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ONESPAWORLD HOLDINGS Ltd - Quarter Report: 2023 March (Form 10-Q)

10-Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the three months ended March 31, 2023

OR

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

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)

(242) 322-2670

(Registrant’s telephone number, including area code)

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

Title of each class

Trading

Symbol(s)

Name of each exchange

on which registered

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

OSW

The Nasdaq
Capital Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 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 (§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, a 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of March 31, 2023, the registrant had 79,786,014 voting shares and 13,421,914 non-voting shares of common stock issued and outstanding.

 


Table of Contents

 

OneSpaWorld Holdings Limited

Table of Contents

Page

PART I - FINANCIAL INFORMATION

1

Item 1.

Unaudited Financial Statements

1

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

25

Item 4.

Controls and Procedures

25

PART II - OTHER INFORMATION

26

Item 1.

Legal Proceedings

26

Item 1A.

Risk Factors

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26

Item 4.

Mine Safety Disclosures

26

Item 5.

Other Information

26

Item 6.

Exhibits

26

i


Table of Contents

 

PART I - FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

As of

 

 

 

March 31,
2023

 

 

December 31,
2022

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

  Cash and cash equivalents

 

$

22,799

 

 

$

32,064

 

  Restricted cash

 

 

1,198

 

 

 

1,198

 

  Accounts receivable, net

 

 

41,760

 

 

 

33,558

 

  Inventories, net

 

 

51,080

 

 

 

39,835

 

  Prepaid expenses

 

 

6,404

 

 

 

7,084

 

  Other current assets

 

 

4,189

 

 

 

4,154

 

  Total current assets

 

 

127,430

 

 

 

117,893

 

Property and equipment, net

 

 

14,781

 

 

 

14,517

 

Operating lease right-of-use assets, net

 

 

13,670

 

 

 

13,932

 

Intangible assets, net

 

 

561,261

 

 

 

565,467

 

OTHER ASSETS:

 

 

 

 

 

 

  Deferred tax asset

 

 

 

 

 

227

 

  Other non-current assets

 

 

4,483

 

 

 

5,399

 

  Total other assets

 

 

4,483

 

 

 

5,626

 

  Total assets

 

$

721,625

 

 

$

717,435

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

Accounts payable

 

$

38,634

 

 

$

24,124

 

Accrued expenses

 

 

31,791

 

 

 

39,999

 

Current portion of operating leases

 

 

2,431

 

 

 

2,239

 

Current portion of long-term debt

 

 

2,085

 

 

 

2,085

 

Other current liabilities

 

 

1,366

 

 

 

1,116

 

  Total current liabilities

 

 

76,307

 

 

 

69,563

 

Income tax contingency

 

 

3,939

 

 

 

3,912

 

Warrant liabilities

 

 

74,800

 

 

 

52,900

 

Other long-term liabilities

 

 

2,449

 

 

 

2,449

 

Long-term operating leases

 

 

11,698

 

 

 

12,101

 

Long-term debt, net

 

 

200,504

 

 

 

210,701

 

  Total liabilities

 

 

369,697

 

 

 

351,626

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

SHAREHOLDERS' EQUITY:

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

Voting common stock, $0.0001 par value; 225,000,000 shares authorized, 79,786,014 issued and outstanding at March 31, 2023 and 79,544,055 shares issued and outstanding at December 31, 2022

 

 

8

 

 

 

8

 

Non-voting common stock, $0.0001 par value; 25,000,000 shares authorized, 13,421,914 shares issued and outstanding, at both March 31, 2023 and December 31, 2022

 

 

1

 

 

 

1

 

Additional paid-in capital

 

 

703,418

 

 

 

700,612

 

Accumulated deficit

 

 

(354,513

)

 

 

(338,609

)

Accumulated other comprehensive income

 

 

3,014

 

 

 

3,797

 

Total shareholders' equity

 

 

351,928

 

 

 

365,809

 

Total liabilities and shareholders' equity

 

$

721,625

 

 

$

717,435

 

 

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

1


Table of Contents

 

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

REVENUES:

 

 

 

 

 

 

Service revenues

 

$

150,121

 

 

$

71,162

 

Product revenues

 

 

32,334

 

 

 

16,501

 

Total revenues

 

 

182,455

 

 

 

87,663

 

COST OF REVENUES AND OPERATING EXPENSES:

 

 

 

 

 

 

Cost of services

 

 

126,328

 

 

 

62,667

 

Cost of products

 

 

28,265

 

 

 

14,652

 

Administrative

 

 

3,570

 

 

 

3,833

 

Salaries, benefits and payroll taxes

 

 

8,921

 

 

 

8,727

 

Amortization of intangible assets

 

 

4,206

 

 

 

4,206

 

Total cost of revenues and operating expenses

 

 

171,290

 

 

 

94,085

 

Income (loss) from operations

 

 

11,165

 

 

 

(6,422

)

OTHER (EXPENSE) INCOME

 

 

 

 

 

 

Interest expense, net

 

 

(4,610

)

 

 

(3,407

)

Change in fair value of warrant liabilities

 

 

(21,900

)

 

 

3,400

 

Total other expense

 

 

(26,510

)

 

 

(7

)

Loss before income tax expense (benefit)

 

 

(15,345

)

 

 

(6,429

)

INCOME TAX EXPENSE (BENEFIT)

 

 

559

 

 

 

(113

)

NET LOSS

 

$

(15,904

)

 

$

(6,316

)

NET LOSS PER VOTING AND NON-VOTING SHARE

 

 

 

 

 

 

Basic and diluted

 

$

(0.17

)

 

$

(0.07

)

WEIGHTED-AVERAGE SHARES OUTSTANDING

 

 

 

 

 

 

Basic and diluted

 

 

93,418

 

 

 

92,204

 

 

 

 

 

 

 

 

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

 

2


Table of Contents

 

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

(in thousands)

 

Three Months Ended March 31,

 

 

2023

 

 

2022

 

Net loss

$

(15,904

)

 

$

(6,316

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Foreign currency translation adjustments

 

188

 

 

 

(242

)

Cash flows hedges:

 

 

 

 

 

Net unrealized (loss) gain on derivative

 

(232

)

 

 

3,243

 

Amount realized and reclassified into earnings

 

(739

)

 

 

397

 

Total other comprehensive (loss) income, net of tax

 

(783

)

 

 

3,398

 

Total comprehensive loss

$

(16,687

)

 

$

(2,918

)

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

 

3


Table of Contents

 

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2023

 

 

 

Issued Common Voting Shares

 

 

Issued Common Non-Voting Shares

 

 

Voting and Non-Voting Common Stock

 

 

Additional Paid-in Capital

 

 

Accumulated Other Comprehensive Income

 

 

Accumulated Deficit

 

 

Total Shareholders’ Equity

 

BALANCE, December 31, 2022

 

 

79,544

 

 

 

13,422

 

 

$

9

 

 

$

700,612

 

 

$

3,797

 

 

$

(338,609

)

 

$

365,809

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,904

)

 

 

(15,904

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

2,591

 

 

 

 

 

 

 

 

 

2,591

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

188

 

 

 

 

 

 

188

 

Unrecognized loss on derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(971

)

 

 

 

 

 

(971

)

Proceeds from exercise of warrants

 

 

20

 

 

 

 

 

 

 

 

 

215

 

 

 

 

 

 

 

 

 

215

 

Common shares issued under equity incentive plan

 

 

222

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, March 31, 2023

 

 

79,786

 

 

 

13,422

 

 

$

9

 

 

$

703,418

 

 

$

3,014

 

 

$

(354,513

)

 

$

351,928

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2022

 

 

 

Issued Common Voting Shares

 

 

Issued Common Non-Voting Shares

 

 

Voting and Non-Voting Common Stock

 

 

Additional Paid-in Capital

 

 

Accumulated Other Comprehensive (Loss) Income

 

 

Accumulated Deficit

 

 

Total Shareholders’ Equity

 

BALANCE, December 31, 2021

 

 

78,423

 

 

 

13,422

 

 

$

9

 

 

$

687,660

 

 

$

(1,997

)

 

$

(391,768

)

 

$

293,904

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,316

)

 

 

(6,316

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

3,286

 

 

 

 

 

 

 

 

 

3,286

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(242

)

 

 

 

 

 

(242

)

Unrecognized gain on derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,640

 

 

 

 

 

 

3,640

 

Proceeds from 2021 exercise of public warrants

 

 

 

 

 

 

 

 

 

 

 

55

 

 

 

 

 

 

 

 

 

55

 

Common shares issued under equity incentive plan

 

 

286

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, March 31, 2022

 

 

78,709

 

 

 

13,422

 

 

$

9

 

 

$

691,001

 

 

$

1,401

 

 

$

(398,084

)

 

$

294,327

 

 

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

 

 

 

 

 

 

 

 

4


Table of Contents

 

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$

(15,904

)

 

$

(6,316

)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

5,509

 

 

 

5,477

 

Amortization of deferred financing costs

 

 

324

 

 

 

257

 

Change in fair value of warrant liabilities

 

 

21,900

 

 

 

(3,400

)

Stock-based compensation

 

 

2,591

 

 

 

3,286

 

Provision for doubtful accounts

 

 

5

 

 

 

 

Loss from write-offs of property and equipment

 

 

 

 

 

10

 

Noncash lease expense

 

 

51

 

 

 

20

 

Deferred income taxes

 

 

227

 

 

 

 

Changes in:

 

 

 

 

 

 

Accounts receivable, net

 

 

(8,207

)

 

 

(2,227

)

Inventories, net

 

 

(11,245

)

 

 

(220

)

Prepaid expenses

 

 

680

 

 

 

750

 

Other current assets

 

 

(179

)

 

 

217

 

Other noncurrent assets

 

 

(139

)

 

 

192

 

Accounts payable

 

 

14,510

 

 

 

1,726

 

Accrued expenses

 

 

(8,208

)

 

 

(210

)

Other current liabilities

 

 

250

 

 

 

(56

)

Income tax contingency

 

 

27

 

 

 

(67

)

Net cash provided by (used in) operating activities

 

 

2,192

 

 

 

(561

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Capital expenditures

 

 

(1,319

)

 

 

(919

)

Net cash used in investing activities

 

 

(1,319

)

 

 

(919

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from exercise of warrants

 

 

215

 

 

 

55

 

Repayment on term loan facilities

 

 

(10,521

)

 

 

(212

)

Net cash used in financing activities

 

 

(10,306

)

 

 

(157

)

Effect of exchange rate changes on cash

 

 

168

 

 

 

(246

)

Net decrease in cash and cash equivalents and restricted cash

 

 

(9,265

)

 

 

(1,883

)

Cash and cash equivalents and restricted cash, Beginning of period

 

 

33,262

 

 

 

32,833

 

Cash and cash equivalents and restricted cash, End of period

 

$

23,997

 

 

$

30,950

 

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

5


Table of Contents

 

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(CONTINUED)

(Unaudited)

(in thousands)

 

Three Months Ended March 31,

 

 

2023

 

 

2022

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Income taxes

$

41

 

 

$

35

 

Interest

$

5,123

 

 

$

3,350

 

 

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

6


Table of Contents

 

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

1. ORGANIZATION

OneSpaWorld Holdings Limited (“OneSpaWorld,” the “Company,” “we,” “us,” or “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 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 and skin treatments, fitness, acupuncture, and Medispa 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 resorts, followed by sales of products through the timetospa.com website.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation, Principles of Consolidation

In the opinion of management, the accompanying unaudited condensed 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 quarterly financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been omitted or condensed 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 unaudited condensed consolidated financial statements reflect all adjustments (which are of a normal recurring nature) necessary to present fairly our unaudited financial position, results of operations and cash flows. The unaudited results of operations and cash flows of our interim periods are not necessarily indicative of the results of operations or cash flows that may be expected for the entire fiscal year. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”). The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. Actual results could differ from those estimates. The accompanying unaudited condensed consolidated financial statements include the condensed consolidated balance sheet and statement of operations, comprehensive income (loss), changes in equity, and cash flows of OneSpaWorld. All significant intercompany items and transactions have been eliminated in consolidation.

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 condensed consolidated balance sheet as of March 31, 2023 and 2022 to the total amount presented in our condensed consolidated statements of cash flows for the three months ended March 31, 2023 and 2022 (in thousands):

 

 

Balance as of March 31,

 

 

 

2023

 

2022

 

Cash and cash equivalents

 

$

22,799

 

$

29,054

 

Restricted cash

 

 

1,198

 

 

1,896

 

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

 

$

23,997

 

$

30,950

 

 

Inventories

Inventories, consisting principally of beauty, health and wellness 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 sale to customers. Inventory reserve is recorded to write down the cost of inventory to the estimated market value. No inventory impairment charge was recorded for the three months ended March 31, 2023 and 2022.

Earnings Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income (loss) adjusted for the change in fair value of warrant liabilities, if the impact is dilutive, 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, if their effect is anti-dilutive.

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Table of Contents

 

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 income (loss) per share is computed by dividing net income (loss) by the weighted average number of Voting and Non-Voting common shares outstanding for the period. Diluted income (loss) per share is computed by dividing net income (loss) 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 income (loss) 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):

 

 

Three Months Ended March 31,

 

 

 

2023 (a)

 

 

2022 (a)

 

Numerator:

 

 

 

 

 

 

Net loss

 

$

(15,904

)

 

$

(6,316

)

Denominator:

 

 

 

 

 

 

Weighted average shares outstanding – Basic and diluted

 

 

93,418

 

 

 

92,204

 

Loss per share:

 

 

 

 

 

 

Basic and diluted

 

$

(0.17

)

 

$

(0.07

)

 

(a) Potential common shares under the treasury stock method and the if-converted 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, restricted share units and warrants.

The table below presents the weighted average number of antidilutive potential common shares that are not considered in the calculation of diluted loss per share (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2023

 

2022

 

Sponsor warrants

 

 

8,000

 

 

8,000

 

Public warrants

 

 

16,128

 

 

16,145

 

2020 PIPE warrants

 

 

4,997

 

 

5,000

 

Restricted stock units

 

 

1,181

 

 

1,580

 

Performance stock units

 

 

1,127

 

 

1,044

 

 

 

31,433

 

 

31,769

 

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 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, 2023, with early adoption permitted. The Company is in the process of starting its initial scoping review and 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

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result of the discounting transition. In December 2022, the FASB issued ASU 2022-06, which extended the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. The Company continues to assess the ultimate impact of the future adoption of this guidance, that is, the eventual replacement of the LIBOR benchmark interest rate on its consolidated financial statements.

3. GOODWILL AND INTANGIBLE ASSETS

Intangible assets consist of finite and indefinite life assets. The following is a summary of the Company’s intangible assets as of March 31, 2023 (in thousands, except amortization period):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost

 

 

Accumulated Amortization and Impairment

 

 

Net Balance

 

 

Weighted Average Amortization Period (in years)

 

Retail concession agreements

$

604,700

 

 

$

(62,569

)

 

$

542,131

 

 

 

39

 

Destination resort agreements

 

17,900

 

 

 

(4,778

)

 

 

13,122

 

 

 

15

 

Trade name

 

6,200

 

 

 

(700

)

 

 

5,500

 

 

Indefinite-life

 

Licensing agreement

 

1,000

 

 

 

(492

)

 

 

508

 

 

 

8

 

 

$

629,800

 

 

$

(68,539

)

 

$

561,261

 

 

 

 

The following is a summary of the Company’s intangible assets as of December 31, 2022 (in thousands, except amortization period):

 

 

Cost

 

Accumulated Amortization and Impairment

 

Net Balance

 

 

Weighted Average Amortization Period (in years)

 

Retail concession agreements

$

604,700

 

$

(58,692

)

$

546,008

 

 

 

39

 

Destination resort agreements

 

17,900

 

 

(4,480

)

 

13,420

 

 

 

15

 

Trade name

 

6,200

 

 

(700

)

 

5,500

 

 

Indefinite-life

 

Licensing agreement

 

1,000

 

 

(461

)

 

539

 

 

 

8

 

 

$

629,800

 

$

(64,333

)

$

565,467

 

 

 

 

The Company amortizes intangible assets with definite lives on a straight-line basis over their estimated useful lives. Amortization expense for the three months ended March 31, 2023 and 2022 was $4.2 million for each period, respectively. Amortization expense is estimated to be $16.8 million in each of the next five years beginning in 2023.

 

4. LONG-TERM DEBT

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate As of

 

 

 

As of

 

 

 

March 31,
2023

 

December 31,
2022

 

Maturities Through

 

March 31,
2023

 

 

 

December 31,
2022

 

First lien term loan facility

 

8.8%

 

8.3%

 

2026

 

$

200,160

 

 

 

$

200,681

 

Second lien term loan facility

 

12.3%

 

11.8%

 

2027

 

 

5,000

 

 

 

 

15,000

 

Total debt

 

 

 

 

 

 

 

$

205,160

 

 

 

$

215,681

 

Less: unamortized debt issuance cost

 

 

 

 

 

 

 

 

(2,571

)

 

 

 

(2,895

)

Total debt, net of unamortized debt issuance cost

 

 

 

 

 

 

 

$

202,589

 

 

 

$

212,786

 

Less: current portion of long-term debt

 

 

 

 

 

 

 

 

(2,085

)

 

 

 

(2,085

)

Long-term debt, net

 

 

 

 

 

 

 

$

200,504

 

 

 

$

210,701

 

The following are scheduled principal repayments on long-term debt as of March 31, 2023 for each of the next five years (in thousands):

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Year

 

Amount

 

2023

 

$

2,085

 

2024

 

 

2,085

 

2025

 

 

2,085

 

2026

 

 

193,905

 

2027

 

 

5,000

 

Total

 

$

205,160

 

 

 

 

 

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 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. During the fourth quarter of 2022 and the first quarter of 2023, we prepaid principal amounts of $10 million during each period of our Second Lien Term Loan Facility.

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 March 31, 2023 and December 31, 2022, 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 inter creditor provisions among the first and second lien secured parties, which would have a material adverse impact to our operations and liquidity.

Borrowing Capacity

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As of March 31, 2023, our available borrowing capacity under the First Lien Revolving Facility was $20 million. Utilization of the borrowing capacity was as follows (in thousands):

 

 

Borrowing Capacity

 

 

Amount Borrowed

 

First Lien Revolving Facility

 

$

20,000

 

 

$

-

 

 

5. WARRANT LIABILITIES

Sponsor Warrants

As of March 31, 2023 and December 31, 2022, eight million Sponsor Warrants were issued and outstanding.

Public Warrants

As of March 31, 2023 and December 31, 2022, 16,128,238 and 16,145,279, respectively, Public Warrants were issued and outstanding.

2020 PIPE Warrants

As of March 31, 2023 and December 31, 2022, 4,996,667 and 5,000,000, respectively, 2020 PIPE Warrants were issued and outstanding.

Exchange Agreements

Between March 13 and March 15, 2023, the Company entered into separate privately negotiated warrant exchange agreements (the “Exchange Agreements”) with certain holders of its Public and Sponsor Warrants to exchange for the Company’s common shares: (i) 15,286,824 Public Warrants, (ii) 928,003 Sponsor Warrants from certain non-affiliates, and (iii) 3,055,906 Sponsor Warrants from certain affiliates.

The exchange ratio for the Public and Sponsor Warrants from non-affiliates is determined over a thirty-trading day period using a volume-weighted average price measurement. For each Public and Sponsor Warrant from non-affiliates exchanged, the Company will issue a number of common shares equal to the quotient of the warrant price of $1.912 divided by the common share price of $10.74 or an initial exchange ratio of 0.178, with the maximum exchange ratio at the completion of the 30-day volume-weighted average price (“VWAP”) period being no greater than 0.220.

The Sponsor warrants from affiliates are exchanged at a fixed exchange ratio of 0.175. Such ratio reflects a price per warrant of $1.62 (representing a 10% discount to the price per warrant used in the exchange ratio for the Public Warrants and non-affiliate holders of Sponsor Warrants) and a price of $10.74 per Common Share. Affiliated holders of Sponsor Warrants also agreed not to transfer Common Shares issuable upon such exchange for a period of 60 days commencing on March 14, 2023. The Exchange Agreements executed in connection with such exchanges contain terms substantially similar to the terms set forth the Public Warrants.

If certain corporate events that constitute a Fundamental Change (as defined in the Exchange Agreements) occur prior to the Closing Date (as defined in the Exchange Agreements), then the Public and Sponsor Warrant holders may in their sole discretion, but only prior to the Closing Date, terminate the Exchange Agreements and not participate in the Exchange at any time after a Fundamental Change event. Based on Accounting Standards Codification (“ASC”) 815-40, Derivatives and Hedging - Contracts in an Entity’s Own Equity (ASC Topic 815), instruments that do not meet the criteria to be considered indexed to an entity’s own stock shall be classified as liabilities. The Company has concluded that the Warrants exchanged pursuant the Exchange Agreements do not meet the conditions to be classified as equity under the Standard until the exchange occurs. Therefore, the Exchanged Warrants continue to be classified as liabilities at the estimated fair values as of March 31, 2023, and the changes in the estimated fair value were reported in the statement of operations.

The exchanges closed on April 25 and 26, 2023. Following the closing of the above transactions, the Company exchanged an aggregate of 15,286,824 Public Warrants (or 95% of the outstanding Public Warrants) and 3,983,909 Sponsor Warrants (or 50% of the outstanding Sponsor Warrants). See Note 13 “Subsequent Events” for further detail.

6. STOCK-BASED COMPENSATION

 

 

The share-based compensation expense for the three months ended March 31, 2023 and 2022 was $2.6 million and $3.3 million, respectively, which is included as a component of salaries, benefits and payroll taxes in the accompanying condensed consolidated statements of operations.

 

The following is a summary of RSUs activity for the three months ended March 31, 2023:

 

RSUs Activity

 

Number of Awards

 

 

Weighted-Average Grant Date Fair Value

 

Non-vested share units as of December 31, 2022

 

 

1,284,570

 

 

$

9.28

 

Vested

 

 

(105,072

)

 

 

11.85

 

Non-vested share units as of March 31, 2023

 

 

1,179,498

 

 

$

9.05

 

 

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The following is a summary of PSUs activity for the three months ended March 31, 2023:

 

PSUs activity

 

Number of Performance -Based Awards

 

 

Weighted-Average Grant Date Fair Value

 

 

 

Non-vested share units as of December 31, 2022

 

 

792,108

 

 

$

10.48

 

 

 

Granted

 

 

75,715

 

 

 

10.17

 

 

 

Vested

 

 

(174,553

)

 

 

11.36

 

 

 

Non-vested share units as of March 31, 2023

 

 

693,270

 

 

$

10.22

 

 

 

 

7. 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 material difference in the timing of recognition across reporting periods.

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 an estimate of 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 condensed consolidated balance sheets and was $0.7 million and $0.8 million, as of March 31, 2023 and December 31, 2022, 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 March 31, 2023 and December 31, 2022.

Contract Balances

Receivables from the Company’s contracts with customers are included within accounts receivables, net. 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 March 31, 2023, and December 31, 2022, our receivables from contracts with customers were $41.8 million and $33.6 million, respectively. Our contract liabilities for gift cards and customer loyalty programs are described above.

Disaggregation of Revenue and Segment Reporting

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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):

 

 

 

 

Three Months Ended March 31,

 

 

2023

 

2022

 

Service revenues:

 

 

 

 

Maritime

$

140,333

 

$

63,361

 

Destination resorts

 

9,788

 

 

7,801

 

Total service revenues

 

150,121

 

 

71,162

 

Product revenues:

 

 

 

 

Maritime

 

31,021

 

 

15,164

 

Destination resorts

 

723

 

 

695

 

Timetospa.com

 

590

 

 

642

 

Total product revenues

 

32,334

 

 

16,501

 

 

 

 

 

 

Total revenues

$

182,455

 

$

87,663

 

 

8. SEGMENT AND GEOGRAPHICAL INFORMATION

The Company operates facilities on cruise ships and in destination resort spas, which provide health and wellness services and sell beauty products onboard cruise ships and in destination resort spas. 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 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):

 

 

 

Three Months Ended March 31,

 

 

 

2023

 

2022

 

Revenues:

 

 

 

 

 

U.S.

 

$

5,078

 

$

6,396

 

Other countries

 

 

6,216

 

 

4,475

 

Not connected to a country

 

 

171,161

 

 

76,792

 

Total

 

$

182,455

 

$

87,663

 

 

 

 

As of

 

 

 

March 31,
2023

 

 

December 31,
2022

 

Property and equipment, net:

 

 

 

 

 

 

U.S.

 

$

5,313

 

 

$

5,363

 

Other countries

 

 

1,896

 

 

 

1,728

 

Not connected to a country

 

 

7,572

 

 

 

7,426

 

Total

 

$

14,781

 

 

$

14,517

 

 

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9. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

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

 

 

Accumulated Other Comprehensive (Loss) Income for the Three Months Ended March 31, 2023

 

Accumulated Other Comprehensive (Loss) Income for the Three Months Ended March 31, 2022

 

Foreign Currency Translation Adjustments

 

 

Changes Related to Cash Flow Derivative Hedge (1)

 

 

Accumulated Other Comprehensive (Loss) Income

 

 

Foreign Currency Translation Adjustments

 

 

Changes Related to Cash Flow Derivative Hedge (1)

 

 

Accumulated Other Comprehensive Loss

 

 

Accumulated other comprehensive loss, beginning of period

$

(1,229

)

 

$

5,026

 

 

$

3,797

 

 

$

(673

)

 

$

(1,324

)

 

$

(1,997

)

 

Other comprehensive (loss) income before reclassifications

 

188

 

 

 

(232

)

 

 

(44

)

 

 

(242

)

 

 

3,243

 

 

 

3,001

 

 

Amounts reclassified from accumulated other comprehensive (loss) income

 

-

 

 

 

(739

)

 

 

(739

)

 

 

-

 

 

 

397

 

 

 

397

 

 

Net current period other comprehensive (loss) income

 

188

 

 

 

(971

)

 

 

(783

)

 

 

(242

)

 

 

3,640

 

 

 

3,398

 

 

Accumulated other comprehensive (loss) income, end of period

$

(1,041

)

 

$

4,055

 

 

$

3,014

 

 

$

(915

)

 

$

2,316

 

 

$

1,401

 

 

(1) See Note 10.

 

10. FAIR VALUE MEASUREMENTS AND DERIVATIVES

Fair Value Measurements

Cash and cash equivalents at March 31, 2023 and December 31, 2022 are comprised of cash and are categorized as Level 1 instruments. The Company maintains cash with various high-quality financial institutions. Restricted cash at March 31, 2023 and December 31, 2022 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 March 31, 2023 and December 31, 2022 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):

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

Carrying Value

 

 

Estimated Fair Value

 

 

Carrying Value

 

 

Estimated Fair Value

 

Cash

 

$

22,799

 

 

$

22,799

 

 

$

32,064

 

 

$

32,064

 

Restricted cash

 

 

1,198

 

 

 

1,198

 

 

 

1,198

 

 

 

1,198

 

Total cash

 

$

23,997

 

 

$

23,997

 

 

$

33,262

 

 

$

33,262

 

First lien term loan facility

 

$

200,160

 

 

$

191,500

 

 

$

200,681

 

 

$

192,770

 

Second lien term loan facility

 

 

5,000

 

 

 

4,630

 

 

 

15,000

 

 

 

14,500

 

Total debt (a)

 

$

205,160

 

 

$

196,130

 

 

$

215,681

 

 

$

207,270

 

(a)
The debt amounts above do not include the impact of the interest rate swap or debt issuance costs.

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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 March 31, 2023

 

 

Fair Value Measurements at December 31, 2022

 

Description

 

Balance Sheet Location

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments (1)

 

Other current assets

 

$

2,974

 

 

$

-

 

 

$

2,974

 

 

$

-

 

 

$

3,117

 

 

$

-

 

 

$

3,117

 

 

$

-

 

Derivative financial instruments (1)

 

Other non-current assets

 

$

1,082

 

 

 

-

 

 

 

1,082

 

 

 

-

 

 

 

1,909

 

 

 

-

 

 

 

1,909

 

 

 

-

 

Total assets

 

 

 

$

4,056

 

 

$

-

 

 

$

4,056

 

 

$

-

 

 

$

5,026

 

 

$

-

 

 

$

5,026

 

 

$

-

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

Warrant liabilities

 

 

74,800

 

 

 

-

 

 

 

74,800

 

 

 

-

 

 

 

52,900

 

 

 

-

 

 

 

52,900

 

 

 

-

 

Total liabilities

 

 

 

$

74,800

 

 

$

-

 

 

$

74,800

 

 

$

-

 

 

$

52,900

 

 

$

-

 

 

$

52,900

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)
Consists of an interest rate swap.

 

Warrants

 

Public Warrants and 2020 PIPE Warrants

 

The fair value of the Public Warrants and 2020 PIPE Warrants are considered a Level 2 valuation and are determined using the Monte Carlo model. In March 2023, the Company entered into Exchange Agreements with certain holders of its Public Warrants (See Note 5). Certain assumptions were used to determine the fair value of the Public Warrants to be Exchanged ("Public Warrants to be Exchanged"). The significant assumptions which the Company used in the model are:

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

Public Warrants to Be Exchanged

 

Public Warrants

 

 

2020 PIPE Warrants

 

 

Public Warrants

 

 

2020 PIPE Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Stock price

 

$

11.99

 

$

11.99

 

 

$

11.99

 

 

$

9.33

 

 

$

9.33

 

 Strike price

 

$

-

 

$

11.50

 

 

$

5.75

 

 

$

11.50

 

 

$

5.75

 

 Remaining life (in years)

 

 

0.06

 

 

0.97

 

 

 

2.20

 

 

 

1.22

 

 

 

2.45

 

 Volatility

 

 

19

%

 

40

%

 

 

45

%

 

 

44

%

 

 

44

%

 Interest rate

 

 

4.68

%

 

4.60

%

 

 

3.97

%

 

 

4.61

%

 

 

4.28

%

 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-Sholes model. In March 2023, the Company entered into Exchange Agreements with certain holders of its Sponsor Warrants (See Note 5). Certain assumptions were used to determine the fair value of the Sponsor Warrants to be Exchanged ("Sponsor Warrants to be exchanged"). The significant assumptions which the Company used in the model are:

 

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March 31, 2023

 

 

December 31, 2022

 

 

 

Sponsor Warrants to Be Exchanged

 

Sponsor Warrants

 

 

Sponsor Warrants

 

 Stock price

 

$

11.99

 

$

11.99

 

 

$

9.33

 

 Strike price

 

$

-

 

$

11.50

 

 

$

11.50

 

 Remaining life (in years)

 

0.06

 

 

0.97

 

 

 

1.22

 

 Volatility

 

18.80%

 

 

40

%

 

 

44

%

 Interest rate

 

4.68%

 

 

4.60

%

 

 

4.61

%

 Dividend yield

 

0.0%

 

 

0.0

%

 

 

0.0

%

 

Derivatives

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.

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 March 31, 2023 and December 31, 2022, the notional amount is $95.4 million and $101.0 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 $1.0 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.

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

 

 

Three Months Ended March 31,

 

 

 

 

2023

 

 

2022

 

 

(Losses) gain recognized in accumulated other comprehensive income (loss)

 

$

(232

)

 

$

3,243

 

 

 

 

 

 

 

 

 

 

(Losses) gains reclassified from accumulated other comprehensive income (loss) to interest expense

 

$

(739

)

 

$

397

 

 

 

 

 

 

 

 

 

 

 

11. INCOME TAXES

For the three months ended March 31, 2023 and 2022, the Company recorded an income tax expense (benefit) of $0.6 million and $(0.1) million, respectively. The difference between the expected provision for income taxes using the 21% U.S. federal income tax rate 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 withholding taxes due in various jurisdictions. We believe that it is reasonably possible that a decrease of up to $3.4 million in uncertain tax benefits related to foreign tax exposures may be necessary within the coming year as a result of our potential participation in a tax amnesty program to settle the liability.

12. COMMITMENTS AND CONTINGENCIES

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 has recorded an accrual of $1.2 million for this matter as of March 31, 2023 and December 31, 2022 and is included in “Accrued expenses” on the Company's condensed consolidated balance sheets. The Company believes the ultimate outcome of this matter will not have a material adverse impact on the consolidated financial statements.

13. SUBSEQUENT EVENTS

On April 25, 2023, the Company closed the exchange of the Sponsor Warrants. Certain directors and affiliates of the Company exchanged 3,055,906 Sponsor Warrants at a fixed exchange ratio of 0.175 Common Shares per Sponsor Warrant for an aggregate of 534,780 Common Shares, and non-affiliated holders of Sponsor Warrants exchanged 928,003 Sponsor Warrants at an exchange ratio of 0.2047 Common Shares per Sponsor Warrant for an aggregate of 189,958 Common Shares. The exchange ratio was determined pursuant to the Exchange Agreements and was based on the 30-day VWAP of Common Shares, ending on April 24, 2023. On April 26, 2023, the Company closed the exchange of the Public Warrants, and holders of Public Warrants exchanged 15,286,824 Public Warrants at an exchange ratio of 0.2047 Common Shares per Public Warrant for an aggregate of 3,129,200 Common Shares. As a result of the closing of the above-described transactions, the Company has exchanged an aggregate of approximately 95% of the outstanding Public Warrants and approximately 50% of the outstanding Sponsor Warrants. Following the transaction, 83,697,994 voting shares and 13,421,914 non-voting shares of common stock are issued and outstanding. See Note 5 "Warrant Liabilities" for further detail.

On April 6, 2023, we repaid an aggregate principal amount of $5.0 million on our Second Lien Term Loan Facility, together with all accrued interest thereon. Accordingly, as of the date of this quarterly report, our Second Lien Term Loan Facility has been fully repaid.

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

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” and in “Risk Factors” in our Form 10-K for the fiscal year ended December 31, 2022. We assume no obligation to update any of these forward-looking statements.

During the first quarter of 2023, we continued to execute the resumption of our health and wellness center operations on cruise ships and in destination resorts, and have substantially returned to normal operations. Despite the impacts of the recent pandemic on the travel leisure industry and our business, we believe we have certain strengths that have positioned us as a leader in the hospitality-based health and wellness industry and as a participant in the continued recovery of the cruise and hospitality industries.

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 offer 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 more than 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.

Key Performance Indicators

In assessing the performance of our business, we consider key performance indicators used by management, including, among others:

Average Ship Count. The number of ships, on average during the period, on which we operate health and wellness centers. This is a key metric that impacts revenue and profitability and reflects the fact that during the period ships were in and out of service, and is calculated by adding the total number of days that each of the ships generated revenue during the period, divided by the number of calendar days during the period.
Period End Ship Count: The number of ships 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.
Average Resort Count. The number of destination resorts on average during the period in which we operate the health and wellness centers. This is a key metric that impacts revenue and profitability and reflects the fact that during the period destination resort health and wellness centers were in and out of service, and is calculated by adding the total number of days that each destination resort health and wellness center generated revenue during the period, divided by the number of calendar days during the period.
Period End Resort Count. The number of destination resorts at period end on which we operate the health and wellness centers. This is a key metric that impacts revenue and profitability.

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Average Weekly Revenue Per Destination Resort. 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 geographic mix of health and wellness centers in operation for such period. Typically our U.S. and Caribbean health and wellness centers are larger and produce substantially more revenues per location than our Asian centers. Additionally, average weekly revenue can also be negatively impacted by renovations of our destination resort health and wellness centers.

 

 

Three Months
Ended
March 31

 

 

 

2023

 

 

2022

 

Average Ship Count

 

 

173

 

 

 

104

 

Period End Ship Count

 

 

179

 

 

 

170

 

Average Weekly Revenue Per Ship

 

$

77,076

 

 

$

58,775

 

Average Revenue Per Shipboard Staff Per Day

 

$

542

 

 

$

449

 

Average Resort Count

 

 

48

 

 

 

47

 

Period End Resort Count

 

 

51

 

 

 

51

 

Average Weekly Revenue Per Resort

 

$

16,973

 

 

$

13,992

 

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 and body care treatments, hair care treatments, skin and facial treatments, nutritional/weight management consultations, teeth whitening, ayurvedic treatments, acupuncture, medi-spa, and fitness personal training 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 skincare, body care, hair care, orthotics, and nutritional supplement products, among others, to cruise ship passengers, destination resort guests and timetospa.com customers.

Cost of services. Cost of services consists primarily of an allocable portion of payments to cruise line partners (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, wages paid directly to destination resort employees, payments to destination resort partners, the allocable cost of products consumed in the rendering of services, 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 corresponding increases or decreases 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 line 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 corresponding increases or decreases in product revenues and includes impairment of the carrying value 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.

Salaries, benefits and payroll taxes. Salaries, 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 prior transactions.

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Table of Contents

 

Other income (expense), net. Other income (expense) consists of interest income, interest expense and changes in the fair value of warrant liabilities.

Income tax expense (benefit). Income tax expense (benefit) includes current and deferred federal income tax expenses, as well as state and local income taxes.

Net income (loss). Net income (loss) consists of income (loss) from operations less other income (expense) and income tax expense (benefit).

Revenue Drivers and Business Trends

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

 

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 recent pandemic, 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 on innovating and implementing 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 profitable 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 and advanced facial services, resulting in higher guest spending.
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 and guest socioeconomic factors.
The mix of cruise itineraries. Revenue generated per shipboard health and wellness center is influenced by cruise itinerary, including the number of sea days versus port days, which impacts center utilization, and the geographic sailing region, which may impact ship category and offerings of services and products to align with forecast 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 of health and wellness services. We directly market and promote to onboard passengers as a result of enhanced collaboration with select cruise line partners. We also utilize our proprietary health and wellness services pre-booking and pre-payment technology platforms integrated with certain of 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, particularly during the August through October period, which may be increasing in frequency and intensity due to climate change.
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” in Part II, Item 1A of the Company’s 2022 Form 10-K.

 

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


 

 

 

Recent Accounting Pronouncements

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

Results of Operations

 

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Three Months
Ended
March 31, 2023

 

 

% of Total
Revenue

 

 

Three Months
Ended
March 31, 2022

 

 

% of Total
Revenue

 

(dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

Service revenues

 

$

150,121

 

 

 

82

%

 

$

71,162

 

 

 

81

%

Product revenues

 

 

32,334

 

 

 

18

%

 

 

16,501

 

 

 

19

%

Total revenues

 

 

182,455

 

 

 

100

%

 

 

87,663

 

 

 

100

%

COST OF REVENUES AND OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

 

126,328

 

 

 

69

%

 

 

62,667

 

 

 

71

%

Cost of products

 

 

28,265

 

 

 

15

%

 

 

14,652

 

 

 

17

%

Administrative

 

 

3,570

 

 

 

2

%

 

 

3,833

 

 

 

4

%

Salaries, benefits and payroll taxes

 

 

8,921

 

 

 

5

%

 

 

8,727

 

 

 

10

%

Amortization of intangible assets

 

 

4,206

 

 

 

2

%

 

 

4,206

 

 

 

5

%

Total cost of revenues and operating expenses

 

 

171,290

 

 

 

94

%

 

 

94,085

 

 

 

107

%

Income (loss) from operations

 

 

11,165

 

 

 

6

%

 

 

(6,422

)

 

 

-7

%

OTHER (EXPENSE) INCOME

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(4,610

)

 

 

-3

%

 

 

(3,407

)

 

 

-4

%

Change in fair value of warrant liabilities

 

 

(21,900

)

 

 

-12

%

 

 

3,400

 

 

 

4

%

Total other expense

 

 

(26,510

)

 

 

-15

%

 

 

(7

)

 

 

-0

%

Loss before income tax expense (benefit)

 

 

(15,345

)

 

 

-8

%

 

 

(6,429

)

 

 

-7

%

INCOME TAX EXPENSE (BENEFIT)

 

 

559

 

 

 

0

%

 

 

(113

)

 

 

0

%

NET LOSS

 

$

(15,904

)

 

 

-9

%

 

$

(6,316

)

 

 

-7

%

NET LOSS PER VOTING AND NON-VOTING SHARE

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.17

)

 

 

 

 

$

(0.07

)

 

 

 

WEIGHTED-AVERAGE SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

93,418

 

 

 

 

 

 

92,204

 

 

 

 

Comparison of Results for the Three Months Ended March 31, 2023 and 2022

Results of operations for the first quarter of 2023 continued to accelerate from 2022 as the Company has substantially returned to normalized operations since the advent of the COVID-19 pandemic.

 

Revenues. Revenues for the three months ended March 31, 2023 and 2022 were $182.5 million and $87.7 million, respectively. The increase was primarily attributable to our average ship count of 173 health and wellness centers onboard ships operating during the quarter compared with our average ship count of 104 health and wellness centers onboard ships operating during the first quarter of 2022 and the occupancy of the average ships in service in the respective quarters.

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

Service revenues. Service revenues for the three months ended March 31, 2023 were $150.1 million, an increase of $79.0 million, or 111%, compared to $71.2 million for the three months ended March 31, 2022.
Product revenues. Product revenues for the three months ended March 31, 2023 were $32.3 million, an increase of $15.8 million, or 96%, compared to $16.5 million for the three months ended March 31, 2022.

Cost of services. Cost of services for the three months ended March 31, 2023 were $126.3 million, an increase of $63.7 million, or 102%, compared to $62.7 million for the three months ended March 31, 2022. The increase was primarily attributable to costs associated with increased service revenues of $150.1 million in the quarter from our operating health and wellness centers at sea and on land, compared with service revenues of $71.2 million in the first quarter of 2022.

Cost of products. Cost of products for the three months ended March 31, 2023 were $28.3 million, an increase of $13.6 million, or 93%, compared to $14.7 million for the three months ended March 31, 2022. The increase was primarily attributable to costs associated with increased product revenues of $32.3 million in the quarter from our operating health and wellness centers at sea and on land, compared to product revenues of $16.5 million in the first quarter of 2022.

Administrative. Administrative expenses for the three months ended March 31, 2023 were $3.6 million, a decrease of $0.2 million, or 7%, compared to $3.8 million for the three months ended March 31, 2022. The decrease was primarily attributable to a reduction of costs in the three months ended March 31, 2023 in connection to administrative costs related to recruitment, travel, housing and training of shipboard employees at our London Wellness Academy and professional fees.

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Salaries, benefits and payroll taxes. Salaries, benefits and payroll taxes for the three months ended March 31, 2023 were $8.9 million, an increase of $0.2 million, or 2%, compared to $8.7 million for the three months ended March 31, 2022. The increase was primarily attributable the measured increase in corporate head count to account for the return to normal operations.

Amortization of intangible assets. Amortization of intangible assets for the three months ended March 31, 2023 and 2022 was $4.2 million for both periods.

Other (expense) income. Other (expense) income includes interest expense and change in the fair value of the warrant liabilities. Interest expense for the three months ended March 31, 2023 was ($4.6) million, an increase of $1.2 million, or 35%, compared to ($3.4) million for the three months ended March 31, 2022. The increase was primarily attributable to the interest rate increase partially offset by lower debt balances. The change in fair value of the outstanding warrants during the three months ended March 31, 2023 was a loss of ($21.9) million compared to a gain of $3.4 million during the three months ended March 31, 2022. The change in fair value of warrant liabilities is the result of changes in market prices deriving the value of the financial instruments.

Income tax expense (benefit) Income tax expense (benefit) for the three months ended March 31, 2023 was $0.6 million, an increase of $0.7 million, or 595%, compared to an income tax benefit of ($0.1) million for the three months ended March 31, 2022. The increase was primarily driven by a change in valuation allowance, withholding taxes due in various jurisdictions and the decrease in availability of net operating losses.

Net loss. Net loss for the three months ended March 31, 2023 was ($15.9) million, a decrease of $9.6 million, or 152%, compared to a net loss of ($6.3) million for the three months ended March 31, 2022. The decrease was primarily attributable to the negative change in fair value of warrant liabilities as a result of the increased share price. The change in fair value of warrant liabilities was a loss of ($21.9) million in the quarter, compared to a gain of $3.4 million in the first quarter of 2022. Excluding the change in fair value of warrant liabilities the improvement in the first quarter of 2023 was primarily a result of the $17.6 million change in income from operations derived primarily from the increase in the number of wellness centers onboard ships operating during the quarter.

Liquidity and Capital Resources

Overview

Prior to the COVID-19 pandemic, we funded our operations principally with cash flow from operations. Upon the onset of the COVID-19 pandemic in March 2020, we took prudently aggressive actions to increase our 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) completing the 2020 Private Placement on June 12, 2020; (v) borrowing $7 million, net, on our First Lien Revolving Facility, leaving $13 million available and undrawn; and (vi) entering into an agreement to allow for the Company to operate its ATM Program, which permitted the Company to sell, from time to time, common shares up to an aggregate offering price of $50.0 million, pursuant to which, as of July 31, 2022, shares representing approximately $10 million remained available for sale under the Agreement, and which Agreement was terminated by the Company on August 1, 2022.

Since the substantial easing of COVID-19 pandemic restrictions, our principal uses for liquidity have been funding our return to service on 179 cruise ships and in 51 destination resorts, associated working capital investment, debt service and full repayment of our Second Lien Term Loan Facility.

Our results continued to experience significant recovery during the three months ended March 31, 2023 when compared to the prior year period, building upon the positive net operating cash flows. Taking into account the actions 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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Cash Flows

The following table shows summary cash flow information for the three months ended March 31, 2023 and 2022.

 

 

 

 

 

(in thousands)

 

Three Months
Ended
March 31, 2023

 

 

Three Months
Ended
March 31, 2022

 

 

 

 

 

 

 

 

Net loss

 

$

(15,904

)

 

$

(6,316

)

Depreciation and amortization

 

 

5,509

 

 

 

5,477

 

Amortization of deferred financing costs

 

 

324

 

 

 

257

 

Change in fair value of warrant liabilities

 

 

21,900

 

 

 

(3,400

)

Stock-based compensation

 

 

2,591

 

 

 

3,286

 

Provision for doubtful accounts

 

 

5

 

 

 

 

Loss from write-offs of property and equipment

 

 

 

 

 

10

 

Noncash lease expense

 

 

51

 

 

 

20

 

Deferred income taxes

 

 

227

 

 

 

 

Change in working capital

 

 

(12,511

)

 

 

105

 

Net cash provided by (used in) operating activities

 

 

2,192

 

 

 

(561

)

Capital expenditures

 

 

(1,319

)

 

 

(919

)

Net cash used in investing activities

 

 

(1,319

)

 

 

(919

)

Proceeds from exercise of warrants

 

 

215

 

 

 

55

 

Repayment on term loan facilities

 

 

(10,521

)

 

 

(212

)

Net cash used in financing activities

 

 

(10,306

)

 

 

(157

)

Effect of exchange rate changes on cash

 

 

168

 

 

 

(246

)

Net decrease in cash and cash equivalents and restricted cash

 

$

(9,265

)

 

$

(1,883

)

Comparison of Results for the Three Months Ended March 31, 2023 and 2022

Operating activities. Our net cash provided by (used in) operating activities for the three months ended March 31, 2023 and 2022 were $2.2 million and $(0.6) million, respectively. In the three months ended March 31, 2023, net operating cash flows continue to accelerate from 2022, as the Company has substantially returned to normal operations. In the three months ended March 31, 2022, the Company incurred a deficit in net cash provided by (used in) operating activities, as the Company had substantially reduced revenues from operations onboard cruise ships due to the COVID-19 pandemic, while still incurring operating expenses.

Investing activities. Our net cash used in investing activities for the three months ended March 31, 2023 and 2022 were $1.3 million and $0.9 million, respectively. In the three months ended March 31, 2023, the Company incurred more capital expenditures than in the three months ended March 31, 2022, as the Company has substantially returned to normal operations since the advent of the COVID-19 pandemic.

Financing activities. Our net cash used in financing activities for the three months ended March 31, 2023 and 2022 were $10.3 million and $0.2 million, respectively. For the three months ended March 31, 2023, the Company repaid $0.5 million on the First Lien Term Loan Facility and $10.0 million on the Second Lien Term Loan Facility and received proceeds from the exercise of public warrants of $0.2 million. For the three months ended March 31, 2022, the Company repaid $0.2 million on the First Lien Term Loan Facility and received proceeds from the exercise of public warrants of $0.1 million.

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, particularly during the August through October period, which may be increasing in frequency and intensity due to climate change.

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Contractual Obligations

As of March 31, 2023, our future contractual obligations have not changed significantly from the amounts disclosed in our 2022 Form 10-K.

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated unaudited financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated unaudited financial statements and the reported amount of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. At least quarterly, management reevaluates its judgments and estimates, which are based on historical experience, current trends and various other assumptions that are believed to be reasonable under the circumstances.

Our critical accounting policies are included in our 2022 Form 10-K. We believe that there have been no significant changes during the three months ended March 31, 2023 to the critical accounting policies disclosed in our 2022 Form 10-K.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, income or expenses, results of operations, liquidity, capital expenditures or capital resources.

Inflation and Economic Conditions

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 substantially negatively impacted our business, operations, results of operations and financial condition in 2022 and 2021. Recurrence of the more severe aspects of the recent adverse economic conditions, including a reescalation of the COVID-19 outbreak, increases in inflation rates and interest rates, as well as periods of 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.

 

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, but are not limited to, statements regarding:

the impact of COVID-19 on the industries and the markets in which the Company operates and the Company’s business, 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;

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Table of Contents

 

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 our 2022 Form 10-K, 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For a discussion of our market risks, refer to Part II, Item 7A. - Quantitative and Qualitative Disclosures about Market Risk in our 2022 Form 10-K.

Item 4. Controls and Procedures

We carried out an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15(d)-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 March 31, 2023.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the three months ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Table of Contents

 

PART II - OTHER INFORMATION

None.

Item 1A. Risk Factors

There have been no material changes in the risk factors previously disclosed in the Company’s 2022 Form 10-K, Part II, Item 1A. “Risk Factors.” However, the risks and uncertainties that we face are not limited to those set forth in the 2022 Form 10-K. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our securities.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

 

Exhibit

No.

 

 

 

 

 

  31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

  31.2

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

  32.1

Section 1350 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

  32.2

Section 1350 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

 

101.SCH*

Inline XBRL Taxonomy Extension Schema Document

 

 

 

 

101.CAL*

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

101.DEF*

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

101.LAB*

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

101.PRE*

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

104

 

The cover page for the Company’s Quarterly Report on Form 10-Q has been formatted in Inline XBRL and contained in Exhibit 101

 

 

* To be furnished by amendment within the 30-day grace period provided by Rule 405(a)(2) of Regulation S-T.

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SIGNATURES

Pursuant to the requirements 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.

Dated: May 5, 2023

ONESPAWORLD HOLDINGS LIMITED

 

 

By:

/s/ Leonard Fluxman

 

Leonard Fluxman

 

Executive Chairman, President, Chief Executive Officer and Director

 

Principal Executive Officer

 

 

By:

/s/ STEPHEN B. LAZARUS

 

Stephen B. Lazarus

 

Chief Operating Officer and Chief Financial Officer

 

Principal Financial and Accounting Officer

 

 

27