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

Large Accelerated filer

Accelerated filer

Non-Accelerated filer

Smaller reporting company

Emerging growth company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the three months ended September 30, 2023


☐	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.

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 September 30, 2023, the registrant had 99,910,834 common shares issued and outstanding.

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	20

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29

Item 4.	Controls and Procedures	29

PART II - OTHER INFORMATION		30

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 4.	Mine Safety Disclosures	30

Item 5.	Other Information	30

Item 6.	Exhibits	30

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
	September 30, 2023			December 31, 2022
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	26,802		$	32,064
Restricted cash		1,198			1,198
Accounts receivable, net		47,694			33,558
Inventories, net		43,843			39,835
Prepaid expenses		8,207			7,084
Other current assets		4,444			4,154
Total current assets		132,188			117,893
Property and equipment, net		14,038			14,517
Operating lease right-of-use assets, net		12,528			13,932
Intangible assets, net		552,849			565,467
OTHER ASSETS:
Deferred tax asset		—			227
Other non-current assets		3,148			5,399
Total other assets		3,148			5,626
Total assets	$	714,751		$	717,435
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable	$	31,614		$	24,124
Accrued expenses		46,163			39,999
Current portion of operating leases		2,232			2,239
Current portion of long-term debt		—			2,085
Other current liabilities		1,049			1,116
Total current liabilities		81,058			69,563
Income tax contingency		—			3,912
Warrant liabilities		9,600			52,900
Other long-term liabilities		2,449			2,449
Long-term operating leases		10,597			12,101
Long-term debt, net		162,970			210,701
Total liabilities		266,674			351,626
Commitments and contingencies (Note 12)
SHAREHOLDERS' EQUITY:
Common stock:
Voting common stock, $0.0001 par value; 225,000,000 shares authorized, 99,910,834 issued and outstanding at September 30, 2023 and 79,544,055 shares issued and outstanding at December 31, 2022		10			8
Non-voting common stock, $0.0001 par value; 25,000,000 shares authorized, zero shares issued and outstanding, at September 30, 2023 and 13,421,914 shares issued and outstanding at December 31, 2022		—			1
Additional paid-in capital		779,907			700,612
Accumulated deficit		(334,279	)		(338,609	)
Accumulated other comprehensive income		2,439			3,797
Total shareholders' equity		448,077			365,809
Total liabilities and shareholders' equity	$	714,751		$	717,435

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

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
REVENUES:
Service revenues	$	175,849		$	132,777		$	489,204		$	307,555
Product revenues		40,422			29,515			110,035			69,782
Total revenues		216,271			162,292			599,239			377,337
COST OF REVENUES AND OPERATING EXPENSES:
Cost of services		146,128			110,585			409,648			260,271
Cost of products		34,477			25,323			94,949			63,253
Administrative		4,673			3,936			12,762			11,630
Salary, benefits and payroll taxes		9,833			8,411			27,708			25,132
Amortization of intangible assets		4,206			4,206			12,618			12,618
Total cost of revenues and operating expenses		199,317			152,461			557,685			372,904
Income from operations		16,954			9,831			41,554			4,433
OTHER INCOME (EXPENSE):
Interest expense, net		(3,726	)		(3,984	)		(12,688	)		(10,935	)
Change in fair value of warrant liabilities		7,365			300			(26,736	)		62,200
Total other income (expense)		3,639			(3,684	)		(39,424	)		51,265
Income before income tax (benefit) expense		20,593			6,147			2,130			55,698
INCOME TAX (BENEFIT) EXPENSE		(2,818	)		236			(2,200	)		209
NET INCOME	$	23,411		$	5,911		$	4,330		$	55,489
NET INCOME PER VOTING AND NON-VOTING SHARE
Basic	$	0.23		$	0.06		$	0.04		$	0.60
Diluted	$	0.16		$	0.06		$	0.04		$	0.49
WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic		99,963			92,557			96,975			92,371
Diluted		101,369			94,432			96,975			94,745

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

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Net income	$	23,411		$	5,911		$	4,330		$	55,489
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments		(126	)		(108	)		110			(722	)
Cash flows hedges:
Net unrealized gain on derivative		240			1,971			1,062			6,112
Amount realized and reclassified into earnings		(936	)		(211	)		(2,530	)		385
Total other comprehensive (loss) income, net of tax		(822	)		1,652			(1,358	)		5,775
Total comprehensive income	$	22,589		$	7,563		$	2,972		$	61,264

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

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(in thousands)


						Three Months Ended September 30, 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, June 30, 2023		99,470		—		$	10	$	777,275	$	3,261		$	(357,690	)	$	422,856
Net income		—		—			—		—		—			23,411			23,411
Stock-based compensation		—		—			—		2,197		—			—			2,197
Foreign currency translation adjustment		—		—			—		—		(126	)		—			(126	)
Unrecognized loss on derivatives		—		—			—		—		(696	)		—			(696	)
Cashless exercise of warrants		31		—			—		435		—			—			435
Common shares issued under equity incentive plan		410		—			—		—		—			—			—
BALANCE, September 30, 2023		99,911		—		$	10	$	779,907	$	2,439		$	(334,279	)	$	448,077

						Nine Months Ended September 30, 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 income		—		—			—		—		—			4,330			4,330
Stock-based compensation		—		—			—		7,045		—			—			7,045
Foreign currency translation adjustment		—		—			—		—		110			—			110
Unrecognized loss on derivatives		—		—			—		—		(1,468	)		—			(1,468	)
Exchange of warrants into common shares		3,854		—			1		45,260		—			—			45,261
Exercise of warrants (1)		194		—			—		2,620		—			—			2,620
Cashless exercise of warrants		84		2,123			—		24,370		—			—			24,370
Common shares issued under equity incentive plan		690		—			—		—		—			—			—
Conversion of non-voting common shares into voting shares		15,545		(15,545	)		—		—		—			—			—
BALANCE, September 30, 2023		99,911		—		$	10	$	779,907	$	2,439		$	(334,279	)	$	448,077

(1) The exercise of Warrants includes $2.2 million of cash received and a reduction of warrants liability related to the exercise of the Warrants.
						Three Months Ended September 30, 2022
	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, June 30, 2022		78,709		13,422		$	9	$	693,840	$	2,126		$	(342,190	)	$	353,785
Net income		—		—			—		—		—			5,911			5,911
Stock-based compensation		—		—			—		3,175		—			—			3,175
Foreign currency translation adjustment		—		—			—		—		(108	)		—			(108	)
Unrecognized gain on derivatives		—		—			—		—		1,760			—			1,760
Common shares issued under equity incentive plan		345		—			—		—		—			—			—
BALANCE, September 30, 2022		79,054		13,422		$	9	$	697,015	$	3,778		$	(336,279	)	$	364,523

						Nine Months Ended September 30, 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 income		—		—			—		—		—			55,489			55,489
Stock-based compensation		—		—			—		9,296		—			—			9,296
Foreign currency translation adjustment		—		—			—		—		(722	)		—			(722	)
Unrecognized gain on derivatives		—		—			—		—		6,497			—			6,497
Proceeds from 2021 exercise of public warrants		—		—			—		59		—			—			59
Common shares issued under equity incentive plan		631		—			—		—		—			—			—
BALANCE, September 30, 2022		79,054		13,422		$	9	$	697,015	$	3,778		$	(336,279	)	$	364,523

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

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2023			2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,330		$	55,489
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		16,498			15,974
Amortization of deferred financing costs		1,226			770
Change in fair value of warrant liabilities		26,736			(62,200	)
Stock-based compensation		7,045			9,296
Income tax benefit from change in reserve of uncertain tax positions		(3,440	)		—
Provision for doubtful accounts		55			13
Loss from write-offs of property and equipment		20			10
Noncash lease expense		61			55
Deferred income taxes		227			70
Changes in:
Accounts receivable, net		(14,191	)		(9,478	)
Inventories, net		(4,008	)		(3,110	)
Prepaid expenses		(1,123	)		(1,062	)
Other current assets		150			(272	)
Other non-current assets		(364	)		607
Accounts payable		7,490			2,201
Accrued expenses		6,164			8,720
Other current liabilities		(67	)		(81	)
Income tax contingency		(472	)		(116	)
Net cash provided by operating activities		46,337			16,886
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(2,871	)		(3,268	)
Net cash used in investing activities		(2,871	)		(3,268	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants		2,216			59
Repayment on term loan facilities		(51,042	)		(8,255	)
Net cash used in financing activities		(48,826	)		(8,196	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		98			(1,113	)
Net (decrease) increase in cash, cash equivalents and restricted cash		(5,262	)		4,309
Cash, cash equivalents and restricted cash, Beginning of period		33,262			32,833
Cash, cash equivalents and restricted cash, End of period	$	28,000		$	37,142

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

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(CONTINUED)

(Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2023		2022
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes	$	746	$	335
Interest	$	17,494	$	10,252
Non-cash financing transactions:
Exchange of warrants into common shares	$	45,261	$	—
Cashless exercise of warrants	$	24,370	$	—

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

ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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 medi-spa treatments. The Company also sells premium quality health and wellness, fitness and beauty products at its facilities and through its timetospa.com website. The predominant business, based on revenues, is sales of services and products on cruise ships and in land-based 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 September 30, 2023 and 2022 to the total amount presented in our condensed consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022 (in thousands):


	Balance as of September 30,
	2023		2022
Cash and cash equivalents	$	26,802	$	35,246
Restricted cash		1,198		1,896
Total cash and restricted cash in the condensed consolidated statement of cash flows	$	28,000	$	37,142

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. An inventory reserve is recorded when necessary to write down the cost of inventory to the estimated market value, however, no material inventory reserve charges were necessary for the three and nine months ended September 30, 2023 and 2022.

Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income 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.

The Company had 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 per share is computed by dividing net income by the weighted average number of Voting and Non-Voting common shares outstanding for the period. Diluted income per share is computed by dividing net income by the weighted average number of diluted Voting and Non-voting common shares, as calculated under the treasury stock method, which includes the potential effect of dilutive common stock equivalents, such as options and warrants to purchase Voting and Non-Voting common shares. If the entity reports a net loss, rather than net income for the period, the computation of diluted loss per share excludes the effect of dilutive common stock equivalents, as their effect would be anti-dilutive. The Company has not presented income per share under the two-class method, because the income per share are the same for both Voting and Non-Voting common stock since they are entitled to the same liquidation and dividend rights.

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


	Three Months Ended September 30,					Nine Months Ended September 30,
	2023			2022		2023 (a)		2022
Numerator:
Net income	$	23,411		$	5,911	$	4,330	$	55,489
Less change in fair value of in-the-money warrant liabilities		(7,400	)		—		—		(9,500	)
Net income, adjusted for change in fair value of warrants for diluted earnings per share	$	16,011		$	5,911	$	4,330	$	45,989
Denominator:
Weighted average shares outstanding – Basic		99,963			92,557		96,975		92,371
Dilutive effect of Warrants		482			1,571		—		1,897
Dilutive effect of stock-based awards		924			304		—		477
Diluted		101,369			94,432		96,975		94,745
Net Income per voting and non-voting share:
Basic	$	0.23		$	0.06	$	0.04	$	0.60
Diluted	$	0.16		$	0.06	$	0.04	$	0.49

(a) Potential common shares under the treasury stock method and the if-converted method were antidilutive because 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 income per share related to stock-based awards and warrants.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Sponsor Warrants		—		8,000		3,842		8,000
Public Warrants		—		16,145		841		16,145
2020 PIPE Warrants		—		—		—		—
Restricted stock units		105		375		105		192
Performance stock units		—		—		—		—
		105		24,520		4,788		24,337

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 with early adoption permitted. On implementation in 2023, the adoption of this guidance did not have a material impact on our consolidated financial statements.

In March 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides practical expedients and exception for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The FASB also issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope in January 2021, which adds implementation guidance to clarify which optional expedients in Topic 848 may be applied to derivative instruments that do not reference LIBOR or a reference rate that is expected to be discontinued, but that are being modified as a result of the discounting transition. 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. On April 5, 2023, the Company amended its First Lien Credit Facilities (as defined in Note 4, “Debt”), where the interest rate benchmark was updated from LIBOR to the Secured Overnight Financing Rate (“SOFR”) as a result of the expected cessation of LIBOR. In June 2023, the Company amended its interest rate swap agreement to implement certain changes in the reference rate from LIBOR to SOFR (See Note 10). In connection with the amendment of our First Lien Credit Facilities and debt interest rate swap agreement,we elected to apply the optional expedients in Topic 848 to (i) assert that the hedged interest payments remain probable regardless of any expected modification in terms related to reference rate reform, and (ii) continue the method of assessing effectiveness as documented in the original hedge documentation so that the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument. The application of these expedients preserves the cash flow hedge designation of the interest rate swap and presentation consistent with past presentation and did not have a material impact on our consolidated financial statements.

3. INTANGIBLE ASSETS

Intangible assets consist of finite and indefinite life assets. The following is a summary of the Company’s intangible assets as of September 30, 2023 (in thousands, except amortization period):


	Cost		Accumulated Amortization and Impairment			Net Balance		Weighted Average Amortization Period (in years)
Retail concession agreements	$	604,700	$	(70,321	)	$	534,379		39
Destination resort agreements		17,900		(5,375	)		12,525		15
Trade name		6,200		(700	)		5,500	Indefinite-life
Licensing agreement		1,000		(555	)		445		8
	$	629,800	$	(76,951	)	$	552,849

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 September 30, 2023 and 2022 was $4.2 million for each period, respectively. Amortization expense for the nine months ended September 30, 2023 and 2022 was $12.6 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
	September 30, 2023		December 31, 2022	Maturities Through		September 30, 2023			December 31, 2022
First lien term loan facility	9.2%		8.3%	2026		$	164,639		$	200,681
Second lien term loan facility		—	11.8%		—		-			15,000
Total debt						$	164,639		$	215,681
Less: unamortized debt issuance cost							(1,669	)		(2,895	)
Total debt, net of unamortized debt issuance cost						$	162,970		$	212,786
Less: current portion of long-term debt							-			(2,085	)
Long-term debt, net						$	162,970		$	210,701

The following are scheduled principal repayments on long-term debt as of September 30, 2023 for each of the next five years (in thousands):


Year	Amount
2023	$	-
2024		-
2025		-
2026		164,639
2027		-
Thereafter		-
Total	$	164,639

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.

On April 5, 2023, we entered into amendment No 2 to the First Lien Credit Facilities, which replaced the LIBOR-based rate of interest therein with an adjusted SOFR-based rate of interest. As amended, loans outstanding under the First Lien Credit Facilities will accrue interest at a rate per annum equal to SOFR 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 2023, we repaid principal amounts of $36 million of our First Lien Credit Facilities. During the first and second quarter of 2023, we repaid the remaining principal amount of $15 million of our Second Lien Term Loan Facility. Accordingly, as of September 30, 2023, our Second Lien Term Loan Facility has been fully repaid and terminated.

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 September 30, 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:

As of September 30, 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 AND EQUITY

Sponsor Warrants

As of September 30, 2023 and December 31, 2022, 3,842,191 and 8,000,000, respectively, Sponsor Warrants were issued and outstanding.

Public Warrants

As of September 30, 2023 and December 31, 2022, 841,414 and 16,145,279, respectively, Public Warrants were issued and outstanding.

2020 PIPE Warrants

As of September 30, 2023 and December 31, 2022, 828,334 and 5,000,000 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) 3,055,906 Sponsor Warrants from certain affiliates, and (iii) 928,003 Sponsor Warrants from certain non-affiliates.

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 volume-weighted average price ("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. 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. As a result of the closing of the above-described transactions, the Company exchanged an aggregate of approximately 95% of the outstanding Public Warrants and approximately 50% of the outstanding Sponsor Warrants. Immediately prior to the exchanges, the Public and Sponsor Warrants exchanged were remeasured to fair value, resulting on a loss of $15.5 million in "Change in fair value of warrant liabilities" on the condensed consolidated statement of operations for the nine months ended September 30, 2023 and a warrant liability of $45.3 million, which was then reclassified to additional paid in capital in the condensed consolidated balance sheet as of September 30, 2023.

2020 PIPE Warrants Exercised

On May 16, 2023, certain holders of the 2020 PIPE warrants elected to exercise 4,104,999 warrants on a cashless basis pursuant to the agreement governing the warrants at an exchange ratio of 0.53, in exchange for which the Company issued 2,122,951 of non-voting common shares and 53,008 of voting common shares, respectively. Immediately prior to the exercise, the 2020 PIPE Warrants exercised were remeasured to fair value, resulting on a gain of $3.8 million in "Change in fair value of warrant liabilities" on the condensed consolidated statement of operations for the nine months ended September 30, 2023 and a warrant liability of $23.9 million, which was then reclassified to additional paid in capital in the condensed consolidated balance sheet as of September 30, 2023.

In July 2023, certain holder of the 2020 PIPE warrants elected to exercise 63,334 warrants on a cashless basis pursuant to the agreement governing the warrants at an exchange ratio of 0.49, in exchange for which the Company issued 31,319 of voting common shares.

Conversion of Non-Voting Common Shares to Voting Common Shares

In May 2023, Steiner Leisure Limited sold an aggregate of 10,320,000 shares of our common stock in a registered, underwritten public offering (the “May 2023 Secondary Offering”). Of the total shares of common stock sold by Steiner Leisure Limited in the May 2023 Secondary Offering, 3,034,104 shares of common stock were shares of non-voting common stock that were automatically converted into shares of voting common stock on a one-for-one basis upon the closing of the transaction. Following the closing of the May 2023 Secondary Offering, Steiner Leisure Limited exercised its right to convert its remaining 12,510,760 shares of non-voting common stock (including 2,122,950 shares of non-voting common stock previously issued to Steiner Leisure Limited in connection with the exercise of its 2020 PIPE Warrants to purchase common stock in May 2023) into shares of voting common stock on a one-for-one basis pursuant to the terms of our Third Amended and Restated Memorandum of Association.

6. STOCK-BASED COMPENSATION

The share-based compensation expense for the three months ended September 30, 2023 and 2022 was $2.2 million and $3.2 million, respectively, which is included as a component of salary, benefits and payroll taxes in the accompanying condensed consolidated statements of operations.

The share-based compensation expense for the nine months ended September 30, 2023 and 2022 was $7.0 million and $9.3 million, respectively, which is included as a component of salary, benefits and payroll taxes in the accompanying condensed consolidated statements of operations.

The following is a summary of RSUs activity for the nine months ended September 30, 2023:


RSUs Activity	Number of Awards			Weighted-Average Grant Date Fair Value

Outstanding at December 31, 2022		1,284,570		$	9.28
Granted		104,628		$	11.90
Vested		(439,406	)	$	7.13
Forfeited		(33,780	)	$	7.16
Non-Vested share units as of September 30, 2023		916,012		$	10.69

The following is a summary of performance share units (“PSUs”) activity for the nine months ended September 30, 2023:


PSUs Activity	Number of Performance-Based Awards			Weighted-Average Grant Date Fair Value

Outstanding at December 31, 2022		792,108		$	10.48
Granted		75,715		$	10.17
Vested		(174,553	)	$	11.36
Forfeited		(1,637	)	$	10.25
Non-Vested share units as of September 30, 2023		691,633		$	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 $0.5 million and $0.8 million as of September 30, 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 September 30, 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 September 30, 2023, and December 31, 2022, our receivables from contracts with customers were $47.7 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

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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Service revenues:
Maritime	$	167,215	$	124,517	$	461,283	$	282,576
Destination resorts		8,634		8,260		27,921		24,979
Total service revenues		175,849		132,777		489,204		307,555
Product revenues:
Maritime		39,151		28,218		106,112		65,854
Destination resorts		618		684		2,116		2,138
Timetospa.com		653		613		1,807		1,790
Total product revenues		40,422		29,515		110,035		69,782
Total revenues	$	216,271	$	162,292	$	599,239	$	377,337

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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenues:
U.S.	$	4,796	$	4,968	$	14,989	$	14,869
Other countries		5,324		4,929		17,476		14,528
Not connected to a country		206,151		152,395		566,774		347,940
Total	$	216,271	$	162,292	$	599,239	$	377,337


	As of
	September 30, 2023		December 31, 2022
Property and equipment, net:
U.S.	$	5,078	$	5,363
Other countries		1,386		1,728
Not connected to a country		7,574		7,426
Total	$	14,038	$	14,517

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 Nine Months Ended September 30, 2023									Accumulated Other Comprehensive (Loss) Income for the Nine Months Ended September 30, 2022
	Foreign Currency Translation Adjustments			Changes Related to Cash Flow Derivative Hedge (1)			Accumulated Other Comprehensive Income (Loss)				Foreign Currency Translation Adjustments			Changes Related to Cash Flow Derivative Hedge (1)			Accumulated Other Comprehensive (Loss) Income
Accumulated other comprehensive (loss) income, beginning of period	$	(1,229	)	$	5,026		$	3,797			$	(673	)	$	(1,324	)	$	(1,997	)
Current period other comprehensive income (loss) before reclassifications		110			1,062			1,172				(722	)		6,112			5,390
Amounts reclassified into earnings		-			(2,530	)		(2,530	)			-			385			385
Net current period other comprehensive income (loss)		110			(1,468	)		(1,358	)			(722	)		6,497			5,775
Accumulated other comprehensive (loss) income, end of period	$	(1,119	)	$	3,558		$	2,439			$	(1,395	)	$	5,173		$	3,778

(1)

See Note 10.

10. FAIR VALUE MEASUREMENTS AND DERIVATIVES

Fair Value Measurements

Cash and cash equivalents at September 30, 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 September 30, 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 September 30, 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):


	September 30, 2023				December 31, 2022
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Cash	$	26,802	$	26,802	$	32,064	$	32,064
Restricted Cash		1,198		1,198		1,198		1,198
Total cash	$	28,000	$	28,000	$	33,262	$	33,262
First lien term loan facility	$	164,639	$	167,120	$	200,681	$	192,770
Second lien term loan facility		-		-		15,000		14,500
Total debt (a)	$	164,639	$	167,120	$	215,681	$	207,270

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

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 September 30, 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	$	3,558	$	-	$	3,558	$	-	$	3,117	$	-	$	3,117	$	-
Derivative financial instruments (1)	Other non-current assets		-		-				-		1,909		-		1,909		-
Total Assets		$	3,558	$	-	$	3,558	$	-	$	5,026	$	-	$	5,026	$	-
Liabilities:
Warrants	Warrant liabilities		9,600		-		9,600		-		52,900		-		52,900		-
Total liabilities		$	9,600	$	-	$	9,600	$	-	$	52,900	$	-	$	52,900	$	-

(1)

Consists of an interest rate swap.

Warrants

Public and 2020 PIPE Warrants

The fair value of the Public and 2020 PIPE Warrants are considered a Level 2 valuation and are determined using the Monte Carlo model. The significant assumptions which the Company used in the model are:


	September 30, 2023						December 31, 2022
	Public Warrants			2020 PIPE Warrants			Public Warrants			2020 PIPE Warrants
Stock price	$	11.22		$	11.22		$	9.33		$	9.33
Strike price	$	11.50		$	5.75		$	11.50		$	5.75
Remaining life (in years)		0.47			1.70			1.22			2.45
Volatility		32	%		33	%		44	%		44	%
Interest rate		5.46	%		5.09	%		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. The significant assumptions which the Company used in the model are:


	September 30, 2023			December 31, 2022
Stock price	$	11.22		$	9.33
Strike price	$	11.50		$	11.50
Remaining life (in years)		0.47			1.22
Volatility		32	%		44	%
Interest rate		5.46	%		4.61	%
Dividend yield		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. In June 2023, the interest rate swap agreement was amended to replace the reference rate from LIBOR to SOFR, to be consistent with the amended First Lien Credit Facilities.

The interest rate swap agreement has a maturity date of September 19, 2024. As of September 30, 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 $3.6 million of income from accumulated other comprehensive income (loss) into interest expense within the next twelve months.

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

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Gain recognized in accumulated other comprehensive (loss) income	$	240		$	1,971		$	1,062		$	6,112

Gains reclassified from accumulated other comprehensive income (loss) to interest expense	$	(936	)	$	(211	)	$	(2,530	)	$	385

11. INCOME TAXES

For the three months ended September 30, 2023 and 2022, the Company recorded an income tax benefit of $2.8 million and an expense of $0.2 million, respectively. For the nine months ended September 30, 2023 and 2022, the Company recorded an income tax benefit of $2.2 million and an expense of $0.2 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 a release of an uncertain tax position, 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. For the three and nine months ended September 30, 2023, the Company recognized a discrete tax benefit of approximately $3.4 million related to a release of an uncertain foreign tax position as a result of our participation in a tax amnesty program in Italy that settled such liability in August 2023.

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 regarding the application of the value added tax (“VAT”) law on the change in the ultimate beneficial ownership of one of our subsidiaries as result of the business combination in March 2019 (the “Business Combination”). The Company is disputing the assessment and has recorded an accrual of $1.2 million for this matter as of September 30, 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.

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.

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. During the third 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 normalized operations, with strengths that position us as a leader in the hospitality-based health and wellness industry. 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 powerful recruiting, training and logistics platforms to manage our operational complexity, maintain our industry-leading quality standards, and maximize revenue and profitability per health and wellness center. The combination of our personnel recruiting and training platform, deep proprietary global labor pool, global logistics and supply chain infrastructure, and proven health and wellness center operating, revenue, and profitability 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 substantially all of our existing cruise line partner agreements, and gain new agreements to operate health and wellness centers for new cruise line partners.

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.

•

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 September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Period End Ship Count		189		176		179		176
Average Ship Count (1)		185		167		178		138
Average Weekly Revenue Per Ship	$	84,749	$	69,660	$	81,444	$	64,548
Average Revenue Per Shipboard Staff Per Day	$	587	$	576	$	568	$	528
Period End Resort Count		54		51		54		51
Average Resort Count (2)		52		48		50		47
Average Weekly Revenue Per Resort	$	13,550	$	14,273	$	15,269	$	14,664

(1) Average Ship Count 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.

(2) Average Resort Count 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.

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.

Other income (expense). 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 health and wellness centers we operate on cruise ships and in destination resorts. The number of cruise ships on which we operate during each period is primarily impacted by our renewal of existing cruise ship partner agreements, introductions of new ships to service under our existing agreements, agreements with new cruise line partners, ships temporarily out of service for maintenance and repair, and ships prevented from sailing due to outbreaks of illnesses, such as the COVID-19 pandemic, among other factors. The number of destination resorts in which we operate during each period is primarily attributable to renewal of existing agreements with destination resort partners and destination resorts prevented from operating due to outbreaks of illnesses, such as the COVID-19 pandemic, among other factors.

•

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 introduce and expand our higher value added and price point offerings in existing health and wellness centers, including introducing premium medi-spa, acupuncture, and advanced facial services, resulting in higher guest demand and 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 length of cruise, 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 guest socioeconomic mix and 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 certain of our 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 productivity, revenue generation, and profitability 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


	Three Months Ended September 30, 2023			% of Total Revenue			Three Months Ended September 30, 2022			% of Total Revenue
(dollars in thousands, except per share amounts)
REVENUES:
Service revenues	$	175,849			81	%	$	132,777			82	%
Product revenues		40,422			19	%		29,515			18	%
Total revenues		216,271			100	%		162,292			100	%
COST OF REVENUES AND OPERATING EXPENSES:
Cost of services		146,128			68	%		110,585			68	%
Cost of products		34,477			16	%		25,323			16	%
Administrative		4,673			2	%		3,936			2	%
Salary, benefits and payroll taxes		9,833			5	%		8,411			5	%
Amortization of intangible assets		4,206			2	%		4,206			3	%
Total cost of revenues and operating expenses		199,317			92	%		152,461			94	%
Income from operations		16,954			8	%		9,831			6	%
OTHER INCOME (EXPENSE)
Interest expense, net		(3,726	)		-2	%		(3,984	)		-2	%
Change in fair value of warrant liabilities		7,365			3	%		300			0	%
Total other income (expense)		3,639			2	%		(3,684	)		-2	%
Income before income tax (benefit) expense		20,593			10	%		6,147			4	%
INCOME TAX (BENEFIT) EXPENSE		(2,818	)		-1	%		236			0	%
NET INCOME	$	23,411			11	%	$	5,911			4	%
NET INCOME PER VOTING AND NON-VOTING SHARE:
Basic	$	0.23					$	0.06
Diluted (1)	$	0.16					$	0.06
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic		99,963						92,557
Diluted		101,369						94,432

(1) Refer to Note 2 to the Condensed Consolidated Financial Statements in this report for details underlying OneSpaWorld’s income diluted share calculation.

Comparison of Results for the three months ended September 30, 2023 compared to three months ended September 30, 2022

The results of operations in the third quarter of 2023 continued to accelerate from 2022 as the Company has returned to normalized operations since the inception of the COVID-19 pandemic.

Revenues. Revenues for the three months ended September 30, 2023 and 2022 were $216.3 million and $162.3 million, respectively. The increase was attributable to our average ship count increasing 11% to 185 health and wellness centers onboard ships operating during the quarter compared with our average ship count of 167 health and wellness centers onboard ships operating during the third quarter of 2022, and our initiatives to drive revenue growth in each of our on-board health and wellness centers through enhanced guest engagement and experiences, our guest service and product offering innovations, and the disciplined execution of our complex operating protocols by our on-board and corporate teams.

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

•

Service revenues. Service revenues for the three months ended September 30, 2023 were $175.8 million, an increase of $43.1 million, or 32%, compared to $132.8 million for the three months ended September 30, 2022.

•

Product revenues. Product revenues for the three months ended September 30, 2023 were $40.4 million, an increase of $10.9 million, or 37%, compared to $29.5 million for the three months ended September 30, 2022.

Cost of services. Cost of services for the three months ended September 30, 2023 were $146.1 million, an increase of $35.5 million, or 32%, compared to $110.6 million for the three months ended September 30, 2022. The increase was primarily attributable to costs associated with increased service revenues of $175.8 million in the quarter from our operating health and wellness centers at sea and on land, compared with service revenues of $132.8 million in the third quarter of 2022.

Cost of products. Cost of products for the three months ended September 30, 2023 were $34.5 million, an increase of $9.2 million, or 36%, compared to $25.3 million for the three months ended September 30, 2022. The increase was primarily attributable to costs associated with increased product revenues of $40.4 million in the quarter from our operating health and wellness centers at sea and on land, compared to product revenue of $ 29.5 million in the third quarter of 2022. Product margin in the third quarter of 2023 temporarily benefited from retail price increases implemented on board vessels ahead of an increase in the cost of those products. This resulted in an approximately 60 basis point improvement in the quarter.

Administrative. Administrative expenses for the three months ended September 30, 2023 were $4.7 million, an increase of $0.7 million, or 19%, compared to $3.9 million for the three months ended September 30, 2022. The increase was primarily attributable to professional fees incurred during the three months ended September 30, 2023 for a secondary offering of common shares by selling shareholders related to the Business Combination and increased public company costs as the Company emerged from emerging growth company status.

Salary, benefits and payroll taxes. Salary, benefits and payroll taxes for the three months ended September 30, 2023 were $9.8 million, an increase of $1.4 million, or 17%, compared to $8.4 million for the three months ended September 30, 2022. The increase was primarily attributable to measured increase in corporate headcount and higher performance based compensation for the three months ended September 30, 2023.

Amortization of intangible assets. Amortization of intangible assets for the three months ended September 30, 2023 and September 30, 2022 was $4.2 million in both periods.

Other income (expense). Other income (expense) includes interest expense and change in the fair value of warrant liabilities. Interest expense for the three months ended September 30, 2023 was $3.7 million, a decrease of $0.3 million, or 6%, compared to $4.0 million for the three months ended September 30, 2022. The decrease in interest expense was related to lower debt balances as the Company repaid a total of $61.6 million in debt instruments since the third quarter of 2022. The change in fair value of warrant liabilities during the three months ended September 30, 2023 was a gain of $7.4 million compared to a gain of $0.3 million during the three months ended September 30, 2022. The change in fair value of warrant liabilities was the result of changes in market prices of our common stock and other observable inputs deriving the value of the financial instruments.

Income tax (benefit) expense. Income tax benefit for the three months ended September 30, 2023 was $2.8 million, a decrease of $3.1 million, or 1,294%, compared to an income tax expense of $0.2 million for the three months ended September 30, 2022. The decrease was primarily driven by the recognition of a discrete tax benefit of approximately $3.4 million in uncertain tax benefits during the third quarter of 2023 related to foreign tax exposures as a result of our participation in a tax amnesty program in Italy that settled such liability in August 2023, offset by an increase in the taxable income and a change in valuation allowance, withholding taxes due in various jurisdictions and the decrease in availability of net operating losses.

Net income. Net income for the three months ended September 30, 2023 was $23.4 million, as compared to net income of $5.9 million for the three months ended September 30, 2022. The $17.5 million increase was attributable to the $7.1 million positive change in fair value of warrant liabilities, a $7.1 million positive change in income from operations, and a $3.4 million decrease in uncertain tax benefits related to foreign tax exposure as a result of the Company's participation in a tax amnesty program in Italy settled in August 2023.


	Consolidated
	Nine Months Ended September 30, 2023			% of Total Revenue			Nine Months Ended September 30, 2022			% of Total Revenue
(dollars in thousands, except per share amounts)
REVENUES:
Service revenues	$	489,204			82	%	$	307,555			82	%
Product revenues		110,035			18	%		69,782			18	%
Total revenues		599,239			100	%		377,337			100	%
COST OF REVENUES AND OPERATING EXPENSES:
Cost of services		409,648			68	%		260,271			69	%
Cost of products		94,949			16	%		63,253			17	%
Administrative		12,762			2	%		11,630			3	%
Salary, benefits and payroll taxes		27,708			5	%		25,132			7	%
Amortization of intangible assets		12,618			2	%		12,618			3	%
Total cost of revenues and operating expenses		557,685			93	%		372,904			99	%
Income from operations		41,554			7	%		4,433			1	%
OTHER (EXPENSE) INCOME
Interest expense, net		(12,688	)		-2	%		(10,935	)		-3	%
Change in fair value of warrant liabilities		(26,736	)		-4	%		62,200			16	%
Total other (expense) income		(39,424	)		-7	%		51,265			14	%
Income before income tax (benefit) expense		2,130			0	%		55,698			15	%
INCOME TAX (BENEFIT) EXPENSE		(2,200	)		0	%		209			0	%
NET INCOME	$	4,330			1	%	$	55,489			15	%
NET INCOME PER VOTING AND NON-VOTING SHARE
Basic	$	0.04					$	0.60
Diluted (1)	$	0.04					$	0.49
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic		96,975						92,371
Diluted		96,975						94,745

(1) Refer to Note 2 to the Condensed Consolidated Financial Statements in this report for details underlying OneSpaWorld’s income diluted share calculation.

Comparison of Results for the nine months ended September 30, 2023 compared to nine months ended September 30, 2022

Results of operations for the nine months ended September 30, 2023 continued to accelerate from 2022 as the Company has returned to normalized operations since the inception of the COVID-19 pandemic.

Revenues. Revenues for the nine months ended September 30, 2023 and 2022 were $599.2 million and $377.3 million, respectively. The increase was attributable to our average ship count increasing 29% to 178 health and wellness centers onboard ships operating during the nine months ended September 30, 2023 compared with our average ship count of 138 health and wellness centers onboard ships operating during the nine months ended September 30, 2022, and the impact of our on-board initiatives to drive revenue growth.

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

•

Service revenues. Service revenues for the nine months ended September 30, 2023 were $489.2 million, an increase of $181.6 million, or 59%, compared to $307.6 million for the nine months ended September 30, 2022.

•

Product revenues. Product revenues for the nine months ended September 30, 2023 were $110.0 million, an increase of $40.3 million, or 58%, compared to $69.8 million for the nine months ended September 30, 2022.

Cost of services. Cost of services for the nine months ended September 30, 2023 were $409.7 million, an increase of $149.4 million, or 57%, compared to $260.3 million for the nine months ended September 30, 2022. The increase was primarily attributable to costs

associated with increased service revenues of $489.2 million in the nine months ended September 30, 2023 from our operating health and wellness centers at sea and on land, compared with service revenues of $307.6 million in the nine months ended September 30, 2022.

Cost of products. Cost of products for the nine months ended September 30, 2023 were $94.9 million, an increase of $31.7 million, or 50%, compared to $63.3 million for the nine months ended September 30, 2022. The increase was primarily attributable to costs associated with increased product revenues of $110.0 million in the nine months ended September 30, 2023 from our operating health and wellness centers at sea and on land, compared to product revenues of $69.8 million in the nine months ended September 30, 2022.

Administrative. Administrative expenses for the nine months ended September 30, 2023 were $12.8 million, an increase of $1.1 million, or 10%, compared to $11.6 million for the nine months ended September 30, 2022. The increase was primarily attributable to professional fees incurred during the nine months ended September 30, 2023 for a secondary offering of common shares by selling shareholders related to the Business Combination and increased public company costs as the Company emerged from emerging growth company status.

Salary, benefits and payroll taxes. Salary, benefits and payroll taxes for the nine months ended September 30, 2023 were $27.7 million, an increase of $2.6 million, or 10%, compared to $25.1 million for the nine months ended September 30, 2022. The increase was primarily attributable to measured increase in corporate headcount and higher performance based compensation for the nine months ended September 30, 2023.

Amortization of intangible assets. Amortization of intangible assets for the nine months ended September 30, 2023 and 2022 were both $12.6 million.

Other (expense) income. Other (expense) income, includes interest expense and change in fair value of warrant liabilities. Interest expense for the nine months ended September 30, 2023 was $12.7 million, a increase of $1.7 million, or 16%, compared to $10.9 million for the nine months ended September 30, 2022. The increase in interest expense was related to higher interest rates and prepayment penalties to extinguish the second lien term loan offset by lower debt balances as the Company repaid a total of $61.6 million in debt instruments since the third quarter of 2022. The change in fair value of warrant liabilities during the nine months ended September 30, 2023 was a loss of $26.7 million compared to a gain of $62.2 million during the nine months ended September 30, 2022. Net loss in change in fair value of warrant liabilities was the result of increases in market prices of our common stock and other observable inputs deriving the value of the financial instruments and the exchange of approximately 95% of the Public Warrants and approximately 50% of Sponsor Warrants for the Company’s common shares in April 2023. Refer to Note 5 to the Condensed Consolidated Financial statements in this report for further detail.

Income tax (benefit) expense . Income tax benefit for the nine months ended September 30, 2023 was a $2.2 million, a decrease of $2.4 million, or 1,153%, compared to an income tax expense of $0.2 million for the nine months ended September 30, 2022. The decrease was primarily driven by the recognition of a discrete tax benefit of approximately $3.4 million in uncertain tax benefits during the third quarter of 2023 related to foreign tax exposures as a result of our participation in a tax amnesty program in Italy that settled such liability in August 2023, offset by an increase in the taxable income and a change in valuation allowance, withholding taxes due in various jurisdictions and the decrease in availability of net operating losses.

Net income. Net income for the nine months ended September 30, 2023 was $4.3 million, as compared to net income of $55.5 million in the nine months ended September 30, 2022. The $51.1 million decrease was primarily attributable to the $88.9 million negative change in fair value of warrant liabilities partially offset by the $37.1 million positive change in income from operations. The change in fair value of the outstanding warrants during the nine months ended September 30, 2023 was a loss of ($26.7) million compared to a gain of $62.2 million during the nine months ended September 30, 2022. Excluding the change in fair value of warrant liabilities, the improvement in the nine months ended September 30, 2023 was primarily a result of the $37.1 million change in income from operations correlated to the increase in the number of health and wellness centers onboard ships operating during the nine month period and our on-board initiatives to drive revenue growth.

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 189 cruise ships and in 54 destination resorts, associated working capital investment, capital expenditures, debt service, full repayment of $7

million borrowed under our First Lien Revolving Facility, full repayment of our $25 million Second Lien Term Loan Facility, and $37 million repayment of our First Lien Term Loan Facility.

Our results continued to experience significant recovery during the three months ended September 30, 2023 when compared to the prior year period, building upon the increasing magnitude of our positive net operating cash flows. Taking into account the actions described above, the magnitude and positive trend of our results of operations, and our current financial condition and 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.

Cash Flows

The following table shows summary cash flow information for the nine months ended September 30, 2023 and the nine months ended September 30, 2022.



(in thousands)	Nine Months Ended September 30, 2023			Nine Months Ended September 30, 2022

Net income	$	4,330		$	55,489
Depreciation and amortization		16,498			15,974
Amortization of deferred financing costs		1,226			770
Change in fair value of warrant liabilities		26,736			(62,200	)
Stock-based compensation		7,045			9,296
Income tax benefit from change in reserve of uncertain tax positions		(3,440	)		—
Provision for doubtful accounts		55			13
Loss from write-offs of property and equipment		20			10
Noncash lease expense		61			55
Deferred income taxes		227			70
Changes in working capital		(6,421	)		(2,591	)
Net cash provided by operating activities		46,337			16,886
Capital expenditures		(2,871	)		(3,268	)
Net cash used in investing activities		(2,871	)		(3,268	)
Proceeds from exercise of warrants		2,216			59
Repayment on term loan facilities		(51,042	)		(8,255	)
Net cash used in financing activities		(48,826	)		(8,196	)
Effect of exchange rates		98			(1,113	)
Net (decrease) increase in cash, cash equivalents and restricted cash	$	(5,262	)	$	4,309

Comparison of Results for the nine months ended September 30, 2023 and 2022

Operating activities. Our net cash provided by operating activities for the nine months ended September 30, 2023 and 2022 were $46.3 million and $16.9 million, respectively. In the nine months ended September 30, 2023, net operating cash flows continued to accelerate from 2022, as the Company has returned to normalized operations.

Investing activities. Our net cash used in investing activities for the nine months ended September 30, 2023 and 2022 were $2.9 million and $3.3 million, respectively.

Financing activities. Our net cash used in financing activities for the nine months ended September 30, 2023 and 2022 were $48.8 million and $8.2 million, respectively. For the nine months ended September 30, 2023, the Company repaid $36.0 million on the First Lien Term Loan Facility and $15.0 million on the Second Lien Term Loan Facility and received proceeds from the exercise of warrants of $2.2 million. For the nine months ended September 30, 2022, the Company repaid $1.3 million on the first lien term loan facility, $7.0 million on the revolving facility and received proceeds from the exercise of public warrants of $0.059 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.

Contractual Obligations

As of September 30, 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 nine months ended September 30, 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, 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 global epidemics or pandemics 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;

•

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 September 30, 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 September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

During the quarter ended September 30, 2023, none of our directors or officers adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K).

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*		The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 formatted in iXBRL (Inline eXtensible Business Reporting Language) includes: (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Statements of Comprehensive (Loss) Income, (iii) the Condensed Consolidated Statements of Equity and (v) Notes to Condensed Consolidated Financial Statements.

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

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: November 3, 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 Financial Officer and Chief Operating Officer
		Principal Financial and Accounting Officer