less: Accumulated depreciation and amortization

 

 

 

(17,006

)

 

 

 

(14,085

)

 

 

 

$

14,107

 

 

 

$

17,056

 

 

Depreciation and amortization expense for years ended December 31, 2021, 2020 (Successor), for the period from March 20, 2019 to December 31, 2019 (Successor) and for the period from January 1, 2019 to March 19, 2019 (Predecessor) was $5.7 million, $7.6 million, $6.4 million and $1.2 million, respectively.

5. Goodwill and Intangible Assets 

Goodwill represents the purchase price in excess of the fair value of the net assets acquired and liabilities assumed in connection with the Business Combination (See “Note 3”). As a result of the Business Combination on March 19, 2019, and the related application of acquisition accounting, the Company completed a valuation of goodwill of $190.1 million.

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As a result of the effect of COVID-19 on our expected future operating cash flows and our evaluation of the economic and market conditions, and its impact on the Company’s common share price, we concluded it is more likely than not that the trade name indefinite-lived intangible asset and goodwill are impaired and performed, including work performed by third-party valuation specialists, interim impairment tests as of March 31, 2020. As a result, we concluded that the goodwill of $174.2 million and $15.9 million associated with the Maritime and Destination Resorts reporting units, respectively, was fully impaired as of March 31, 2020. Goodwill impairment charges of approximately $190 million for these reporting units are included in Goodwill and tradename intangible assets impairment in the accompanying consolidated statement of operations during the year ended December 31, 2020 (Successor) (See “Note 16”).  

The changes in the carrying amount of goodwill for each unit for the year ended December 31, 2020 (Successor) were as follows (in thousands):

 

Maritime

 

 

Destination Resorts

 

 

Total

 

Balance at December 31, 2019

$

174,150

 

 

$

15,927

 

 

$

190,077

 

Impairments

 

(174,150

)

 

 

(15,927

)

 

$

(190,077

)

Balance at December 31, 2020

$

-

 

 

$

-

 

 

$

-

 

 

As a result of the interim impairment tests discussed above, we performed a fair value test applying the relief of royalty method and determined that the estimated fair value of one of our trade names is less than carrying value as of March 31, 2020. As a result, we recognized an impairment charge of $0.7 million and it is included in Goodwill and tradename intangible assets impairment in the accompanying consolidated statement of operation during the year ended December 31, 2020 (Successor). As of October 1, 2021 and 2020, we performed our annual trade name indefinite-lived intangible asset impairment review and determined there was no incremental impairment.

Intangible assets consist of finite and indefinite life assets. The following is a summary of the Company’s intangible assets as of December 31, 2021 (Successor) (in thousands, except amortization period):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost

 

 

Accumulated Amortization and Impairment

 

 

Net Balance

 

 

Weighted Average Amortization Period (in years)

Retail concession agreements

$

604,700

 

 

$

(43,187

)

 

$

561,513

 

 

39

Destination resort agreements

 

17,900

 

 

 

(3,287

)

 

 

14,613

 

 

15

Trade name

 

6,200

 

 

 

(700

)

 

 

5,500

 

 

Indefinite-life

Licensing agreement

 

1,000

 

 

 

(336

)

 

 

664

 

 

8

 

$

629,800

 

 

$

(47,510

)

 

$

582,290

 

 

 

The following is a summary of the Company’s intangible assets as of December 31, 2020 (Successor) (in thousands, except amortization period):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost

 

 

Accumulated Amortization

 

 

Net Balance

 

 

Weighted Average Amortization Period (in years)

Retail concession agreements

$

604,700

 

 

$

(27,680

)

 

$

577,020

 

 

39

Destination resort agreements

 

17,900

 

 

 

(2,095

)

 

 

15,805

 

 

15

Trade name

 

6,200

 

 

 

(700

)

 

 

5,500

 

 

Indefinite-life

Licensing agreement

 

1,000

 

 

 

(211

)

 

 

789

 

 

8

 

$

629,800

 

 

$

(30,686

)

 

$

599,114

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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The Company amortizes intangible assets with definite lives on a straight-line basis over their estimated useful lives. Amortization expense for the years ended December 31, 2021, 2020 (Successor), for the period from March 20, 2019 to December 31, 2019 (Successor) and for the period from January 1, 2019 to March 19, 2019 (Predecessor) was $16.8 million, $16.8 million, $13.2 million, $0.8 million and $3.5 million, respectively. Amortization expense is estimated to be $16.8 million in each of the next five years beginning in 2022.

6. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

 

 

2021

 

 

 

2020

 

 

Operative commissions

$

3,132

 

 

 

$

286

 

 

Minimum cruise line commissions

 

6,329

 

 

 

 

2,246

 

 

Professional fees

 

7,028

 

 

 

 

6,034

 

 

Payroll and bonuses

 

6,277

 

 

 

 

4,512

 

 

Interest

 

1,964

 

 

 

 

2,292

 

 

Other

 

7,502

 

 

 

 

10,391

 

 

 

$

32,232

 

 

 

$

25,761

 

 

 

7. Long-term Debt

Long-term debt consisted of the following (in thousands, except interest rate):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate December 31,

 

 

Maturities Through

 

As of December 31,

 

 

 

2021

 

 

2020

 

 

 

 

2021

 

 

 

2020

 

First lien term loan facility

 

4.0%

 

 

4.0%

 

 

2026

 

$

202,457

 

 

 

$

202,457

 

Second lien term loan facility

 

7.6%

 

 

7.7%

 

 

2027

 

 

25,000

 

 

 

 

25,000

 

Term credit agreement

 

4.0%

 

 

4.0%

 

 

2024

 

 

7,000

 

 

 

 

7,000

 

Total debt

 

 

 

 

 

 

 

 

 

 

 

 

234,457

 

 

 

 

234,457

 

Less: unamortized debt issuance cost

 

 

 

 

 

 

 

 

 

 

 

 

(3,998

)

 

 

 

(5,024

)

Total debt, net of unamortized debt issuance cost

 

 

 

 

 

 

 

 

 

 

 

 

230,459

 

 

 

 

229,433

 

Less: current portion of long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

(1,776

)

 

 

 

-

 

Long-term debt, net

 

 

 

 

 

 

 

 

 

 

 

$

228,683

 

 

 

$

229,433

 

On March 19, 2019, the Company entered into (i) senior secured first lien credit facilities (the “First Lien Credit Facilities”) with Goldman Sachs Lending Partners LLC, as administrative agent, and certain lenders, consisting of (x) a term loan facility of $208.5 million (of which $20 million was borrowed by a subsidiary of the Company) (the “First Lien Term Loan Facility”), (y) a revolving loan facility of up to $20 million (the “First Lien Revolving Facility”) and (z) a delayed draw term loan facility of $5 million (the “First Lien Delayed Draw Facility”), and (ii) a senior secured second lien term loan facility of $25 million with Cortland Capital Market Services LLC, as administrative agent, and Neuberger Berman Alternative Funds, Neuberger Berman Long Short Fund, as lender. (the “Second Lien Term Loan Facility” and, together with the First Lien Term Loan Facility, the “Term Loan Facilities”; the New Term Loan Facilities, together with the First Lien Revolving Facility and the First Lien Delayed Draw Facility, are referred to as the “New Credit Facilities”). The First Lien Revolving Facility includes borrowing capacity available for letters of credit up to $5 million. Any issuance of letters of credit reduces the amount available under the New First Lien Revolving Facility. The First Lien Term Loan Facility matures seven years after March 19, 2019, the First Lien Revolving Facility matures five years after March 19, 2019 and the Second Lien Term Loan Facility matures eight years after March 19, 2019.

Loans outstanding under the First Lien Credit Facilities will accrue interest at a rate per annum equal to LIBOR plus a margin of 4.00%, with one step down to 3.75% upon achievement of a certain leverage ratio, and undrawn amounts under the First Lien Revolving Facility will accrue a commitment fee at a rate per annum of 0.50% on the average daily undrawn portion of the commitments thereunder, with one step down to 0.325% upon achievement of a certain leverage ratio. Loans outstanding under the Second Lien Term Loan Facility will accrue interest at a rate per annum equal to LIBOR plus 7.50%.

The obligations under the New Credit Facilities are guaranteed by the Company and each of its direct or indirect wholly-owned subsidiaries organized under the laws of the United States and the Commonwealth of The Bahamas, in each case, other than certain excluded subsidiaries, including, but not limited to, immaterial subsidiaries, non-profit subsidiaries, and any other subsidiary with

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respect to which the burden or cost of providing a guarantee is excessive in view of the benefits to be obtained by the lenders therefrom. In addition, under the New Credit Facilities, certain of our direct and indirect subsidiaries have granted the lenders a security interest in substantially all of their assets.

The Term Loan Facilities require the Company to make certain mandatory prepayments, with (i) 100% of net cash proceeds of all non-ordinary course asset sales or other dispositions of property, subject to the ability to reinvest such proceeds and certain other exceptions, and subject to step downs if certain leverage ratios are met and (ii) 100% of the net cash proceeds of any debt incurrence, other than debt permitted under the definitive agreements (but excluding debt incurred to refinance the New Credit Facilities). The Company also is required to make quarterly amortization payments equal to 0.25% of the original principal amount of the First Lien Term Loan Facility commencing after the first full fiscal quarter after the closing date of the New Credit Facilities (subject to reductions by optional and mandatory prepayments of the loans). The Company may prepay (i) the First Lien Credit Facilities at any time without premium or penalty, subject to payment of customary breakage costs and a customary “soft call,” and (ii) the Second Lien Term Loan Facility at any time without premium or penalty, subject to a customary make-whole premium for any voluntary prepayment prior to the date that is 30 months following the closing date of the New Credit Facilities (the “Callable Date”), following by a call premium of (x) 4.00% on or prior to the first anniversary of the Callable Date, (y) 2.50% after the first anniversary but on or prior to the second anniversary of the Callable Date, and (z) 1.50% after the second anniversary but on or prior to the third anniversary of the Callable Date. During the fourth quarter of 2019, we prepaid principal amounts of $5 million of our First Lien Credit Facilities.

The New Credit Facilities contain a financial covenant related to the maintenance of a leverage ratio and a number of customary negative covenants including covenants related to the following subjects: consolidations, mergers, and sales of assets; limitations on the incurrence of certain liens; limitations on certain indebtedness; limitations on the ability to pay dividends; and certain affiliate transactions. As of December 31, 2021 and 2020, the company was in compliance with all of the covenants contained in the New Credit Facilities.

If we do not comply with these covenants, we would have to seek amendments to these covenants from our lenders or evaluate the options to cure the defaults contained in the credit agreements. However, no assurances can be made that such amendments would be approved by our lenders. If an event of default occurs, the lenders under the New Credit Facilities are entitled to take various actions, including the acceleration of amounts due under the New Credit Facilities and all actions permitted to be taken by a secured creditor, subject to customary intercreditor provisions among the first and second lien secured parties, which would have a material adverse impact to our operations and liquidity.

The following are scheduled principal repayments on long-term debt as of December 31, 2021 for each of the next five years (in thousands):

 

 

 

 

Year

Amount

 

2022

$

1,776

 

2023

 

2,085

 

2024

 

9,085

 

2025

 

2,085

 

2026

 

2,085

 

Thereafter Total

 

217,341

 

 

$

234,457

 

Borrowing Capacity:

As of December 31, 2021, our available borrowing capacity under the First Lien Revolving Facility was $13 million. Utilization of the borrowing capacity was as follows (in thousands):

 

 

Borrowing Capacity

 

 

Amount Borrowed

 

First Lien Revolving Facility

 

$

20,000

 

 

$

7,000

 

 

8. Warrant Liabilities

Public Warrants

Each whole Public Warrant is exercisable to purchase one share of common stock and only whole warrants are exercisable. The Public Warrants became exercisable 30 days after the completion of the Business Combination. Each whole Public Warrant entitles the holder to purchase one share of OneSpaWorld common stock at an exercise price of $11.50. For the period from March 20, 2019 to December 31, 2019 (Successor Period), 1,100 Public Warrants were converted into 1,100 OneSpaWorld common shares. During the first quarter of 2020, the Company repurchased 348,521 warrants for a total of $0.9 million in open market transactions. As of December 31, 2021 and 2020, 16,145,279 and 16,150,379 Public Warrants were issued and outstanding, respectively. We evaluated the Public Warrants under ASC Topic 815 and concluded that upon issuance of the Non-Voting Common Shares on June 12, 2020 they do not meet the criteria to be classified in stockholders’ equity. Accordingly, the Public Warrants are classified as a liability at fair value on the Company’s consolidated balance sheets at December 31,2021 and 2020 (See “Note 2”).

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Pursuant to the warrant agreement, a warrant holder may exercise its warrants only for a whole number of shares of OneSpaWorld common stock. This means that only a whole warrant may be exercised at any given time by a warrant holder. No fractional warrants will be issued upon separation of the units and only whole warrants will trade. Accordingly, unless the holder purchases at least two units, the holder will not be able to receive or trade a whole warrant. The warrants will expire five years after the date of the Business Combination or earlier upon redemption or liquidation.

The Company filed with the SEC a registration statement for the registration, under the Securities Act, of the shares of OneSpaWorld common stock issuable upon exercise of the warrants. This registration statement has since been declared effective by the SEC. The Company will use its reasonable efforts to maintain the effectiveness of such registration statement, and a current prospectus relating thereto, until the expiration of the warrants in accordance with the provisions of the warrant agreement. Notwithstanding the above, if the Company’s common stock is at the time of any exercise of a warrant not listed on a national securities exchange such that it satisfies the definition of a “covered security” under Section 18(b)(1) of the Securities Act, the Company may, at its option, require holders of public warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act and, in the event the Company so elects, the Company will not be required to file or maintain in effect a registration statement, but the Company will be required to use its best efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available.

Once the warrants become exercisable, the Company may call the warrants for redemption:

 

in whole and not in part;

 

at a price of $0.01 per warrant;

 

upon not less than 30 days’ prior written notice of redemption (the “30-day redemption period”) to each warrant holder; and

 

if, and only if, the reported last sale price of the Class A common stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period ending three business days before the Company sends the notice of redemption to the warrant holders.

Sponsor Warrants

On October 19, 2017, Haymaker issued 8,000,000 Sponsor Warrants to purchase its common stock in a private placement concurrently with its IPO. In connection with the Business Combination Haymaker transferred 3,105,294 Sponsor Warrants (the “2019 PIPE Warrants”) in private placements to certain investors (the “PIPE Investors”) and to SLL. Each whole 2019 PIPE Warrant is exercisable for one whole share of OneSpaWorld common stock at a price of $11.50 per share. The proceeds from the purchase of the 2019 PIPE Warrants were used to fund a portion of the cash payment payable in connection with the consummation of the Business Combination. The 2019 PIPE Warrants will be non-redeemable and exercisable on a cashless basis so long as they are held by the Investors or their permitted transferees.

The 2019 PIPE Warrants (including the OneSpaWorld common stock issuable upon exercise of the 2019 PIPE Warrants will not be transferable, assignable or saleable until 30 days after the Business Combination and they will not be redeemable so long as they are held by the Investors or their permitted transferees. Otherwise, the 2019 PIPE Warrants have terms and provisions that are identical to those of the Public Warrants, including as to exercise price, exercisability and exercise period. If the 2019 PIPE Warrants are held by holders other than the Sponsor or its permitted transferees, the 2019 PIPE Warrants will be redeemable by the Company and exercisable by the holders on the same basis the Public Warrants. If holders of the 2019 PIPE Warrants elect to exercise them on a cashless basis, they would pay the exercise price by surrendering their warrants for that number of shares of OneSpaWorld common stock equal to the quotient obtained by dividing (x) the product of the number of shares of OneSpaWorld common stock underlying the 2019 PIPE Warrants, multiplied by the difference between the exercise price of the warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” shall mean the average reported last sale price of the Class A common stock for the 10 trading days ending on the third trading day prior to the date on which the notice of warrant exercise is sent to the warrant agent.

As of December 31, 2021 and 2020, 8,000,000 of the 2019 PIPE Warrants were issued and outstanding. We evaluated the Sponsor Warrants, including the 2019 PIPE Warrants under ASC Topic 815, and concluded that upon issuance on March 19, 2019 they do not meet the criteria to be classified in shareholders’ equity. Accordingly, the Sponsor Warrants are classified as a liability at fair value on the Company’s consolidated balance sheets at December 31, 2021 and 2020 (See “Note 2”).

2020 PIPE Warrants

The 2020 PIPE Warrants will expire on the earlier of (i) the fifth anniversary of the closing of the 2020 Private Placement or (ii) the Redemption Date (as defined below). Each Warrant entitles the holder to purchase one share of OneSpaWorld common stock at an exercise price of $5.75. The 2020 PIPE Warrants may be exercised on a “cashless” basis, in accordance with a specified formula. In addition, the Company may, at any time prior to their expiration, elect to redeem not less than all of such then-outstanding 2020 PIPE

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Warrants at a price of $0.01 per warrant, provided that the last sales price of the common shares reported has been at least $14.50 per share (subject to adjustment in accordance with certain specified events), on each of twenty trading days within the thirty-trading day period ending on the third business day prior to the date on which notice of the redemption is given (the “Redemption Date”), and provided that the common shares issuable upon exercise of such 2020 PIPE Warrants have been registered, qualified or are exempt from registration or qualification under the Securities Act and under the securities laws of the state of residence of the registered holder of the 2020 PIPE Warrant. As of December 31, 2021 and 2020, 5,000,000 of the 2020 PIPE Warrants were issued and outstanding. We evaluated the 2020 PIPE Warrant Warrants under ASC Topic 815 and concluded that they do not meet the criteria to be classified in shareholders’ equity. Accordingly, the 2020 PIPE Warrants are classified as a liability at fair value upon issuance on June 12, 2020 and subsequently (See “Note 2”).

9. Equity

Common Shares

The Company is authorized to issue 250,000,000 common shares with a par value of $0.0001 per share. Pursuant to the Investment Agreement discussed below, we have amended our Articles of Incorporation (the “Articles”) and created a new class of Non-Voting Common Shares, par value $0.0001 per share. Of the authorized shares 225,000,000 are “Voting Common Shares” and 25,000,000 are “Non-Voting Common Shares.” The Non-Voting Common Shares are of equal rank to the Voting Common Shares, in terms of dividends, liquidation, preferences and all other rights and features, with the following exceptions: (i) the Non-Voting Common Shares have no voting rights, except as may be required by law; (ii) Steiner Leisure Limited (“Steiner Leisure”) may vote its Non-Voting Common Shares in favor of its director designees; and (iii) the Non-Voting Common Shares will automatically be converted to Voting Common Shares upon the occurrence of certain events set forth in the Articles. Holders of the Company’s voting common stock are entitled to one vote for each share. At December 31, 2021, there were 78,422,887 voting shares and 13,421,914 non-voting shares of OneSpaWorld common stock issued and outstanding. At December 31, 2020, there were 69,292,596 voting shares and 17,185,500 non-voting shares of OneSpaWorld common stock issued and outstanding.

Conversion of Non-Voting Common Shares to Voting Common Shares

 

Automatic Conversion

Each Non-Voting Common Share will automatically convert into one Voting Common Share, upon the occurrence of a Qualified Transfer of such Non-Voting Common Share or with the prior consent of our Board of Directors. A “Qualified Transfer” means a transfer (x) to a third party that is not (1) an affiliate of such holder nor (2) a person whose ownership thereof would result in such shares being treated as constructively owned by such holder under Section 958(b) of the U.S. Tax Code, applicable Treasury Regulations and other official guidance (a Person described in this clause (x), an “Unrelated Person”), and (y) that is not otherwise prohibited under the Articles. During the year ended December 31, 2021, 3.8 million Non-Voting Common Shares were converted into Voting Common Shares as a result of a Qualified Transfer.

Elective Conversion

Upon the occurrence of a Contingent Conversion Triggering Event (as defined below), a number of Non-Voting Common Shares as elected will be converted into an identical number of Voting Common Shares; provided, that the number of Non-Voting Common Shares so converted may not exceed the number of Non-Voting Common Shares that, if converted, would reasonably be expected to (1) cause the Company to become a “CFC” (as defined in the Articles) as reasonably determined in good faith by the Company, upon the advice of its legal counsel, or (2) cause such holder, together with its affiliates, to hold voting power exceeding 44.9% (as reasonably determined in good faith by the Company). A “Contingent Conversion Triggering Event” shall mean (1) a decrease in the number of directors that the applicable holder has the right to designate for appointment or nomination or a decrease in the number of directors so designated by the applicable holder as a result of an irrevocable waiver of such rights, (2) the transfer of Voting Common Shares by certain holders that participated in the 2020 Private Placement or any of their affiliates on or prior to the one year anniversary of the closing of the 2020 Private Placement (I) to an “Unrelated Person” (as defined in the Articles), and (II) that is not prohibited under the Articles, or (3) the exercise by a the holder or its affiliates of a warrant to purchase Non-Voting Common Shares (or a warrant for which such holder or such affiliate has previously agreed to receive Non- Voting Common Shares upon exercise); provided that, with respect to clause (3), the number of shares designated for conversion shall not exceed the number of Non-Voting Common Shares received upon exercise of such warrant. Each Non-Voting Common Share that is converted into a Voting Common Share shall be cancelled by the Company and shall not be available for reissuance.

2020 Private Placement

On April 30, 2020, we entered into an Investment Agreement (the “Investment Agreement”) with Steiner Leisure and certain other investors, including members of our management and Board of Directors (collectively, the “Co-Investors” and, together with Steiner Leisure, the “Investors”). Pursuant the Investment Agreement, we completed a private placement financing transaction on June 12, 2020 (the “2020 Private Placement”) in which among other things, (i) we issued to Steiner Leisure an aggregate of (x) approximately 15.0 million Non-Voting Common Shares and (y) warrants to purchase approximately 4.0 million Non-Voting Common Shares at an exercise price of $5.75 per share, and (ii) we issued to the Co-Investors an aggregate of (x) approximately 3.7 million Voting Common Shares and (y) warrants to purchase approximately 1.0 million Voting Common Shares at an exercise price of $5.75 per share, for an aggregate purchase price of $75.0 million. We paid approximately $6.4 million of offering-related expenses (of which approximately $1.4 million is attributable to the 2020 PIPE Warrants, discussed below), resulting in total net proceeds of approximately $68.6 million.

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Governance Agreement

In connection with the closing of the 2020 Private Placement, the Company, Steiner Leisure and, solely for the purpose of Section 18 thereof, Haymaker, entered into a Governance Agreement (the “Governance Agreement”), pursuant to which, Steiner Leisure and certain of its affiliates were granted certain consent, director designation, and other rights with respect to the Company. The Governance Agreement superseded the Director Designation Agreement, dated as of November 1, 2018, by and among the Company, Steiner Leisure and Haymaker. Under the terms of the Governance Agreement, among other things, Steiner Leisure has the right to designate and appoint two directors so long as Steiner Leisure and its affiliates own at least 15% of the issued and outstanding common shares and one director so long as Steiner Leisure and its affiliates own at least 5% of the issued and outstanding common shares.

At-The-Market Equity Offering

On December 7, 2020, we entered into the ATM Sales Agreement with Stifel, Nicolaus & Company, Incorporated (the “Sales Agent”), pursuant to which the Company may offer and sell, from time to time, through the Sales Agent, its common shares, par value $0.0001 per share, having an aggregate offering amount of up to $50.0 million pursuant to the shelf registration statement. During the year ended December 31, 2021, we sold 2.6 million shares under the ATM Sales Agreement for net proceeds of $27.5 million, after offering-related expenses paid of $0.9 million. During the year ended December 31, 2020, we sold 1.3 million shares under the ATM Sales Agreement for net proceeds of $11.1 million, after offering-related expenses paid of $0.6 million. As of December 31, 2021, shares representing approximately $10.0 million remain available for sale under the ATM Sales Agreement. The Company is not obligated to sell any shares under the ATM Sales Agreement. Subject to the terms and conditions of the Agreement, the Sales Agent will use commercially reasonable efforts consistent with its normal trading and sales practices to sell shares from time to time based upon the Company’s instructions, including the number of shares to be issued, the time period during which sales are requested to be made and any minimum price below sales may not be made.

Deferred Shares

As part of the equity consideration transferred in the Business Combination on March 19, 2019, Steiner and Haymaker Sponsor, LLC (“Haymaker Sponsor”) received deferred shares which provided the right to receive 5.0 million and 1.6 million shares OneSpaWorld common stock, respectively. The issuance of the OneSpaWorld common shares related to the Deferred Shares is contingent upon the earliest occurrence of any of the following events: (i) OneSpaWorld share price reaching $20 per share for five consecutive trading dates, as adjusted to reflect any stock split, reverse stock split, stock dividend, payment of dividends and other events as defined in the applicable Deferred Shares agreement, (ii) in the event of a change of control, as defined, of the Company if the price per share paid in connection with such change in control is equal to or greater than $20; however, if the price per share paid in connection with such change in control is less than $20, then no OneSpaWorld common shares will be issued and all the rights to receive the shares will be forfeited for no consideration, and (iii) ten years from the date of the Business Combination agreement.

 

In consideration for, among other things, Steiner Leisure providing a “back stop” for the 2020 Private Placement and Steiner Leisure’s agreement to voting limitations in respect of certain of the securities issuable to it, we issued and delivered an aggregate of 5.0 million common shares (2.8 million of Voting Common Shares and 2.2 million of Non-Voting Common Shares) to Steiner Leisure at the closing of the 2020 Private Placement, which satisfied in full the Company’s obligation to issue 5.0 million deferred common shares to Steiner Leisure pursuant to the Business Combination Agreement(the “BCA”).

 

In addition, in order to align the incentives of certain members of the Board of Directors, the parties agreed to amend the terms of the Founder Deferred Shares (as defined in the BCA), such that, effective as of the closing of the 2020 Private Placement, such shares will be issuable upon the occurrence of any of the following: (A) the first day on which the common shares achieve a 5-day volume weighted average price equal to or greater than $10.50 (such share price, as may be adjusted, the “Price Target”); (B) in the case of a change in control of the Company, if the price per common share paid or payable in connection with such change in control is equal to or greater than the Price Target; or (C) the two-year anniversary of the closing of the 2020 Private Placement.

Dividends Declared Per Common Share

In November 2019, the Company adopted a cash dividend program and declared an initial quarterly payment of $0.04 per common share. On March 24, 2020, the Company announced that it is deferring payment of its dividend declared on February 26, 2020, for payment on May 29, 2020, to shareholders of record on April 10, 2020, until the Board of Directors reapproves its payment; and withdrawing its dividend program until further notice. As of December 31, 2021, and 2020, dividends payable amounted to approximately $2.4 million which is presented as other-long term liabilities and other current liabilities in the accompanying consolidated balance sheets.

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10. Stock-Based Compensation

Successor:

 

2019 Equity Incentive Plan and Stock-Based Compensation

The Company’s board of directors and shareholders approved the 2019 Equity Incentive Plan (the “2019 Plan”) on March 18, 2019. The purpose of the 2019 Plan is to make available incentives that will assist the Company to attract, retain, and motivate employees, including officers, consultants and directors. The Company may provide these incentives through the grant of share options, share appreciation rights, restricted shares, restricted share units, performance shares and units and other cash-based or share-based awards. The Equity Plan provides participants an option to defer compensation on a tax-deferred basis. Awards may be granted under the 2019 Plan to OneSpaWorld employees, including officers, directors or consultants or those of any present or future parent or subsidiary corporation or other affiliated entity. A total of 7,000,000 OneSpaWorld Shares have been authorized and reserved for issuance under the 2019 Plan. Non-cash stock-based compensation expense is included within general and administrative expense in the consolidated statements of operations. Share-based payments, to the extent they are compensatory, are recognized based on their grant date fair values. Forfeitures are recorded as they occur.

Stock Based Compensation Cost

Stock based compensation cost, which is included as a component of salary, benefits and payroll taxes in the accompanying consolidated statements of operations for the years ended December 31, 2021, 2020 and for the period from March 20, 2019 to December 31, 2019 was $10.6 million, $4.9 million and $20.7 million, respectively. As of December 31, 2021, the Company had $15.8 million of total unrecognized compensation expense related to restricted stock units and performance stock units.

Restricted Share Units

 

The Company’s restricted stock units (“RSUs”) have been issued to employees and directors with vesting periods ranging from one year to three years and vest based solely on service conditions. RSUs become unrestricted common stock upon vesting on a one-for-one basis. The cost of these awards is determined using the fair value of our common stock on the date of the grant, and compensation expense is recognized over the vesting period.

 

The following is a summary of RSUs activity for the years ended December 31, 2021 and 2020:

RSU Activity

 

Number of Awards

 

 

Weighted-Average Grant Date Fair Value

 

 

Aggregate Intrinsic Value (In thousands) (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Vested share units as of December 31, 2019

 

 

60,902

 

 

$

15.60

 

 

 

 

 

Granted

 

 

1,833,821

 

 

 

7.33

 

 

 

 

 

Vested

 

 

(54,491

)

 

 

15.60

 

 

 

 

 

Forfeited

 

 

(9,117

)

 

 

15.62

 

 

 

 

 

Non-Vested share units as of December 31, 2020

 

 

1,831,115

 

 

$

7.32

 

 

$

18,568

 

Granted

 

 

411,595

 

 

$

10.07

 

 

 

 

 

Vested

 

 

(697,640

)

 

 

5.88

 

 

 

 

 

Forfeited

 

 

(47,025

)

 

 

12.19

 

 

 

 

 

Non-Vested share units as of December 31, 2021

 

 

1,498,045

 

 

$

8.76

 

 

$

15,010

 

 

 

(1)

The aggregate intrinsic value is calculated based on the fair value of $10.02 and $10.14 per share of the Company’s common stock on December 31, 2021 and 2020, respectively, due to the fact that the performance stock units carry a $0 exercise price.

 

The total fair value of RSUs that vested in 2021 and 2020, based on the market price of the underlying shares on that day of vesting, was $6.6 million and $0.3 million, respectively.

 

There were 411,595, 1,833,821 and 60,902 RSUs granted during the years ended December 31, 2021, 2020 and the period from March 20, 2019 to December 31, 2019, respectively. The weighted average estimated fair value of RSUs granted during the period from March 20, 2019 to December 31, 2019 was $15.60. As of December 31, 2021, the Company had $9.9 million of total

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unrecognized compensation expense related to restricted stock award grants, which will be recognized over the weighted-average period of approximately 1.9 years.

 

On February 22, 2022, the Company granted 189,640 time-based RSU’s awards to certain executive officers which one third vest on March 7, 2022, and two-thirds of the RSU’s vest on December 5, 2022.

 

Performance Share Units

 

The Company grants certain senior-level employees performance share units that generally vest based on either performance and time-based service condition (“Performance Condition-Based Awards”) or market and time-based service conditions (“Market Condition-Based Awards”) which are referred to herein as Performance Share Units (“PSUs”). The number of shares of common stock underlying each award is determined at the end of the performance period. In order to vest, the employee must be employed by the Company, with certain contractual exclusions, at the end of the performance period.

 

Performance Condition-Based Awards

 

On January 21, 2020, the Company granted 181,316 PSUs to certain employees which vest upon the achievement of certain pre-established performance target established for the 2020 calendar year and the satisfaction of an additional time-based vesting requirement that generally requires continued employment through January 21, 2023. PSUs are converted into shares of common stock upon vesting on a one-for-one basis. The Company estimates the fair value of each performance share when the grant is authorized, and the related service period has commenced. The Company recognizes compensation cost over the vesting period based on the probability of the performance conditions being achieved. If the specified service and performance conditions are not met, compensation expense is not recognized, and any previously recognized compensation expense will be reversed. In December 2020, the Company’s compensation committee approved the waiver of the performance condition after considering the severe interruption of the Company’s business and operations resulting from the unforeseen circumstances of COVID-19 and the material adverse impact on the Company’s share price. As a result of this modification, the PSUs were revalued as of the date of the modification to $8.76 per share, based on the market price of the underlying shares on that day and the aggregate fair value of the modification was approximately $1.3 million which represents the total fair value of the modified award which will be expensed over the remaining vesting period. The modified PSUs will vest approximately 33% on each anniversary of the original grant date.

 

Market Condition-Based Awards

 

The Company estimates the fair value of each PSUs when the grant is authorized, and the related service period has commenced. Expense for these PSUs is recorded over the derived service period.

 

On August 18, 2020, the Company granted 1,003,000 PSUs to certain executive officers. The PSUs expire on the sixth anniversary of the Grant Date. The PSUs are converted into shares of common stock upon vesting on a one-for-one basis. The PSU’s will vest upon achievement of the twenty-day volume weighted average price of OneSpaWorld common shares reaching the following hurdle prices:

 

Hurdle Price

 

 

Percentage of PSU's Vested

 

$

7.24

 

 

25%

 

$

8.83

 

 

25%

 

$

10.41

 

 

25%

 

$

12.00

 

 

25%

 

 

On October 1, 2020, the Company granted 166,667 PSUs to an executive officer. The PSUs expire on the sixth anniversary of the Grant Date. The PSUs are converted into shares of common stock upon vesting on a one-for-one basis. The PSUs will vest upon achievement of the five-day volume weighted average price of OneSpaWorld common shares reaching $12 per share.

 

On October 13, 2020, the Company granted 83,333 PSUs as an inducement grant outside of the 2019 Plan to an executive officer. The PSU’s expire on the sixth anniversary of the Grant Date. The PSUs are converted into shares of common stock upon vesting on a one-for-one basis. The PSUs will vest upon achievement of the twenty-day volume weighted average price of OneSpaWorld common shares reaching the following hurdle prices:

 

Hurdle Price

 

 

Percentage of PSU's Vested

 

$

8.39

 

 

25%

 

$

9.59

 

 

25%

 

$

10.80

 

 

25%

 

$

12.00

 

 

25%

 

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Grant date fair values of the market condition-based awards and the derived service periods assigned to the PSUs were estimated by a third-party valuation specialist using a Monte Carlo simulation in a risk-neutral framework assuming Geometric Motion, 100,000 trials, and using the following assumptions:

 

 

 

August 18, 2020

 

 

October 1, 2020

 

 

October 13, 2020

 

Hurdle prices per share

 

$7.24, $8.83, $10.41, $12.00

 

 

$

12.00

 

 

$8.39, $9.59, $10.80, $12.00

 

End of simulation term

 

August 18, 2026

 

 

October 1, 2026

 

 

October 13, 2026

 

Term of simulation

 

6 years

 

 

6 years

 

 

6 years

 

Stock price as of measurement date

 

$

5.65

 

 

$

6.47

 

 

$

6.99

 

Volatility

 

54.13%

 

 

54.80%

 

 

54.92%

 

Risk-free rate (continuous)

 

0.37%

 

 

0.36%

 

 

0.41%

 

 

PSUs Activity

 

The following is a summary of PSUs activity for the years ended December 31, 2021 and 2020:

 

PSUs Activity

 

Number of Market Based-Awards

 

 

Weighted-Average Grant Date Fair Value

 

 

Number of Performance -Based Awards

 

 

Weighted-Average Grant Date Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Vested share units as of December 31, 2019

 

 

-

 

 

$

-

 

 

 

-

 

 

$

-

 

Granted

 

 

1,253,000

 

 

 

4.81

 

 

 

181,316

 

 

 

15.67

 

Vested

 

 

(271,584

)

 

 

4.76

 

 

 

(48,690

)

 

 

15.67

 

Forfeited

 

 

-

 

 

 

-

 

 

 

(2,706

)

 

 

15.67

 

Non-Vested share units as of December 31, 2020

 

 

981,416

 

 

$

4.83

 

 

 

129,920

 

 

$

15.67

 

Granted

 

 

-

 

 

 

-

 

 

 

698,289

 

 

 

9.94

 

Vested

 

 

(543,167

)

 

 

4.65

 

 

 

(4,955

)

 

 

15.67

 

Forfeited

 

 

-

 

 

 

-

 

 

 

(36,283

)

 

 

15.11

 

Non-Vested share units as of December 31, 2021

 

 

438,249

 

 

$

5.04

 

 

 

786,971

 

 

$

10.63

 

 

No PSUs were granted during the periods from March 20, 2019 to December 31, 2019.

 

The total fair value of PSUS that vested in 2021, 2020 and 2019 was $5.4 million, $2.6 million and $0.4 million, respectively, based on the market price of the underlying shares on that day of vesting. As of December 31, 2021, there was total unrecognized compensation cost related to non-vested market and performance-based PSUs of $0.6 million and $5.1 million, respectively. The costs are expected to be recognized over the weighted-average period of approximately 0.6 years and 2.3 years, respectively. The aggregate intrinsic value of PSUs was $12.2 million and $11.3 million as of December 31, 2021 and December 31, 2020, respectively. The aggregate intrinsic value of PSUs is based on the number of nonvested PSUs and the market value of the Company’s common stock as of December 31, 2021.

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Stock Options

 

On March 26, 2019 (the “Grant Date”), a total of 4,547,076 options were granted by the Company under the 2019 Plan to executive officers of the Company. The options have an exercise price of $12.99 and expire on the sixth anniversary of the Grant Date. The options were 100% vested on the Grant Date. The options become exercisable upon the five day volume weighted average price of OneSpaWorld common shares reaching $20.00 per share. The Grant Date fair value of the option was $4.48, resulting in stock-based compensation of $20,370,900 being recognized by the Company in the period from March 20, 2019 to December 31, 2019 in accordance with ASC Topic 718, Compensation – Stock Compensation. The Grant Date fair value of the option was estimated by a third-party valuation specialist using a Monte Carlo simulation in a risk-neutral framework assuming Geometric Motion, 2,500,000 trials, and using the following assumptions:

 

 

 

 

 

Hurdle price per share

 

$

20.00

 

Strike price per share

 

$

12.99

 

Average period for hurdle price, in days

 

5

 

End of simulation term

 

3/26/2025

 

Term of simulation

 

6.00 years

 

Stock price as of the Measurement Date

 

$

12.99

 

Volatility

 

 

37.5

%

Risk-free rate (continuous)

 

 

2.2

%

Dividend yield (quarterly after 3 years)

 

 

3.0

%

Suboptimal exercise multiple

 

2.8x

 

 

During the year ended December 31, 2021, 941,512 options were forfeited due to the retirement of our former Chief Executive Officer.

 

On August 3, 2021, Leonard Fluxman, Executive Chairman, President and Chief Executive Officer, and Stephen Lazarus, Chief Financial Officer and Chief Operating Officer, voluntarily surrendered outstanding options to purchase an aggregate of 3,434,379 of the Company’s common shares. The common shares underlying these surrendered options will be available for future grant to Company personnel under the 2019 Plan.

 

The following table shows stock options that were outstanding and vested as of December 31, 2021 and 2020 and the related weighted average exercise price and weighted average grant date fair value.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Options

 

Weighted- Average Exercise Price

 

Weighted-Average Grant Date Fair Value

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2020

 

4,375,891

 

$

12.99

 

$

4.48

 

Vested at December 31, 2020

 

4,375,891

 

$

12.99

 

$

4.48

 

Granted

 

-

 

 

-

 

 

-

 

Vested

 

-

 

 

-

 

 

-

 

Cancelled

 

(4,375,891

)

 

12.99

 

 

4.48

 

Vested at December 31, 2021

 

-

 

$

-

 

$

-

 

 

 

The weighted average estimated fair value of options granted during the period from March 20, 2019 to December 31, 2019 was $4.48. On December 31, 2020, our outstanding stock options had no intrinsic value since the closing price on that date of $10.14 per share was below the weighted average exercise price of our outstanding stock options. As of December 31, 2021 and 2020, there was no unrecognized compensation cost related to the share options granted or exercised under the plan. No share options were granted during the year ended December 31, 2021 and 2020. No share options were exercisable as of December 31, 2021 and 2020.

 

11. Noncontrolling Interest

As of December 31, 2019, the Company had a 60% controlling interest and a third party has a 40% noncontrolling interest of Medispa Limited, a Bahamian entity that is a subsidiary of the Company. The operations of MediSpa Limited relate to the delivery of non-invasive aesthetic services, provision of related services, and the sale of related products onboard passenger cruise ships and at destination resort spas outside the tax jurisdiction of the U.S. (Successor). On February 14, 2020, the Company purchased the 40% noncontrolling interest for $12.3 million in a combination of $10.8 million in cash and 98,753 shares of the Company’s common stock

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at a share price of $15.26. As a result of the transaction, the difference between the carrying value of the noncontrolling interest purchased and the consideration given was recorded as additional paid-in capital.

Total equity was adjusted during the year ended December 31, 2020 (Successor) due to the purchase of noncontrolling interest by the Company as follows (in thousands):

 

 

Year Ended December 31, 2020

 

Decrease in noncontrolling interest

 

$

(4,113)

 

Decrease in additional paid-in capital

 

 

(6,697)

 

 

 

12. Revenue Recognition

The Company's revenue generating activities include the following:

 

Service Revenues

Service revenues consist primarily of sales of health, wellness and beauty services, including a full range of massage treatments, facial treatments, nutritional/weight management consultations, teeth whitening, mindfulness services and medi-spa services to cruise ship passengers and destination resort guests. Each service or consultation represents a separate performance obligation and revenues are generally recognized immediately upon the completion of our service. Given the short duration of our performance obligation, although some services are recognized over time, there is no difference in the timing of recognition.

 

Product Revenues

Product revenues consist primarily of sales of health and wellness products, such as facial skincare, body care, hair care, orthotics and nutritional supplements to cruise ship passengers, destination resort guests and timetospa.com customers. Our Shop & Ship program provides guests the ability to buy retail products onboard and have products shipped directly to their home. Each product unit represents a separate performance obligation. Our performance obligations are satisfied and revenue is recognized when the customer obtains control of the product, which occurs either at the point of sale for retail sales and at the time of shipping for Shop & Ship and timetospa.com product sales. The Company provides no warranty on products sold. Shipping and handling fees charged to customers are included in net sales. 

 

Gift Cards

The Company only offers no-fee, non-expiring gift cards to its customers. At the time gift cards are sold, no revenue is recognized; rather, the Company records a contract liability to customers. The liability is relieved, and revenue is recognized equal to the amount redeemed at the time gift cards are redeemed for products or services. The Company records revenue from unredeemed gift cards (breakage) in net sales on a pro-rata basis over the time period gift cards are redeemed. At least three years of historical data, updated annually, is used to determine actual redemption patterns. The liability for unredeemed gift cards is included in “Other current liabilities” on the Company's consolidated balance sheets and was $0.8 million, $0.7 million and $0.8 million as of December 31, 2021, 2020 and 2019, respectively.

 

Customer Loyalty Rewards Program

The Company initiated a customer loyalty program during October 2019 in which customers earn points based on their spending on timetospa.com. The Company recognizes the estimated net amount of the rewards that will be earned and redeemed as a reduction to net sales at the time of the initial transaction and as tender when the points are subsequently redeemed by a customer. The liability for customer loyalty programs was not material as of December 31, 2021 and 2020.

 

Contract Balances

Receivables from the Company’s contracts with customers are included within accounts receivables, net in the consolidated balance sheets. Such amounts are typically remitted to us by our cruise line or destination resort partners, except for online sales, and are net of commissions they withhold. Although paid by our cruise line partners, customers are typically required to pay with major credit cards, reducing our credit risk to individual customers. Amounts are billed immediately, and our cruise line and destination resort partners typically remit payments to us within 30 days. As of December 31, 2021, 2020 and 2019, our receivables from contracts with customers were $19.5 million, $3.0 million and $30.5 million, respectively and the increase as of December 31, 2021 when compared to December 31, 2020, reflects the impact of increased revenues during the fourth quarter of 2021 due to our gradual resumption of our spa operations. See Note 1 – “Impact of Coronavirus (COVID-19) – Liquidity and Management’s Plans”.

 

Costs incurred to enter into new or to renew long-term contracts are capitalized and amortized to cost of revenues over the term of the contract. Deferred contract costs, which relate to a fee accrued to a cruise line partner, amounted to $2.9 million and $3.1 million as of December 31, 2021 and 2020, respectively, and is presented within other non-current assets in the accompanying consolidated balance sheets. No Deferred contract costs was recorded for the period from March 20, 2019 to December 31, 2019. Amortization of the deferred contract cost was $0.7 million and $0.4 million for the years ended December 31, 2021 and 2020, respectively. Amortization

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of deferred costs are included in cost of services in the accompanying consolidated statements of operations. Our contract liabilities for gift cards and customer loyalty programs are described above.

Disaggregation of Revenue and Segment Reporting

The Company operates facilities on cruise ships and in destination resorts, where we provide health, fitness, beauty and wellness services and sell related products. The Company also sells health and wellness, fitness and beauty related products through its timetospa.com website which is a post-cruise sales tool where guests may continue their wellness journey after disembarking. The Company’s Maritime and Destination Resorts operating segments are aggregated into a single reportable segment based upon similar economic characteristics, products, services, customers and delivery methods. Additionally, the Company’s operating segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the chief executive officer, who is the Company’s chief operating decision maker (CODM), in determining how to allocate the

Company’s resources and evaluate performance. The following table disaggregates the Company’s revenues by revenue source and operating segment (in thousands):

 

Successor

 

 

 

Predecessor

 

Consolidated

 

 

 

Combined

 

 

Year Ended December 31, 2021

 

Year Ended December 31, 2020

 

March 20, 2019 to December 31, 2019

 

 

 

January 1, 2019 to March 19, 2019

 

Service Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maritime

$

89,024

 

$

81,395

 

$

308,090

 

 

 

$

81,170

 

Destination resorts

 

26,921

 

 

12,287

 

 

31,703

 

 

 

 

10,110

 

Total service revenues

 

115,945

 

 

93,682

 

 

339,793

 

 

 

 

91,280

 

Product Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maritime

 

23,698

 

 

23,441

 

 

99,308

 

 

 

 

25,794

 

Destination resorts

 

2,162

 

 

975

 

 

2,003

 

 

 

 

633

 

Timetospa.com

 

2,226

 

 

2,827

 

 

2,677

 

 

 

 

745

 

Total product revenues

 

28,086

 

 

27,243

 

 

103,988

 

 

 

 

27,172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

$

144,031

 

$

120,925

 

$

443,781

 

 

 

$

118,452

 

 

13. Income Taxes

Loss before income tax expense (benefit) consists of (in thousands):

 

 

Successor

 

 

 

Predecessor

 

 

Consolidated

 

 

 

Combined

 

 

Year Ended December 31, 2021

 

Year Ended December 31, 2020

 

March 20, 2019 to December 31, 2019

 

 

 

 

January 1, 2019 to March 19, 2019

 

U.S.

$

(2,506

)

$

(12,294

)

$

(19,901

)

 

 

 

$

115

 

Foreign

 

(65,587

)

 

(274,869

)

 

(12,154

)

 

 

 

 

(24,787

)

 

$

(68,093

)

$

(287,163

)

$

(32,055

)

 

 

 

$

(24,672

)

 

The income tax expense (benefit) consists of the following (in thousands):

 

 

Successor

 

 

 

Predecessor

 

 

Consolidated

 

 

 

Combined

 

 

Year Ended December 31, 2021

 

Year Ended December 31, 2020

 

March 20, 2019 to December 31, 2019

 

 

 

 

January 1, 2019 to March 19, 2019

 

U.S. Federal

$

126

 

$

1,309

 

$

(340

)

 

 

 

$

(39

)

U.S. State

 

32

 

 

51

 

 

89

 

 

 

 

 

57

 

Foreign

 

271

 

 

(546

)

 

131

 

 

 

 

 

91

 

 

 

429

 

 

814

 

 

(120

)

 

 

 

 

109

 

Current

 

340

 

 

(761

)

523

 

 

 

 

 

118

 

Deferred

 

89

 

 

1,575

 

 

(643

)

 

 

 

 

(9

)

 

$

429

 

$

814

 

$

(120

)

 

 

 

$

109

 

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A reconciliation of the difference between the expected income tax expense (benefit) using the U.S. federal tax rate and our actual provision is as follows (in thousands):

 

 

Successor

 

 

 

Predecessor

 

 

Consolidated

 

 

 

Combined

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2021

 

Year Ended December 31, 2020

 

March 20, 2019 to December 31, 2019

 

 

 

 

January 1, 2019 to March 19, 2019

 

Provision using statutory

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. federal tax rate

$

(14,298

)

$

(60,304

)

$

(6,731

)

 

 

 

$

(5,162

)

Foreign rate differential

 

12,918

 

 

16,530

 

 

2,378

 

 

 

 

 

4,780

 

Prior period true up adjustment

 

(22

)

 

(1,798

)

 

-

 

 

 

 

 

-

 

State taxes

 

26

 

 

178

 

 

89

 

 

 

 

 

-

 

Change in valuation allowance

 

192

 

 

5,454

 

 

4,093

 

 

 

 

 

-

 

Permanent differences

 

1,679

 

 

40,865

 

 

168

 

 

 

 

 

346

 

Other

 

(66

)

 

(111

)

 

(117

)

 

 

 

 

145

 

Total

$

429

 

$

814

 

$

(120

)

 

 

 

$

109

 

 

The difference between the expected provision for income taxes using the 21% U.S. federal income tax rate for 2021 (Successor), 2020 (Successor) and 2019 (Successor and Predecessor), and the Company’s actual provision is primarily attributable to the change in valuation allowance, foreign rate differential including income earned in jurisdictions not subject to income taxes, and prior period true- up adjustment.

A reconciliation of the beginning and ending amounts of uncertain tax positions, excluding interest and penalties, is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

(Predecessor)

 

 

Year Ended December 31, 2021

 

Year Ended December 31, 2020

 

March 20, 2019 to December 31, 2019

 

 

 

January 1, 2019 to March 19, 2019

 

Beginning balance

$

1,663

 

$

1,663

 

$

1,663

 

 

 

$

1,697

 

Gross (decreases) increases—prior period tax position

 

-

 

 

-

 

 

-

 

 

 

 

(34

)

Ending balance

$

1,663

 

$

1,663

 

$

1,663

 

 

 

$

1,663

 

 

As of December 31, 2021 and 2020, the Company accrued $4.1 million and $4.4 million, respectively, for uncertain tax positions, including interest and penalties that, if recognized, would affect the effective income tax rate.

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The Company classifies interest and penalties on uncertain tax positions as a component of provision for income taxes in the consolidated statements of operations. Accrued interest and penalties related to uncertain tax positions as of December 31, 2021 and 2020, amounted to $2.4 million and $2.6 million respectively, and are included in income tax contingency in the accompanying consolidated balance sheets.

Deferred income taxes consist of the following (in thousands):

 

 

As of December 31,

 

 

2021

 

 

 

2020

 

Deferred income tax assets:

 

 

 

 

 

 

 

 

Stock options

$

6,773

 

 

 

$

5,809

 

Inventory reserves

 

25

 

 

 

 

16

 

Allowance for doubtful accounts

 

-

 

 

 

 

12

 

Depreciation and amortization

 

1,773

 

 

 

 

2,351

 

Other reserves and accruals

 

587

 

 

 

 

430

 

Gift certificates

 

213

 

 

 

 

202

 

Net operating losses

 

3,408

 

 

 

 

3,833

 

Total deferred income tax assets

 

12,779

 

 

 

 

12,653

 

Less valuation allowance

 

(11,809

)

 

 

 

(11,543

)

Deferred income tax asset, net

$

970

 

 

 

$

1,110

 

Deferred income tax liability

$

(900

)

 

 

$

(1,012

)

Net deferred income tax asset

$

70

 

 

 

$

98

 

 

The valuation allowance increased by less than $0.3 million in 2021 and $6.4 million in 2020, primarily stemming from the assessment of realizability of the deferred tax asset.

 

Following is the activity of the valuation allowance (in thousands):

 

2021

 

2020

 

Beginning balance

$

11,543

 

$

5,157

 

Additions

 

266

 

 

6,386

 

Deductions

 

-

 

 

-

 

Ending balance

$

11,809

 

$

11,543

 

 

As of December 31, 2021, we had $11.7 million of foreign tax operating loss carryforwards expiring as follows (in millions):

 

Expires

 

 

 

2022

$

0.3

 

2023

 

0.5

 

2024

 

0.4

 

2025

 

0.9

 

2026

 

0.8

 

2027

 

0.6

 

2028

 

0.4

 

2029

 

0.2

 

2030

 

0.1

 

Indefinite

 

7.5

 

Total

$

11.7

 

As the Company accounts for income taxes under the separate return method for the predecessor period, the statements of equity for period from January 1, 2019 to March 19, 2019 (Predecessor) includes $0.03 million of current income taxes payable that were included in net Parent investment, as such income taxes are not actually owed to the tax authorities. The Company is subject to routine audits by U.S. federal, state, local and foreign tax authorities. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. The tax years 2016-2020 remain subject to examination by taxing authorities throughout the world in major jurisdictions, such as the U.S. and Italy.

 

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14. Commitment and Contingencies

Cruise Line Agreements

A large portion of the Company’s revenues are generated on cruise ships. The Company has entered into agreements of varying terms with the cruise lines under which services and products are paid for by cruise passengers. These agreements provide for the Company to pay the cruise line commissions for use of their shipboard facilities, as well as fees for staff shipboard meals and accommodations. These commissions are based on a percentage of revenue, a minimum annual amount, or a combination of both. Some of the minimum commissions are calculated as a flat dollar amount while others are based upon minimum passenger per diems for passengers actually embarked on each cruise of the respective vessel. Staff shipboard meals and accommodations are charged by the cruise lines on a per staff per day basis. The Company recognizes all expenses related to cruise line commissions, minimum guarantees, and staff shipboard meals and accommodations, generally, as they are incurred and includes such expenses in cost of revenues and operating expenses in the accompanying consolidated statements of operations. For cruises in process at period end, an accrual is made to record such expenses in a manner that approximates a pro-rata basis. In addition, staff-related expenses such as shipboard employee commissions are recognized in the same manner.

 

Pursuant to agreements that provide for minimum commissions, the Company guaranteed total minimum payments to cruise line (excluding payments based on minimum amounts per passenger per day of a cruise applicable to certain ships served by us). As of December 31, 2021, there were no minimum payments guarantee amounts.

Revenues from passengers of each of the following cruise line companies accounted for more than ten percent of the Company’s total revenues in 2021, 2020, period from March 20, 2019 (Successor) to December 31, 2019 and period from January 1, 2019 to March 19, 2019 (Predecessor), respectively: Carnival (including Carnival, Carnival Australia, Costa, Holland America, P&O, Princess and Seabourn cruise lines): 36.7%, 43.4%, 46.7%, and 46.7.% ; Royal Caribbean (including Royal Caribbean, Pullmantur, Celebrity, Azamara and Silversea cruise lines): 22.8%, 20.9%, 22.7% and 24.6% ; and Norwegian Cruise Line (including Norwegian Cruise Line, Oceania Cruises and Regent Seven Seas Cruises) 11.4%, 16.3%, 15.2% and 12.9%.

 

Operating Leases

The Company leases office and warehouse space, as well as office equipment and automobiles, under operating leases. The Company also makes certain payments to the owners of the venues where destination resort health and wellness centers are located. Destination resort health and wellness centers generally require rent based on a percentage of revenues, with some locations having escalating percentages at different revenue amounts. In addition, as part of the rental arrangements for some of the destination resort health and wellness centers, the Company is required to pay a minimum annual rental regardless of whether such amount would be required to be paid under the percentage rent arrangement. Substantially all of these arrangements include renewal options ranging from three to five years.

Rent expense consist of (in thousands):

Successor

 

 

 

Predecessor

 

Consolidated

 

 

 

Combined

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2021

 

Year Ended December 31, 2020

 

March 20, 2019 to December 31, 2019

 

 

 

January 1, 2019 to March 19, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum rentals

$

3,325

 

$

3,791

 

$

5,173

 

 

 

$

1,573

 

Contingent rentals

$

4,072

 

 

1,703

 

 

2,039

 

 

 

 

689

 

 

$

7,397

 

$

5,494

 

$

7,212

 

 

 

$

2,262

 

 

As of December 31, 2021, we guaranteed total minimum payments to owners of our land-based venues of approximately $2.9 million in the aggregate for 2022. Minimum annual commitments under operating leases at December 31, 2021 are as follows (in thousands):

 

Year

 

Amount

 

2022

 

$

2,866

 

2023

 

 

2,511

 

2024

 

 

2,558

 

2025

 

 

2,585

 

2026

 

 

2,182

 

Thereafter

 

 

7,172

 

 

 

$

19,874

 

 

Litigation

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We are routinely involved in legal proceedings, disputes, regulatory matters, and various claims and lawsuits that have been filed or are pending against us, including as noted below, arising in the ordinary course of our business. Most of these claims and lawsuits are covered by insurance and, accordingly, the maximum amount of our liability is typically limited to our deductible amount. Nonetheless, the ultimate outcome of those claims and lawsuits that are not covered by insurance cannot be determined at this time. We have evaluated our overall exposure with respect to all of our legal proceedings, threatened and pending litigation and, to the extent required, we have accrued amounts for all estimable probable losses associated with our deemed exposure. We are currently unable to estimate any other potential contingent losses beyond those accrued, as discovery is not complete and adequate information is not available to estimate such range of loss or potential recovery. However, based on our current knowledge, we do not believe that the aggregate amount or range of reasonably possible losses with respect to these matters will be material to our consolidated results of operations, financial condition or cash flows. We intend to vigorously defend our legal position on all claims and, to the extent necessary, seek recovery.

In February 2020, the Company received a formal assessment of $1.9 million by a foreign tax authority over how the value added tax (“VAT”) law was applied on the change in the ultimate beneficial ownership of one of our subsidiaries as result of the business combination in March 2019. The Company is disputing the assessment and recorded an accrual of $1.2 million for this matter during the year ended December 31, 2020 and is included in “Accrued expenses” on the Company's consolidated balance sheets as of December 31, 2021 and 2020. The Company believes the ultimate outcome of this matter will not have a material adverse impact on the consolidated financial statements.

 

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15. Changes in Accumulated Other Comprehensive Income (Loss) by Component

The following table presents the changes in accumulated other comprehensive income (loss) by component (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

Accumulated Other Comprehensive Income (Loss) for the year ended December 31, 2021

 

 

Accumulated Other Comprehensive Income (Loss) for the year ended December 31, 2020

 

 

Accumulated Other Comprehensive Income (Loss) for the Period from March 20, 2019 to December 31, 2019

 

 

Accumulated Other Comprehensive Income (Loss) for the period from January 1, 2019 to March 19, 2019 (2)

 

 

Foreign Currency Translation Adjustments

 

 

Changes Related to Cash Flow Derivative Hedge (1)

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Foreign Currency Translation Adjustments

 

 

Changes Related to Cash Flow Derivative Hedge (1)

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

Foreign Currency Translation Adjustments

 

 

Changes Related to Cash Flow Derivative Hedge (1)

 

 

Accumulated Other Comprehensive Loss

 

 

Foreign Currency Translation Adjustments

 

Accumulated other comprehensive income (loss), beginning of the period

$

(560

)

 

$

(4,915

)

 

$

(5,475

)

 

$

(183

)

 

$

902

 

 

$

719

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

(649

)

Other comprehensive (loss) income before reclassifications

 

(113

)

 

 

1,684

 

 

 

1,571

 

 

 

(377

)

 

 

(7,215

)

 

 

(7,592

)

 

 

(183

)

 

 

1,109

 

 

 

926

 

 

 

(165

)

Amounts reclassified from accumulated other comprehensive income (loss)

 

-

 

 

 

1,907

 

 

 

1,907

 

 

 

-

 

 

 

1,398

 

 

 

1,398

 

 

 

-

 

 

 

(207

)

 

 

(207

)

 

 

-

 

Net current period other comprehensive (loss) income

 

(113

)

 

 

3,591

 

 

 

3,478

 

 

 

(377

)

 

 

(5,817

)

 

 

(6,194

)

 

 

(183

)

 

 

902

 

 

 

719

 

 

 

(165

)

Ending balance

$

(673

)

 

$

(1,324

)

 

$

(1,997

)

 

$

(560

)

 

$

(4,915

)

 

$

(5,475

)

 

$

(183

)

 

$

902

 

 

$

719

 

 

$

(814

)

(1)

See Note 16.

(2)

For the period from January 1, 2019 to March 19, 2019 (Predecessor) the only component of other comprehensive income (loss) was foreign currency translation adjustments.

16. Fair Value Measurements and Derivatives

Fair Value Measurements

Cash and cash equivalents at December 31, 2021 and December 31, 2020 are comprised of cash and are categorized as Level 1 instruments. The Company maintains cash with various high-quality financial institutions. Restricted cash at December 31, 2021 and December 31, 2020 is comprised of amounts held in escrow accounts, as a result of a legal proceeding related to a tax assessment and is categorized as a Level 1 instrument. The fair value of outstanding long-term debt as of December 31, 2021, and 2020 is estimated using a discounted cash flow analysis based on current market interest rates for debt issuances with similar remaining years-to-maturity and adjusted for credit risk, which represents a Level 3 measurement in the fair value hierarchy.

The carrying amounts and estimated fair values of the Company's cash, restricted cash and long-term debt were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2021

 

As of December 31, 2020

 

 

 

Carrying Value

 

 

Estimated Fair Value

 

Carrying Value

 

 

Estimated Fair Value

 

Cash

 

$

30,937

 

 

$

30,937

 

$

41,552

 

 

$

41,552

 

Restricted cash

 

 

1,896

 

 

 

1,896

 

 

1,896

 

 

 

1,896

 

Total Cash

 

$

32,833

 

 

$

32,833

 

$

43,448

 

 

$

43,448

 

First lien term loan facility

 

$

202,457

 

 

$

198,580

 

$

202,457

 

 

$

188,560

 

Second lien term loan facility

 

 

25,000

 

 

 

23,570

 

 

25,000

 

 

 

20,950

 

Term credit agreement

 

 

7,000

 

 

 

6,890

 

 

7,000

 

 

 

6,680

 

Total debt

 

$

234,457

 

 

$

229,040

 

$

234,457

 

 

$

216,190

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

 

Assets and liabilities that are recorded at fair value have been categorized based upon the fair value hierarchy. The following table presents information about the Company’s financial instruments recorded at fair value on a recurring basis (in thousands):

 

 

 

 

 

Fair Value Measurements at December 31, 2021

 

Fair Value Measurements at December 31, 2020

 

 

Description

 

Balance Sheet Location

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments (1)

 

Other current liabilities

 

$

1,126

 

 

 

-

 

 

$

1,126

 

 

 

-

 

$

1,796

 

 

 

-

 

 

$

1,796

 

 

 

-

 

 

Warrant liabilities

 

Warrant liabilities

 

 

107,300

 

 

 

-

 

 

 

107,300

 

 

 

-

 

 

104,700

 

 

 

-

 

 

 

104,700

 

 

 

-

 

 

Derivative financial instruments (1)

 

Other long term liabilities

 

 

197

 

 

 

-

 

 

 

197

 

 

 

-

 

 

3,119

 

 

 

-

 

 

 

3,119

 

 

 

-

 

 

Total Liabilities

 

 

 

$

108,623

 

 

$

-

 

 

$

108,623

 

 

$

-

 

$

109,615

 

 

$

-

 

 

$

109,615

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Consists of an interest rate swap.

 

Warrants

 

Public and 2020 PIPE Warrants

The fair value of the Public and PIPE Warrants are considered a Level 2 valuation and is determined using the Monte Carlo model. The significant assumptions which the Company used in the model are:

 

 

December 31, 2021

 

 

December 31, 2020

 

 

Public Warrants

 

 

2020 PIPE Warrants

 

 

Public Warrants

 

 

2020 PIPE Warrants

 

Stock price

$

10.02

 

 

$

10.02

 

 

$

10.14

 

 

$

10.14

 

Strike price

$

11.50

 

 

$

5.75

 

 

$

11.50

 

 

$

5.75

 

Remaining life (in years)

2.22

 

 

3.45

 

 

 

3.22

 

 

 

4.45

 

Volatility

 

68

%

 

 

68

%

 

 

54.0

%

 

 

54.0

%

Interest rate

 

0.78

%

 

 

1.03

%

 

 

0.2

%

 

 

0.3

%

Redemption price

$

18.00

 

 

$

14.50

 

 

$

18.00

 

 

$

14.50

 

 

Sponsor Warrants

The fair value of the Sponsor Warrants is considered a Level 2 valuation and is determined using the Black-Scholes model. The significant assumptions which the Company used in the model are:

 

 

December 31, 2021

 

December 31, 2020

 

Stock price

 

$

10.02

 

$

10.14

 

Strike price

 

$

11.50

 

$

11.50

 

Remaining life (in years)

 

2.22

 

 

3.22

 

Volatility

 

 

68

%

 

54.0

%

Interest rate

 

 

0.80

%

 

0.2

%

Dividend yield

 

 

0.0

%

 

0.0

%

Derivatives

Successor:

Market risk associated with the Company’s long-term floating rate debt is the potential increase in interest expense from an increase in interest rates. The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. These instruments are recorded on the balance sheet at their fair value and are designated as hedges. The financial impact of these hedging instruments is primarily offset by corresponding changes in the underlying exposures being hedged.

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Table of Contents

The Company assesses whether derivatives used in hedging transactions are “highly effective” in offsetting changes in the cash flow of its hedged forecasted transactions. The Company uses regression analysis for this hedge relationship and high effectiveness is achieved when a statistically valid relationship reflects a high degree of offset and correlation between the fair values of the derivative and the hedged forecasted transaction. Cash flows from the derivatives are classified in the same category as the cash flows from the underlying hedged transaction. These agreements involve the receipt of variable-rate amounts in exchange for fixed-rate interest payments over the life of the respective agreement without an exchange of the underlying notional amount. The Company classifies derivative instrument cash flows from hedges of benchmark interest rate as operating activities due to the nature of the hedged item. Gains and losses on derivatives that are designated as cash flow hedges are recorded as a component of Accumulated other comprehensive income (loss) until the underlying hedged transactions are recognized in earnings. If it is determined that the hedged forecasted transaction is no longer probable of occurring, then the amount recognized in accumulated other comprehensive income (loss) is released to earnings.

The Company monitors concentrations of credit risk associated with financial and other institutions with which the Company conducts significant business. Credit risk, including, but not limited to, counterparty nonperformance under derivatives, is not considered significant, as the Company primarily conducts business with large, well-established financial institutions with which the Company has established relationships, and which have credit risks acceptable to the Company. The Company does not anticipate non-performance by its counterparty. The amount of the Company’s credit risk exposure is equal to the fair value of the derivative when any of the derivatives are in a net gain position.

In September 2019, the Company entered into a floating-to-fixed interest rate swap agreement to make a series of payments based on a fixed interest rate of 1.457% and receive a series of payments based on the greater of 1 Month USD LIBOR or Strike which is used to hedge the Company’s exposure to changes in cash flows associated with its variable rate Term Loan Facilities and has designated this derivative as a cash flow hedge. Both the fixed and floating payment streams are based on a notional amount of $174.7 million at the inception of the contract.

The interest rate swap agreement has a maturity date of September 19, 2024. As of December 31, 2021 and 2020, the notional amount is $127.7 million and $151.4 million, respectively. There was no ineffectiveness related to the interest rate swaps. The gain or loss on the derivative is recorded as a component of accumulated other comprehensive income (loss) and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. The Company expects to reclassify $1.2 million of income from accumulated other comprehensive income (loss) into interest expense within the next twelve months.

The fair value of the interest rate swap contract is measured on a recurring basis by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates (forward curves) derived from observable market interest rate curves. The interest rate swap contract was categorized as Level 2 in the fair value hierarchy. The Company is not required to post cash collateral related to this derivative instrument.

The effect of the interest rate swap contract designated as cash flows hedging instrument on the consolidated financial statements was as follows (in thousands):

 

Derivative

 

Amount of (Loss) Gain Recognized in Accumulated Other Comprehensive Income (Loss) on Derivative

 

 

Location of Gain Reclassified from Accumulated Other Comprehensive Income (Loss) into Income

 

Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2021

 

 

Year Ended December 31, 2020

 

 

March 20, 2019 to December 31, 2019

 

 

 

 

Year Ended December 31, 2020

 

 

Year Ended December 31, 2020

 

 

March 20, 2019 to December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

$

1,684

 

 

$

(7,215

)

 

$

1,109

 

 

Interest expense

 

$

1,907

 

 

$

1,398

 

 

$

(207

)

 

Total

 

$

1,684

 

 

$

(7,215

)

 

$

1,109

 

 

 

 

$

1,907

 

 

$

1,398

 

 

$

(207

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Predecessor:

During for the period from January 1, 2019 to March 19, 2019, the Company did not enter into or transact any derivative contracts.

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Table of Contents

Nonfinancial Instruments that are Measured at Fair Value on a Nonrecurring Basis

Nonrecurring Fair Value Measurements

Valuation of Goodwill and Trade Name

 

(Successor):

 

We recognized goodwill impairment charges of $190 million for the two segment reporting units and an impairment charge of $0.7 million for the trade name during the year ended December 31, 2020. See “Note 5” – “Goodwill and Other Intangible Assets”. The determination of our reporting units' goodwill and trade name fair values includes numerous assumptions that are subject to various risks and uncertainties.

 

We applied the income approach to estimate the fair value of the reporting units. The income approach estimates the fair value by discounting each reporting unit’s estimated future cash flows using the company estimate of the discount rate, or expected return, that a market participant would have required as of the valuation date. Significant assumptions in the income approach, all of which are considered Level 3 inputs, include the estimated future net annual cash flows for each reporting unit and the discount rate. The discount rates utilized to value the Maritime and Destination Resorts reporting units were approximately 14% and 12.5%, respectively, which were determined depending on the risk and uncertainty inherent in the respective reporting unit.

 

The trade name was valued through application of the relief from royalty method and the significant assumptions used in the valuation are considered Level 3 inputs. Under this method, a royalty rate is applied to the revenues associated with the trade name to capture value associated with use of the name as if licensed. The resulting royalty savings are then discounted to present fair value at rates reflective of the risk and return expectations of the interests to derive its fair value as of the impairment testing date.

 

17. Transactions with Related Parties

Successor:

One Spa World LLC, a subsidiary of OneSpaWorld, entered into a transition services agreement, concurrent with the closing of the Business Combination, with Steiner Management Services, LLC (“SMS”), which became effective at the time of the closing. This agreement provides for the provision by SMS and its affiliates and third-party providers of certain services, including accounting, information technology and legal services, to certain subsidiaries of OneSpaWorld until December 31, 2020. Effective December 31, 2019, the Company and SMS have terminated the transition services agreement (the “Transition Services Agreement”) pursuant to which SMS had provided the Company with certain services, including accounting, information technology and legal services. The Company has transitioned such services to its control. 

The Company and SMS have entered into an Operational Services Agreement effective January 1, 2020, pursuant to which the Company would provide SMS with certain services including with respect to accounting, human resources, information technology, and office related support. This agreement was terminated effective on December 31, 2020 and provides that SMS will pay the Company for its services.

As discussed in Note 9 – “Equity”, on April 30, 2020, we entered into the Investment Agreement with Investors, including members of our management and Board of Directors. Pursuant to the Investment Agreement, we completed the 2020 Private Placement.

Predecessor:

The Company purchases beauty products for resale to its customers from an entity that was formerly a wholly-owned subsidiary of the Parent through March 1, 2019. In 2017, the Company entered into a supply agreement with a wholly-owned subsidiary of the Parent, which established the prices at which beauty products will be purchased by the Company from the supplier for a term of ten years. This supply agreement was subsequently amended and restated in 2018.

Purchases of beauty products from related parties and cost of revenues are as follows (in thousands):

 

 

Predecessor

 

 

 

January 1, 2019 to March 19, 2019

 

Purchases

 

$

2,026

 

Cost of revenues

 

$

1,828

 

The Company received services and support from various functions performed by the Parent until December 31, 2019. 

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Table of Contents

Predecessor and Successor:

The Company entered into a Management Agreement, dated May 25, 2018 and amended and restated October 25, 2018, with Bliss World LLC, an indirect subsidiary of Steiner Leisure, which became effective at the time of the closing of the Business Combination. The Management agreement provides that OSW will manage the operation of nine U.S. health and wellness centers on behalf of Bliss World LLC in exchange for approximately $1.25 million in the aggregate for the year ended December 31, 2019. Subject to certain customary early termination rights, the agreement terminates, with respect to each health and wellness center, upon expiration or termination of the respective lease for each such health and wellness center. As of December 31, 2021, there are no health and wellness centers that remains subject to lease and ongoing operations.

OSW Predecessor entered into an Executive Services Agreement, concurrent with the closing of the Business Combination, with Nemo Investor Aggregator, Limited (“Nemo”), the parent company of Steiner Leisure, which became effective at the time of the closing. The agreement provides that after the closing of the Business Combination, Leonard Fluxman and Stephen Lazarus are to be made available to provide certain transition services to Nemo until December 31, 2020, in exchange for $850,000. Effective March 31, 2020, the Company and Nemo terminated the Executive Services Agreement. The Company has determined it to be in its best interests to have Mr. Fluxman and Mr. Lazarus be unrestricted in any respect regarding their availability to manage the Company’s business, particularly during the current unprecedented conditions caused by the global COVID-19 pandemic. 

On August 3, 2018, OSW entered into a lease of office space in Coral Gables, Florida (the “Coral Gables Lease”) with an initial lease term of twelve years and options to renew for two periods of five years each. Additionally, on August 3, 2018, OSW entered into a sublease of the Coral Gables Lease with SMS, with an initial term of five years and an annual rent amount of approximately $480,000. Effective August 12, 2020, the Company and SMS have terminated the sublease of the Coral Gables Lease (the “Sublease”). 

The total fee for all the aforementioned agreements received by the Company (Successor) in 2021 and 2020 was not material.

18. Profit Sharing Plans

Eligible employees participate in the Company’s profit sharing retirement plan (Successor and Predecessor) and a profit sharing plan of the Parent (Predecessor), which are qualified under Section 401(k) of the Internal Revenue Code. With respect to the Parent’s profit sharing retirement plan, the Company’s Parent makes discretionary annual matching contributions in cash based on a percentage of eligible employee compensation deferrals. The contribution to the plans, included in salary, benefits and payroll taxes in the consolidated statements of operations for the years ended December 31, 2021, 2020 (Successor), for the period from March 20, 2019 to December 31, 2019 (Successor) and for the period from January 1, 2019 to March 19, 2019 (Predecessor) was $0.3 million, $0.3 million, $0.2 million and $0.01 million, respectively.

19. Segment and Geographic Information

The Company operates facilities, provides health and wellness services, and sells beauty products onboard cruise ships and at destination resort health and wellness centers. The Company’s Maritime and Destination Resorts operating segments are aggregated into a single reportable segment based upon similar economic characteristics, products, services, customers and delivery methods. Additionally, the Company’s operating segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the chief executive officer, who is the Company’s chief operating decision maker (CODM), in determining how to allocate the Company’s resources and evaluate performance.

The basis for determining the geographic information below is based on the countries in which the Company operates. The Company is not able to identify the country of origin for the customers to which revenues from cruise ship operations relate. Geographic information is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successor

 

Predecessor

 

 

Consolidated

 

Combined

 

 

Year Ended December 31, 2021

 

Year Ended December 31, 2020

 

March 20,2019 to December 31, 2019

 

 

 

January 1, 2019 to March 19, 2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

$

18,827

 

$

11,585

 

$

25,950

 

 

 

$

6,008

 

Not connected to a country

 

111,346

 

 

102,420

 

 

399,675

 

 

 

 

106,886

 

Other

 

13,858

 

 

6,920

 

 

18,156

 

 

 

 

5,558

 

Total

$

144,031

 

$

120,925

 

$

443,781

 

 

 

$

118,452

 

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Table of Contents

 

 

 

 

 

As of December 31,

 

 

2021

 

 

 

2020

 

Property and equipment, net:

 

 

 

 

 

 

 

 

U.S.

$

5,951

 

 

 

$

7,145

 

Not connected to a country

 

6,298

 

 

 

 

6,242

 

Other

 

1,858

 

 

 

 

3,669

 

Total

$

14,107

 

 

 

$

17,056

 

 

F-42