NOTE

– COMMITMENTS AND CONTINGENCIES

Natural Habitat Contingent Arrangement

Mr. Bressler, founder of Natural Habitat, retains a

19.9%

noncontrolling interest in Natural Habitat, which is subject to a put/call arrangement. The arrangement between the Company and Mr. Bressler was established in order to provide a formal exit opportunity for Mr. Bressler and a path to

100%

ownership for the Company. Mr. Bressler has a put option under certain conditions and subject to providing notice by

October 31, 2020,

that enables him, but does

not

obligate him, to sell his remaining interest in Natural Habitat to the Company on

December 31, 2020.

The Company has a call option, but

not

an obligation, with an expiration of

December 31, 2025,

under which it can buy Mr. Bressler’s remaining interest at a similar fair value measure as Mr. Bressler’s put option.

Since the redemption of the noncontrolling interest is

not

solely in the Company’s control, the Company is required to record the redeemable noncontrolling interest outside of stockholders’ equity but after its total liabilities. In addition, if it is probable that the instrument will become redeemable, as such solely due to the passage of time, the redeemable noncontrollable interest should be adjusted to the redemption value via

one

two

measurement methods.

The Company elected the income classification-excess adjustment and accretion methods for recognizing changes in the redemption value of Mr. Bressler’s put option. Under this methodology, a calculation of the present value of the redemption value is compared to the carrying value of the redeemable noncontrolling interest and the carrying value of the redeemable noncontrolling interest is adjusted to the redemption value’s present value. Any adjustments to the carrying value of the redeemable noncontrolling interest, up to the fair value of the of the noncontrolling interest, are classified to retained earnings. Adjustments in excess of the fair value of the of the noncontrolling interest, are treated as a decrease to net income available to common stockholders.

The fair value of Mr. Bressler’s put option was determined using a discounted cash flow model. The redemption value was adjusted to its present value using the Company’s weighted average cost of capital.

Prior to the year ended

December 31, 2019,

the fair value of the noncontrolling interest exceeded the present value of the put option redemption value, and the differences between the present value of the put option redemption value and the carrying amount of the redeemable noncontrolling interest had been deemed immaterial. At

December 31, 2019,

the fair value of the noncontrolling interest exceeded the present value of the put option redemption value, and the Company recorded a

$7.2

million adjustment, which increased the carrying amount of redeemable noncontrolling interest and reduced the Company’s retained earnings.

In connection with the acquisition of Natural Habitat, Mr. Bressler has an equity incentive opportunity to earn an award of options based on the future financial performance of Natural Habitat, where if the Final Year Equity Value of Natural Habitat, as defined in Mr. Bressler's employment agreement, exceeds

$25

million, effective as of

December 31, 2020,

Mr. Bressler will be granted options with a fair value equal to

10.1%

of such excess, subject to certain conditions.

Lease Commitments

The Company leases office space and equipment under long-term leases, which are classified as operating leases. As of

December 31, 2019,

the Company’s remaining weighted average operating lease terms were approximately

months. A reconciliation of operating lease payments undiscounted cash flows to lease liabilities recognized as of

December 31, 2019

is as follows:

(In thousands)	Operating Lease Payments
2020	$	1,335
2021		1,372
2022		1,437
2023		1,324
2024		1,328
Thereafter		592
Present value discount (6% weighted average)		(1,024	)
Total	$	6,364

Lease expense was approximately

$1.7

million,

$1.5

million and

$1.2

million for the years ended

December 31, 2019,

2018

and

2017,

respectively. These amounts are recorded within general and administrative expenses on the accompanying consolidated statements of operations.

Fleet Expansion

November 2017,

the Company entered into an agreement with Ulstein Verft to construct a polar ice-class vessel, the

National Geographic Endurance

, with a total purchase price of

1,066.0

million NOK. Subsequently, the Company exercised its right to make payments in United States Dollars, which resulted in a purchase price of

$134.6

million, including hedging costs. The purchase price is subject to potential adjustments from contract specifications for variations in speed, deadweight, fuel consumption and delivery date, and is due in installments. The

first

twenty

percent of the purchase price was paid shortly after execution of the agreement with the remaining

eighty

percent due upon delivery and acceptance of the vessel. The vessel is scheduled to be delivered in the

first

quarter of

2020.

See Note

– Long-Term Debt for more information.

February 25, 2019,

the Company entered into an agreement with Ulstein Verft to construct a polar ice-class vessel, the

National Geographic

Resolution,

with a contracted purchase price of

1,291.0

million NOK. The purchase price is subject to potential adjustments from contract specifications for variations in speed, deadweight, fuel consumption and delivery date. The purchase price is due in installments, with the

first

20%

paid shortly after execution of the agreement,

50%

to be paid over the duration of the build and the final

30%

due upon delivery and acceptance of the vessel. The vessel is scheduled to be delivered in the

fourth

quarter of

2021.

During

December 2019,

the Company and Ulstein Verft amended the

National Geographic

Resolution

construction agreement, providing for an expedited delivery schedule for the vessel and a loan agreement for which all or a portion

may

be considered as a delivery bonus and forgiven, as determined by the expedited delivery schedule per the agreement. See Note

– Summary of Significant Accounting Policies and Note

– Long-Term Debt for more information.

Royalty Agreement – National Geographic

The Company is engaged in an alliance and license agreement with National Geographic through

2025,

which allows the Company to use the National Geographic name and logo. In return for these rights, the Company is charged a royalty fee. The royalty fee is included within selling and marketing expense on the accompanying consolidated statements of operations. The amount is calculated based upon a percentage of certain ticket revenues less travel agent commission, including the revenues received from cancellation fees and any revenues received from the sale of voyage extensions. A voyage extension occurs when a guest extends his or her trip with pre- or post-voyage hotel nights and is included within tour revenues on the accompanying consolidated statements of operations. The royalty expense is recognized at the time of revenue recognition. See Note

– Summary of Significant Accounting Policies for a description of the Company’s revenue recognition policy. Royalty expense for the years ended

December 31, 2019,

2018

and

2017

totaled

$5.8

million,

$5.0

million and

$4.5

million, respectively.

The royalty balances payable to National Geographic as of

December 31, 2019

and

2018

was

$2.2

and

$1.0

million, respectively, and are included in accounts payable and accrued expenses on the accompanying consolidated balance sheets.

Royalty Agreement – World Wildlife Fund

Natural Habitat has a license agreement with World Wildlife Fund, which allows it to use the WWF name and logo. In return for these rights, Natural Habitat is charged a royalty fee and a fee based on annual gross sales. The fees are included within selling and marketing expense on the accompanying consolidated statements of operations. The annual royalty payment and gross sales fees are paid on a quarterly basis. For the years ended

December 31, 2019,

2018

and

2017,

these fees totaled

$0.9

million,

$0.8

million and

$0.6

million, respectively.

Royalty Agreement – Islander

Under a perpetual royalty agreement, the Company is obligated to pay a

third

party, based upon net revenues generated through tours conducted on the

National Geographic Islander

. The related royalty payments are charged to cost of tours expenses. Royalty expense for the years ended

December 31, 2019,

2018

and

2017

was

$0.8

million,

$0.7

million and

$0.7

million, respectively.

Charter Commitments

From time to time, the Company enters into agreements to charter vessels onto which it holds its tours and expeditions. Future minimum payments on its charter agreements are as follows:

For the years ended December 31,	Amount
(In thousands)
2020	$	12,769
2021		8,813
2022		1,850
Total	$	23,432

Other Commitments

The Company participates, with other tour operators, in the Consumer Protection Insurance Plan sponsored by the United States Tour Operators Association (“USTOA”). The USTOA requires a

$1.0

million performance bond, letter of credit or assigned certificate of deposit from its members to insure this plan. The Company has assigned a

$1.0

million letter of credit to the USTOA to satisfy this requirement. This letter of credit will be used only if the Company becomes insolvent and cannot refund its customers’ deposits.

In certain instances when

not

fully covered through an insurance company, the Company self-insures cancellation insurance extended to guests. Further, the Company contracts with an unrelated insurance company to administer the guest insurance program, which includes additional guest-related insurance coverage purchased by guests. In connection with the program, the Company has provided a

$150,000

letter of credit to the insurance company to cover unpaid premiums.

Operational Agreement

The Company maintains an agreement with a

third

party in the Galápagos who provides advisory and administrative services, and operational support for the Company’s vessels stationed there, the

National Geographic Endeavour II

and

National Geographic Islander

. This agreement is in effect through

December 31, 2020

and renews annually.

Legal Proceedings

The Company is involved in various claims, legal actions and regulatory proceedings arising from time to time in the ordinary course of business. In the opinion of management, there are

outstanding proceedings that are expected to have a material adverse effect on our financial position, results of operations or cash flows.