10-Q

Large Accelerated filer

Accelerated filer

Non-Accelerated filer

Smaller reporting company

Emerging growth company

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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, 2022


☐	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, 2022, the registrant had 79,053,584 voting shares and 13,421,914 non-voting shares of common stock issued and outstanding.

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OneSpaWorld Holdings Limited

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		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

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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, 2022			December 31, 2021
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	35,246		$	30,937
Restricted cash		1,896			1,896
Accounts receivable, net		28,945			19,480
Inventories, net		32,593			29,483
Prepaid expenses		7,636			6,574
Other current assets		3,510			577
Total current assets		109,826			88,947
Property and equipment, net		13,996			14,107
Intangible assets, net		569,673			582,290
OTHER ASSETS:
Deferred tax asset		—			70
Other non-current assets		5,359			3,454
Total other assets		5,359			3,524
Total assets	$	698,854		$	688,868
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable	$	18,047		$	15,846
Accrued expenses		40,952			32,232
Current portion of long-term debt		2,085			1,776
Other current liabilities		804			2,011
Total current liabilities		61,888			51,865
Deferred rent		396			341
Income tax contingency		3,609			4,129
Warrant liabilities		45,100			107,300
Other long-term liabilities		2,449			2,646
Long-term debt, net		220,889			228,683
Total liabilities		334,331			394,964
Commitments and contingencies (Note 12)
SHAREHOLDERS' EQUITY:
Common stock:
Voting common stock, $0.0001 par value; 225,000,000 shares authorized, 79,053,584 issued and outstanding at September 30, 2022 and 78,422,887 shares issued and outstanding at December 31, 2021		8			8
Non-voting common stock, $0.0001 par value; 25,000,000 shares authorized, 13,421,914 shares issued and outstanding, at both September 30, 2022 and December 31, 2021		1			1
Additional paid-in capital		697,015			687,660
Accumulated deficit		(336,279	)		(391,768	)
Accumulated other comprehensive income (loss)		3,778			(1,997	)
Total shareholders' equity		364,523			293,904
Total liabilities and shareholders' equity	$	698,854		$	688,868

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

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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,
	2022			2021			2022			2021
REVENUES:
Service revenues	$	132,777		$	34,844		$	307,555		$	47,096
Product revenues		29,515			8,791			69,782			11,284
Total revenues		162,292			43,635			377,337			58,380
COST OF REVENUES AND OPERATING EXPENSES:
Cost of services		110,585			33,157			260,271			50,202
Cost of products		25,323			8,395			63,253			11,194
Administrative		3,936			3,363			11,630			12,069
Salary, benefits and payroll taxes		8,411			6,676			25,132			20,316
Amortization of intangible assets		4,206			4,206			12,618			12,618
Total cost of revenues and operating expenses		152,461			55,797			372,904			106,399
Income (loss) from operations		9,831			(12,162	)		4,433			(48,019	)
OTHER (EXPENSE) INCOME, NET:
Interest expense		(3,984	)		(3,151	)		(10,935	)		(9,914	)
Change in fair value of warrant liabilities		300			3,100			62,200			500
Total other (expense) income, net		(3,684	)		(51	)		51,265			(9,414	)
Income (loss) before income tax expense		6,147			(12,213	)		55,698			(57,433	)
INCOME TAX EXPENSE		236			129			209			172
NET INCOME (LOSS)	$	5,911		$	(12,342	)	$	55,489		$	(57,605	)
NET INCOME (LOSS) PER VOTING AND NON-VOTING SHARE
Basic	$	0.06		$	(0.14	)	$	0.60		$	(0.64	)
Diluted	$	0.06		$	(0.14	)	$	0.49		$	(0.64	)
WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic		92,557			90,852			92,371			89,559
Diluted		94,432			90,852			94,745			89,559

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

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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,
	2022			2021			2022			2021
Net income (loss)	$	5,911		$	(12,342	)	$	55,489		$	(57,605	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		(108	)		(204	)		(722	)		(90	)
Cash flows hedges:
Net unrealized gain (loss) on derivative		1,971			(75	)		6,112			629
Amount realized and reclassified into earnings		(211	)		475			385			1,456
Total other comprehensive income net of tax		1,652			196			5,775			1,995
Total comprehensive income (loss)	$	7,563		$	(12,146	)	$	61,264		$	(55,610	)

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

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ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(in thousands)


					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.

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ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

CONTINUED

(Unaudited)

(in thousands)


					Three Months Ended September 30, 2021
	Issued Common Voting Shares		Issued Common Non-Voting Shares		Voting and Non-Voting Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Shareholders’ Equity
BALANCE, June 30, 2021		73,290		17,186	$	9	$	673,375	$	(3,676	)	$	(368,509	)	$	301,199
Net loss		—		—		—		—		—			(12,342	)		(12,342	)
Stock-based compensation		—		—		—		2,059		—			—			2,059
Foreign currency translation adjustment		—		—		—		—		(204	)		—			(204	)
Unrecognized gain on derivatives		—		—		—		—		400			—			400
At-The Market Equity Offering, net of issuance cost		552		—		—		5,493		—			—			5,493
Common shares issued under equity incentive plan		334		—		—		—		—			—			—
BALANCE, September 30, 2021		74,176		17,186	$	9	$	680,927	$	(3,480	)	$	(380,851	)	$	296,605


									Nine Months Ended September 30, 2021
	Issued Common Voting Shares		Issued Common Non-Voting Shares		Voting and Non-Voting Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Shareholders’ Equity
BALANCE, December 31, 2020		69,292		17,186	$	9	$	649,540	$	(5,475	)	$	(323,246	)	$	320,828
Net loss		—		—		—		—		—			(57,605	)		(57,605	)
Stock-based compensation		—		—		—		7,419		—			—			7,419
Foreign currency translation adjustment		—		—		—		—		(90	)		—			(90	)
Unrecognized gain on derivatives		—		—		—		—		2,085			—			2,085
At-The Market Equity Offering, net of issuance cost		2,264		—		—		23,968		—			—			23,968
Common shares issued under equity incentive plan		1,015		—		—		—		—			—			—
Conversion of deferred shares into common shares		1,600		—		—		—		—			—			—
Conversion of public warrants into common shares		5		—		—		—		—			—			—
BALANCE, September 30, 2021		74,176		17,186	$	9	$	680,927	$	(3,480	)	$	(380,851	)	$	296,605

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

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ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	55,489		$	(57,605	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		15,974			16,859
Amortization of deferred financing costs		770			770
Change in fair value of warrant liabilities		(62,200	)		(500	)
Stock-based compensation		9,296			7,419
Provision for doubtful accounts		13			32
Loss from inventories write-downs		—			2,000
Loss from write-offs of property and equipment		10			178
Deferred income taxes		70			107
Changes in:
Accounts receivable, net		(9,478	)		(11,506	)
Inventories, net		(3,110	)		404
Prepaid expenses		(1,062	)		546
Other current assets		(272	)		557
Other noncurrent assets		607			123
Accounts payable		2,201			4,543
Accrued expenses		8,720			4,795
Other current liabilities		(81	)		(119	)
Income tax contingency		(116	)		(138	)
Deferred rent		55			75
Net cash provided by (used in) operating activities		16,886			(31,460	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(3,268	)		(1,306	)
Net cash used in investing activities		(3,268	)		(1,306	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from At-the Market Equity Offering, net of issuance costs paid		—			24,003
Repayment on revolving facility		(7,000	)		—
Repayment on term loan facilities		(1,255	)		—
Proceeds from exercise of public warrants		59			—
Net cash (used in) provided by financing activities		(8,196	)		24,003
Effect of exchange rate changes on cash		(1,113	)		(107	)
Net increase (decrease) in cash and cash equivalents and restricted cash		4,309			(8,870	)
Cash and cash equivalents and restricted cash, Beginning of period		32,833			43,448
Cash and cash equivalents and restricted cash, End of period	$	37,142		$	34,578

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

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ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(CONTINUED)

(Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2022		2021
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes	$	335	$	18
Interest	$	10,252	$	9,506

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

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ONESPAWORLD HOLDINGS LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

1. ORGANIZATION

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation, Principles of Consolidation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in quarterly financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been omitted or condensed pursuant to the SEC’s rules and regulations. However, management believes that the disclosures contained herein are adequate to make the information presented not misleading. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (which are of a normal recurring nature) necessary to present fairly our unaudited financial position, results of operations and cash flows. The unaudited results of operations and cash flows of our interim periods are not necessarily indicative of the results of operations or cash flows that may be expected for the entire fiscal year. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated and combined financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 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, 2022 and 2021 to the total amount presented in our condensed consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021 (in thousands):


	Balance as of September 30,
	2022		2021
Cash and cash equivalents	$	35,246	$	32,682
Restricted cash		1,896		1,896
Total cash and restricted cash in the condensed consolidated statement of cash flows	$	37,142	$	34,578

Inventories

Inventories, consisting principally of beauty, health and wellness products, are stated at the lower of cost, as determined on a first-in, first-out basis, or market. All inventory balances are comprised of finished goods used in beauty and health and wellness services or held for sale to customers. Inventory reserve is recorded to write down the cost of inventory to the estimated market value. No inventory impairment charge was recorded for the three and nine months ended September 30, 2022. For the three and nine months ended September 30, 2021, we recorded an inventory impairment charge of $2.0 million, for the decline in the net realizable value of inventories, which is included in cost of products in the condensed consolidated statement of operations. These losses were principally the result of excess, slow-moving and expired products and damaged inventories caused by the cessation of our cruise line partners operations and our operations due to the coronavirus (COVID-19) pandemic. The establishment of inventory reserves involves the estimate of the amount of inventories that will be sold at or used in health and wellness services on cruises when they return to sailing, which is uncertain and dependent on our cruise line partners and the use of our services and purchase of our products by its customers.

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Earnings Per Share

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

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

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


	Three Months Ended September 30,					Nine Months Ended September 30,
	2022		2021 (a)			2022			2021 (a)
Numerator:
Net income (loss)	$	5,911	$	(12,342	)	$	55,489		$	(57,605	)
Gain on fair value of in-the-money warrant liabilities		—		—			(9,500	)		—
Net income (loss), adjusted for change in fair value of warrants for diluted earnings per share	$	5,911	$	(12,342	)	$	45,989		$	(57,605	)
Denominator:
Weighted average shares outstanding – Basic		92,557		90,852			92,371			89,559
Dilutive effect of 2020 PIPE Warrants		1,571		—			1,897			—
Dilutive effect of stock-based awards		304		—			477			—
Diluted		94,432		90,852			94,745			89,559
Net Income (loss) per voting and non-voting share:
Basic	$	0.06	$	(0.14	)	$	0.60		$	(0.64	)
Diluted	$	0.06	$	(0.14	)	$	0.49		$	(0.64	)

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

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Sponsor Warrants		8,000		8,000		8,000		8,000
Public Warrants		16,145		16,145		16,145		16,147
2020 PIPE Warrants		—		5,000		—		5,000
Deferred shares		—		—		—		515
Employee stock options		—		1,269		—		3,015
Restricted stock units		375		1,598		192		1,752
Performance stock units		—		699		—		704
		24,520		32,711		24,337		35,133

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Recent Accounting Pronouncements

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

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) to increase transparency and comparability among organizations by recognizing rights and obligations resulting from leases as lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The update requires lessees to recognize for all leases with a term of 12 months or more at the commencement date: (a) a lease liability or a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and (b) a right-of-use asset or a lessee’s right to use or control the use of a specified asset for the lease term. Under the update, lessor accounting remains largely unchanged. The update requires a modified retrospective transition approach for leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements and do not require any transition accounting for leases that expire before the earliest comparative period presented. In June 2020, the FASB issued guidance (ASU 2020-05) that defers the effective dates of the lease standard (ASU 2016-02) for entities that have not yet issued financial statements adopting the standard. The update is effective retrospectively for annual periods beginning after December 15, 2021, and interim periods beginning after December 15, 2022, with early adoption permitted. We intend to elect the optional transition method, which allows entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is in the process of completing its scoping review, which includes finalizing the population of leases to be recorded on the consolidated balance sheet with corresponding lease obligation and right of use asset, as well as the implementation of a new lease accounting system. The Company expects that the update will have a material effect on our consolidated balance sheets due to the recognition of operating lease assets and operating lease liabilities primarily related to the destination resort agreements and office space, which will result in a balance sheet presentation that is not comparable to the prior period in the first year of adoption. The estimated increase of initial recognition of operating lease assets and operating lease liabilities on the consolidated balance sheet is expected to exceed $16 million. The Company continues to assess the ultimate impact of the update, which will depend on the final population of leases as of the adoption date.

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

3. GOODWILL AND INTANGIBLE ASSETS

Intangible assets consist of finite and indefinite life assets. The following is a summary of the Company’s intangible assets as of September 30, 2022 (in thousands, except amortization period):




	Cost		Accumulated Amortization and Impairment			Net Balance		Weighted Average Amortization Period (in years)
Retail concession agreements	$	604,700	$	(54,816	)	$	549,884		39
Destination resort agreements		17,900		(4,181	)		13,719		15
Trade name		6,200		(700	)		5,500	Indefinite-life
Licensing agreement		1,000		(430	)		570		8
	$	629,800	$	(60,127	)	$	569,673

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The following is a summary of the Company’s intangible assets as of December 31, 2021 (in thousands, except amortization period):


	Cost		Accumulated Amortization and Impairment			Net Balance		Weighted Average Amortization Period (in years)
Retail concession agreements	$	604,700	$	(43,187	)	$	561,513		39
Destination resort agreements		17,900		(3,287	)		14,613		15
Trade name		6,200		(700	)		5,500	Indefinite-life
Licensing agreement		1,000		(336	)		664		8
	$	629,800	$	(47,510	)	$	582,290

The 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, 2022 and 2021 was $4.2 million for each period, respectively. Amortization expense for the nine months ended September 30, 2022 and 2021 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 2022.

4. LONG-TERM DEBT

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



	Interest Rate As of			As of
	September 30, 2022	December 31, 2021	Maturities Through	September 30, 2022			December 31, 2021
First lien term loan facility	6.8%	4.0%	2026	$	201,202		$	202,457
Second lien term loan facility	10.3%	7.6%	2027		25,000			25,000
First lien revolving facility	6.7%	4.0%	2024		-			7,000
Total debt				$	226,202		$	234,457
Less: unamortized debt issuance cost					(3,228	)		(3,998	)
Total debt, net of unamortized debt issuance cost				$	222,974		$	230,459
Less: current portion of long-term debt					(2,085	)		(1,776	)
Long-term debt, net				$	220,889		$	228,683

The following are scheduled principal repayments on long-term debt as of September 30, 2022 for each of the next five years (in thousands):



Year	Amount
2022	$	521
2023		2,085
2024		2,085
2025		2,085
2026		2,085
Thereafter		217,341
Total	$	226,202

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.

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

The obligations under the New Credit Facilities are guaranteed by the Company and each of its direct or indirect wholly-owned subsidiaries organized under the laws of the United States and the Commonwealth of The Bahamas, in each case, other than certain excluded subsidiaries, including, but not limited to, immaterial subsidiaries, non-profit subsidiaries, and any other subsidiary with respect to which the burden or cost of providing a guarantee is excessive in view of the benefits to be obtained by the lenders therefrom. In addition, under the New Credit Facilities, certain of our direct and indirect subsidiaries have granted the lenders a security interest in substantially all of their assets.

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

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, 2022 and December 31, 2021, 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, 2022, 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, 2022 and December 31, 2021, eight million Sponsor Warrants were issued and outstanding.

Public Warrants

As of September 30, 2022 and December 31, 2021, 16,145,279 Public Warrants were issued and outstanding.

2020 PIPE Warrants

As of September 30, 2022 and December 31, 2021, five million 2020 PIPE Warrants were issued and outstanding.

At-The-Market Equity Offering

On August 1, 2022, the Company exercised its right to terminate its At-The-Market Equity Offering Sales Agreement (the “Agreement”) entered into on December 7, 2020 with Stifel, Nicolaus & Company, Incorporated (the “Sales Agent”), pursuant to which the Company had the right to offer and sell, from time to time, through the Sales Agent, its common shares, par value $0.0001 per share, having an aggregate offering price of up to $50.0 million (the “ATM Program”). The termination is effective as of August 1, 2022 (the "termination date"). As of

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the termination date, shares representing approximately $10 million remained available for sale under the Agreement. Prior to the termination of the Agreement, the Company sold a total of 3.9 million common shares through the ATM Program. No sales of common shares by the Company under the ATM Program had occurred subsequent to October 2021.

6. STOCK-BASED COMPENSATION

On February 22, 2022, the Company granted 189,640 time-based restricted share units (“RSUs”) to certain executive officers, of which one-third vested on March 7, 2022 and two-thirds are scheduled to vest on December 5, 2022.

On July 26, 2022, the Company granted the board of directors a total of 199,289 RSUs as compensation for future service. The RSUs fully vest at the completion of the one-year period commencing from the date of grant.

The share-based compensation expense for the three months ended September 30, 2022 and 2021 was $3.2 million and $2.1 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, 2022 and 2021 was $9.3 million and $7.4 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, 2022:


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

Outstanding at December 31, 2021		1,498,045		$	8.76
Granted		388,929			8.31
Vested		(550,894	)		7.77
Non-vested share units as of September 30, 2022		1,336,080		$	9.04

The following is a summary of PSUs activity for the nine months ended September 30, 2022:


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

Outstanding at December 31, 2021		786,971		$	10.63
Vested		(176,332	)		11.35
Non-vested share units as of September 30, 2022		610,639		$	10.42

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,

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which occurs either at the point of sale for retail sales and at the time of shipping for Shop & Ship and timetospa.com product sales. The Company provides no warranty on products sold. Shipping and handling fees charged to customers are included in net sales.

Gift Cards

The Company only offers no-fee, non-expiring gift cards to its customers. At the time gift cards are sold, no revenue is recognized; rather, the Company records a contract liability to customers. The liability is relieved, and revenue is recognized equal to the amount redeemed at the time gift cards are redeemed for products or services. The Company records revenue from an estimate of unredeemed gift cards (breakage) in net sales on a pro-rata basis over the time period gift cards are redeemed. At least three years of historical data, updated annually, is used to determine actual redemption patterns. The liability for unredeemed gift cards is included in “Other current liabilities” on the Company's condensed consolidated balance sheets and was $0.7 million, as of September 30, 2022 and December 31, 2021.

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, 2022 and December 31, 2021.

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, 2022, and December 31, 2021, our receivables from contracts with customers were $28.9 million and $19.5 million, respectively and the increase as of September 30, 2022 when compared to December 31, 2021 reflects the impact of increased revenues during the second and third quarter of 2022 due to our ongoing resumption of our spa operations. Our contract liabilities for gift cards and customer loyalty programs are described above.

Disaggregation of Revenue and Segment Reporting

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Service revenues:
Maritime	$	124,517	$	27,072	$	282,576	$	28,186
Destination resorts		8,260		7,772		24,979		18,910
Total service revenues		132,777		34,844		307,555		47,096
Product revenues:
Maritime		28,218		7,766		65,854		8,209
Destination resorts		684		575		2,138		1,538
Timetospa.com		613		450		1,790		1,537
Total product revenues		29,515		8,791		69,782		11,284

Total revenues	$	162,292	$	43,635	$	377,337	$	58,380

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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,
	2022		2021		2022		2021
Revenues:
U.S.	$	4,968	$	5,070	$	14,869	$	12,446
Not connected to a country		152,395		34,830		347,940		36,397
Other		4,929		3,735		14,528		9,537
Total	$	162,292	$	43,635	$	377,337	$	58,380


	As of
	September 30, 2022		December 31, 2021
Property and equipment, net:
U.S.	$	5,438	$	5,951
Not connected to a country		6,876		6,298
Other countries		1,682		1,858
Total	$	13,996	$	14,107

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9. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The following table presents the changes in accumulated other comprehensive (loss) income by component for the nine months ended September 30, 2022 and 2021, respectively (in thousands):


	Accumulated Other Comprehensive (Loss) Income for the Nine Months Ended September 30, 2022									Accumulated Other Comprehensive (Loss) Income for the Nine Months Ended September 30, 2021
	Foreign Currency Translation Adjustments			Changes Related to Cash Flow Derivative Hedge (1)			Accumulated Other Comprehensive (Loss) Income				Foreign Currency Translation Adjustments			Changes Related to Cash Flow Derivative Hedge (1)			Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, beginning of period	$	(673	)	$	(1,324	)	$	(1,997	)		$	(560	)	$	(4,915	)	$	(5,475	)
Other comprehensive (loss) income before reclassifications		(722	)		6,112			5,390				(90	)		629			539
Amounts reclassified from accumulated other comprehensive loss		-			385			385				-			1,456			1,456
Net current period other comprehensive (loss) income		(722	)		6,497			5,775				(90	)		2,085			1,995
Accumulated other comprehensive (loss) income, end of period	$	(1,395	)	$	5,173		$	3,778			$	(650	)	$	(2,830	)	$	(3,480	)

(1) See Note 10.

10. FAIR VALUE MEASUREMENTS AND DERIVATIVES

Fair Value Measurements

Cash and cash equivalents at September 30, 2022 and December 31, 2021 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, 2022 and December 31, 2021 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, 2022 and December 31, 2021 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, 2022				December 31, 2021
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Cash	$	35,246	$	35,246	$	30,937	$	30,937
Restricted Cash		1,896		1,896		1,896		1,896
Total cash	$	37,142	$	37,142	$	32,833	$	32,833
First lien term loan facility	$	201,202	$	193,700	$	202,457	$	198,580
Second lien term loan facility		25,000		22,700		25,000		23,570
First lien revolving facility		-		-		7,000		6,890
Total debt (a)	$	226,202	$	216,400	$	234,457	$	229,040

(a)

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

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


		Fair Value Measurements at September 30, 2022								Fair Value Measurements at December 31, 2021
Description	Balance Sheet Location	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Assets:
Derivative financial instruments (1)	Other current assets	$	2,660	$	-	$	2,661	$	-	$	-	$	-	$	-	$	-
Derivative financial instruments (1)	Other non-current assets		2,513		-		2,513		-		-		-		-		-
Total Assets		$	5,173	$	-	$	5,174	$	-	$	-	$	-	$	-	$	-
Liabilities:
Derivative financial instruments (1)	Other current liabilities	$	-	$	-	$	-	$	-	$	1,126	$	-	$	1,126	$	-
Warrants	Warrant liabilities		45,100		-		45,100		-		107,300		-		107,300		-
Derivative financial instruments (1)	Other long term liabilities		-		-		-		-		197		-		197		-
Total liabilities		$	45,100	$	-	$	45,100	$	-	$	108,623	$	-	$	108,623	$	-

(1)

Consists of an interest rate swap.

Warrants

Public Warrants and 2020 PIPE Warrants

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


	September 30, 2022						December 31, 2021
	Public Warrants			2020 PIPE Warrants			Public Warrants			2020 PIPE Warrants
Stock price	$	8.40		$	8.40		$	10.02		$	10.02
Strike price	$	11.50		$	5.75		$	11.50		$	5.75
Remaining life (in years)		1.47			2.70			2.22			3.45
Volatility		45	%		45	%		68	%		68	%
Interest rate		4.09	%		4.20	%		0.78	%		1.03	%
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:

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	September 30, 2022			December 31, 2021
Stock price	$	8.40		$	10.02
Strike price	$	11.50		$	11.50
Remaining life (in years)		1.47			2.22
Volatility		45	%		68	%
Interest rate		4.09	%		0.80	%
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.

The interest rate swap agreement has a maturity date of September 19, 2024. As of September 30, 2022 and December 31, 2021, the notional amount is $108.6. million and $127.7 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 $2.8 million of income from accumulated other comprehensive income (loss) into interest expense within the next twelve months.

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

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022		2021
Gain (losses) recognized in accumulated other comprehensive (loss) income	$	1,971		$	(75	)	$	6,112	$	629

(Losses) gains reclassified from accumulated other comprehensive (loss) income to interest expense	$	(211	)	$	475		$	385	$	1,456

11. INCOME TAXES

For the three months ended September 30, 2022 and 2021, the Company recorded an income tax expense of $0.2 million and $0.1million, respectively. For the nine months ended September 30, 2022 and 2021, the Company recorded an income tax expense of $ $0.2 million for each period, respectively. The difference between the expected provision for income taxes using the 21% U.S. federal income tax rate and the Company’s actual provision is primarily attributable to the change in valuation allowance, foreign rate differential, including income earned in jurisdictions not subject to income taxes, and withholding taxes due in various jurisdictions.

12. COMMITMENTS AND CONTINGENCIES

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

In February 2020, the Company received a formal assessment of $1.9 million by a foreign tax authority over how the value added tax (“VAT”) law was applied on the change in the ultimate beneficial ownership of one of our subsidiaries as result of the business combination in March 2019. The Company is disputing the assessment and has recorded an accrual of $1.2 million for this matter as of September 30, 2022 and December 31, 2021, and is included in “Accrued expenses” on the Company's condensed consolidated balance sheets. The Company believes the ultimate outcome of this matter will not have a material adverse impact on the consolidated financial statements.

13. SUBSEQUENT EVENTS

On October 24, 2022, we repaid an aggregate principal amount of $5.0 million on our second lien term facility. Accordingly, as of the date of this quarterly report, an aggregate principal amount of $20.0 million of our second lien term facility remains outstanding.

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

Overview

In addition to historical information, the following discussion contains forward-looking statements, such as statements regarding our expectation for future performance, liquidity and capital resources that involve risks, uncertainties and assumptions that could cause actual results to differ materially from those contained in or implied by any forward-looking statements. Factors that could cause such differences include those identified below and those described in the sections entitled “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” and in “Risk Factors” in our Form 10-K for the fiscal year ended December 31, 2021. We assume no obligation to update any of these forward-looking statements.

Due to the global impact of COVID-19, we experienced a near cessation of our operations commencing in the first quarter of 2020. We cannot fully predict the continuing impacts of the COVID-19 pandemic on the industry or on our business. Despite this uncertainty, we believe we have certain strengths that have positioned us as a leader in the hospitality-based health and wellness industry and to participate in the recovery of the cruise industry and the hospitality industry.

OneSpaWorld Holdings Limited (“OneSpaWorld,” the “Company,” “we,” “our, “us” and other similar terms refer to OneSpaWorld Holdings Limited and its consolidated subsidiaries) is the pre-eminent global operator of health and wellness centers onboard cruise ships and a leading operator of health and wellness centers at destination resorts worldwide. Our highly trained and experienced staff offer guests a comprehensive suite of premium health, fitness, beauty and wellness services and products onboard cruise ships and at destination resorts globally. Over the last 50 years, we have built our pre-eminent market position on our depth of staff expertise, broad and innovative service and product offerings, and expansive global recruitment, training and logistics platform focused on delivering flawless experiences and remarkable memories for each of our guests, as well as delivering extraordinary competitive and economic value to our cruise line and destination resort partners, leveraging our decades-long relationships. Throughout our history, our mission has been simple: to provide our cruise line and destination resort partners with extraordinary service, and their guests with remarkable experiences, helping them to look and feel their best during and after their stay.

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

A significant portion of our revenues are generated from our cruise ship operations. Historically, we have been able to renew almost all of our cruise line agreements that expired or were scheduled to expire.

In response to the COVID-19 pandemic, the U.S. Centers for Disease Control and Prevention (“CDC”) took various measures intended to manage risks associated with the pandemic, including, most recently, publishing a voluntary COVID-19 Program for Cruise Ships, with which virtually all cruise lines, including all of the Company’s cruise line partners, had agreed to voluntarily participate. As of July 18, 2022, the COVID-19 Program for Cruise Ships is no longer in effect. The CDC has published new guidance for cruise ships on the mitigation and management of COVID-19, and will periodically reevaluate and update this guidance as needed. Cruise ship operators are encouraged to develop and maintain COVID-19 response plans to prevent and mitigate introduction and onboard transmission of COVID-19.

The global spread of the COVID-19 pandemic is complex and the disruptions it has caused to our industry have had a material adverse impact on our business performance. As the growth of new COVID-19 cases has generally declined in recent months, restrictions on traveling and other measures previously implemented by governments, public institutions and other organizations to contain the spread of the pandemic have gradually been lifted or relaxed. As a result, certain businesses in the global travel and hospitality industry, including our cruise line partners, have gradually resumed their operations and there has been increasing demand for travel and hospitality services. However, there is no assurance of when, or if, global demand for travel and hospitality services will return to pre-pandemic levels. As new variants of the COVID-19 pandemic have recently emerged and may continue to emerge in the future, it is difficult to predict the ultimate impact of the COVID-19 pandemic, but we anticipate that it will continue to have an adverse impact on our business performance for all of fiscal 2022 and into fiscal 2023.

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Key Performance Indicators

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

•

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

•

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

•

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

•

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

•

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

The Company is not reporting the financial indicators above due to the effect of COVID-19 on its business, as the comparison of these key performance indicators for the three and nine months ended September 30, 2022 to the comparative prior periods is not meaningful.

Key Financial Definitions

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

•

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

•

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

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

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

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

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

Income tax expense. Income tax expense 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 from operations less other 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 impact of COVID-19. Our health and wellness centers onboard cruise ships and in destination resorts have been and continue to be negatively affected by the COVID-19 pandemic.

•

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

•

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

•

Innovation and expansion of value-added services and products across modalities in existing and planned health and wellness centers. We continue to innovate and expand our higher value added and higher price point offerings in existing and planned health and wellness centers. We have introduced premium medi-spa services, including Thermage FLX®, CoolSculpting®, truSculpt™ and microneedling, along with precision health therapies, including micronutrient IV Infusions. We have also launched Hyperice™ percussion and vibration body care services and products in selected onboard health and wellness centers, resulting in higher guest spending.

•

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

•

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

•

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

•

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

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.

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Results of Operations


	Consolidated
	Three Months Ended September 30, 2022			% of Total Revenue			Three Months Ended September 30, 2021			% of Total Revenue
(dollars in thousands, except per share amounts)
REVENUES:
Service revenues	$	132,777			82	%	$	34,844			80	%
Product revenues		29,515			18	%		8,791			20	%
Total revenues		162,292			100	%		43,635			100	%
COST OF REVENUES AND OPERATING EXPENSES:
Cost of services		110,585			68	%		33,157			76	%
Cost of products		25,323			16	%		8,395			19	%
Administrative		3,936			2	%		3,363			8	%
Salary, benefits and payroll taxes		8,411			5	%		6,676			15	%
Amortization of intangible assets		4,206			3	%		4,206			10	%
Total cost of revenues and operating expenses		152,461			94	%		55,797			128	%
Income (loss) from operations		9,831			6	%		(12,162	)		-28	%
OTHER (EXPENSE) INCOME, NET:
Interest expense		(3,984	)		-2	%		(3,151	)		-7	%
Change in fair value of warrant liabilities		300			0	%		3,100			7	%
Total other (expense) income, net		(3,684	)		-2	%		(51	)		-0	%
Income (loss) before income tax expense		6,147			4	%		(12,213	)		-28	%
INCOME TAX EXPENSE		236			0	%		129			0	%
NET INCOME (LOSS)	$	5,911			4	%	$	(12,342	)		-28	%
NET INCOME (LOSS) PER VOTING AND NON-VOTING SHARE
Basic	$	0.06					$	(0.14	)
Diluted	$	0.06					$	(0.14	)
WEIGHTED-AVERAGE SHARES OUTSTANDING

Comparison of Results for the Three Months Ended September 30, 2022 and 2021

The results of operations for the third quarter of 2022 continue to recover from the material adverse impacts of COVID-19, which at its peak resulted in the cessation of operations of all of the Company’s health and wellness centers on board cruise ships and the closing of or substantial restrictions imposed on the operation of substantially all of the destination resort health and wellness centers at the end of first quarter 2020. As of September 30, 2022, our operations have resumed on 172 cruise ships and in 48 destination resorts, as compared to 78 cruise ships and 45 destination resorts as of September 30, 2021. Accordingly, we believe that the comparison of these results to the three months ended September 30, 2021 is not meaningful.

Revenues. Revenues for the three months ended September 30, 2022 and 2021 were $162.3 million and $43.6 million, respectively. The revenues generated in the three months ended September 30, 2022 were derived primarily from our 172 health and wellness centers onboard ships having resumed voyages and our health and wellness centers at 48 open and operating destination resorts. The three months ended September 30, 2021 revenues were primarily related to our health and wellness centers on 78 cruise ships and in 45 destination resorts that were open during the quarter and e-commerce product sales through the Company’s timetospa.com website.

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, 2022 were $132.8 million, an increase of $97.9 million, or 281%, compared to $34.8 million for the three months ended September 30, 2021.

•

Product revenues. Product revenues for the three months ended September 30, 2022 were $29.5 million, an increase of $20.7 million, or 236%, compared to $8.8 million for the three months ended September 30, 2021.

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Cost of services. Cost of services for the three months ended September 30, 2022 were $110.6 million, an increase of $77.4 million, or 234%, compared to $33.2 million for the three months ended September 30, 2021. The increase was primarily attributable to costs associated with increased service revenues of $97.9 million in the quarter from our operating health and wellness centers at sea and on land, compared with service revenue of $34.8 million in the third quarter of 2021, and increased costs incurred to resume operations at cruise ship health and wellness centers during the quarter.

Cost of products. Cost of products for the three months ended September 30, 2022 were $25.3 million, an increase of $16.9 million, or 202%, compared to $8.4 million for the three months ended September 30, 2021. The increase was primarily attributable to costs associated with increased product revenues of $20.7 million in the quarter from our operating health and wellness centers at sea and on land, compared to product revenues of $8.8 million in the third quarter of 2021.

Administrative. Administrative expenses for the three months ended September 30, 2022 were $3.9 million, an increase of $0.6 million, or 17%, compared to $3.4 million for the three months ended September 30, 2021. The increase was primarily attributable to higher costs in the three months ended September 30, 2022 in connection to administrative costs related to recruitment, travel, housing and training of shipboard employees at our London Wellness Academy.

Salary, benefits and payroll taxes. Salary, benefits and payroll taxes for the three months ended September 30, 2022 were $8.4 million, an increase of $1.7 million, or 26%, compared to $6.7 million for the three months ended September 30, 2021. The increase was primarily attributable to a $1.1 million increase in stock-based compensation to $3.2 million in the three months ended September 30, 2022, the measured increase in corporate head count to account for the return to sailing and lower corporate salaries in the three months ended September 30, 2021 due to salary reductions and lower headcount which were implemented due to the COVID-19 pandemic.

Amortization of intangible assets. Amortization of intangible assets for the three months ended September 30, 2022 and 2021 was $4.2 million for both periods.

Other income (expense), net. Other income (expense), net includes interest expense and change in the fair value of the warrant liabilities. Interest expense for the three months ended September 30, 2022 was $4.0 million, an increase of $0.8 million, or 26%, compared to $3.2 million for the three months ended September 30, 2021. The increase in Other income (expense) was primarily attributable to the change in fair value of the outstanding warrants for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The change in fair value of the outstanding warrants during the three months ended September 30, 2022 was a gain of $0.3 million compared to a gain of $3.1 million during the three months ended September 30, 2021. The change in fair value of warrant liabilities is the result of changes in market prices deriving the value of the financial instruments.

Income tax expense. Income tax expense for the three months ended September 30, 2022 was $236 thousand, an increase of $107 thousand, or 83%, compared to an Income tax expense of $129 thousand for the three months ended September 30, 2021.

Net income (loss). Net income (loss) for the three months ended September 30, 2022 was $5.9 million, an increase of $18.3 million, or 148%, compared to a Net loss of $12.3 million for the three months ended September 30, 2021. The improvement in the third quarter of 2022 was primarily a result of the $22.0 million change in Income (loss) from operations derived from our 172 health and wellness centers onboard ships having resumed voyages.

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	Consolidated
	Nine Months Ended September 30, 2022			% of Total Revenue			Nine Months Ended September 30, 2021			% of Total Revenue
(dollars in thousands, except per share amounts)
REVENUES:
Service revenues	$	307,555			82	%	$	47,096			81	%
Product revenues		69,782			18	%		11,284			19	%
Total revenues		377,337			100	%		58,380			100	%
COST OF REVENUES AND OPERATING EXPENSES:
Cost of services		260,271			69	%		50,202			86	%
Cost of products		63,253			17	%		11,194			19	%
Administrative		11,630			3	%		12,069			21	%
Salary, benefits and payroll taxes		25,132			7	%		20,316			35	%
Amortization of intangible assets		12,618			3	%		12,618			22	%
Total cost of revenues and operating expenses		372,904			99	%		106,399			182	%
Income (loss) from operations		4,433			1	%		(48,019	)		-82	%
OTHER (EXPENSE) INCOME, NET:
Interest expense		(10,935	)		-3	%		(9,914	)		-17	%
Change in fair value of warrant liabilities		62,200			16	%		500			1	%
Total other (expense) income, net		51,265			14	%		(9,414	)		-16	%
Income (loss) before income tax expense		55,698			15	%		(57,433	)		-98	%
INCOME TAX EXPENSE		209			0	%		172			0	%
NET INCOME (LOSS)	$	55,489			15	%	$	(57,605	)		-99	%
NET INCOME (LOSS) PER VOTING AND NON-VOTING SHARE
Basic	$	0.60					$	(0.64	)
Diluted	$	0.49					$	(0.64	)
WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic		92,371						89,559
Diluted		94,745						89,559

Comparison of Results for the Nine Months Ended September 30, 2022 and 2021

The results of operations for the nine months ended September 30, 2022 continue to recover from the material adverse impacts of COVID-19, which at its peak resulted in the cessation of operations of all of the Company’s health and wellness centers on board cruise ships and the closing of or substantial restrictions imposed on the operation of substantially all of the destination resort health and wellness centers at the end of first quarter 2020. As of September 30, 2022, our operations have resumed on 172 cruise ships and in 48 destination resorts, as compared to 78 cruise ships and 45 destination resorts as of September 30, 2021. Accordingly, we believe that the comparison of these results to the nine months ended September 30, 2021 is not meaningful.

Revenues. Revenues for the nine months ended September 30, 2022 and 2021 were $377.3 million and $58.4 million, respectively. The revenues generated in the nine months ended September 30, 2022 were derived primarily from our 172 health and wellness centers onboard ships having resumed voyages and our health and wellness centers at 48 open and operating destination resort spas. Revenues for the nine months ended September 30, 2021 were negatively impacted by the COVID-19 pandemic and the resulting March 14, 2020 No Sail Order, with revenues derived primarily from health and wellness centers onboard 78 ships and in 45 destination resorts that were open and operating for partial periods during the nine month period and e-commerce product sales through the Company’s timetospa.com website.

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

•

Service revenues. Service revenues for the nine months ended September 30, 2022 were $307.6 million, an increase of $260.5 million, or 553%, compared to $47.1 million for the nine months ended September 30, 2021.

•

Product revenues. Product revenues for the nine months ended September 30, 2022 were $69.8 million, an increase of $58.5 million, or 518%, compared to $11.3 million for the nine months ended September 30, 2021.

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Cost of services. Cost of services for the nine months ended September 30, 2022 were $260.3 million, an increase of $210.1 million, or 418%, compared to $50.2 million for the nine months ended September 30, 2021. The increase was primarily attributable to costs associated with increased service revenues of $260.5 million in the nine months from our operating health and wellness centers at sea and on land, compared with service revenue of $47.1 million in the nine months ended September 30, 2021 and increased costs related to the resumption of operations at our health and wellness centers at sea and on land.

Cost of products. Cost of products for the nine months ended September 30, 2022 were $63.3 million, an increase of $52.1 million, or 465%, compared to $11.2 million for the nine months ended September 30, 2021. The increase was primarily attributable to costs associated with increased product revenues of $58.5 million in the nine months ended September 30, 2022, compared to product revenues of $11.3 million in the nine months ended September 30, 2021 from our operating health and wellness centers at sea and on land.

Administrative. Administrative expenses for the nine months ended September 30, 2022 were $11.6 million, a decrease of $0.4 million, or 4%, compared to $12.1 million for the nine months ended September 30, 2021. The decrease was primarily attributable to higher costs in the nine months ended September 30, 2021 in connection to professional services provided for the valuation of warrant liabilities accounting of $0.5 million, an allowance for accounts receivable of $0.2 million, and a $0.2 million accrual in connection with a formal assessment by a foreign tax authority regarding the application of the VAT law on the change in the ultimate beneficial ownership of one of our subsidiaries as result of the Business Combination.

Salary, benefits and payroll taxes. Salary, benefits and payroll taxes for the nine months ended September 30, 2022 were $25.1 million, an increase of $4.8 million, or 24%, compared to $20.3 million for the nine months ended September 30, 2021. The increase was primarily attributable to a $1.9 million increase in stock-based compensation to $9.3 million in the nine months ended September 30, 2022, the measured increase in corporate head count to account for the return to sailing and lower corporate salaries in the nine months ended September 30, 2021 due to salary reductions and lower corporate headcount which were implemented due to the COVID-19 pandemic.

Amortization of intangible assets. Amortization of intangible assets for the nine months ended September 30, 2022 and 2021 were $12.6 million.

Other income (expense), net. Other income (expense), net includes interest expense and changes in the fair value of the warrant liabilities. Interest expense for the nine months ended September 30, 2022 was $10.9 million, an increase of $1.0 million, or 10%, compared to $9.9 million for the nine months ended September 30, 2021. The increase in other income (expense), net was primarily attributable to the change in fair value of the outstanding warrants for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The change in fair value of the outstanding warrants during the nine months ended September 30, 2022 was a gain of $62.2 million compared to a gain of $0.5 million during the nine months ended September 30, 2021. The change in fair value of warrant liabilities is the result of changes in market prices deriving the value of the financial instruments.

Income tax expenses. Income tax expense for the nine months ended September 30, 2022 was an expense of $209 thousand, an increase of $37 thousand, or 22%, compared to an expense of $172 thousand for the nine months ended September 30, 2021.

Net income (loss). Net income (loss) for the nine months ended September 30, 2022 was $55.5 million, a change in the income (loss) of $113.1 million, or 196%, compared to a net loss of $57.6 million for the nine months ended September 30, 2021. The improvement in the nine months ended September 30, 2022 was primarily a result of the $52.5 million change in Income (loss) from operations derived from our 172 health and wellness centers onboard ships having resumed voyages and the change in the fair value of warrant liabilities. The change in fair value of the outstanding warrants during the nine months ended September 30, 2022 was a gain of $62.2 million compared to a gain of $0.5 million during the nine months ended September 30, 2022. The change in fair value of warrant liabilities is the result of changes in market prices deriving the value of the financial instruments.

Liquidity and Capital Resources

Overview

Since the onset of COVID-19, we have taken 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) the completion of 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. We have historically funded our operations with cash flow from operations, except prior to March 19, 2019 with respect to certain expenses and operating costs that had been paid prior to the Business Combination by Steiner Leisure Limited (“Steiner Leisure”) on our behalf, and, when needed, with borrowings under our credit facility. Steiner Leisure has paid on our behalf

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expenses associated with the allocation of Steiner Leisure corporate overhead and costs associated with the purchase of products from related parties and forgiven by Steiner Leisure. Historical operating cash flows exclude the expenses and operating costs of Steiner Leisure's operating business acquired during the Business Combination paid by Steiner Leisure on our behalf. Consequently, our combined historical cash flows may not be indicative of cash flows had we been a separate stand-alone entity, or of our future cash flows.

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

Our results continued to experience significant recovery during the three and nine months ended September 30, 2022 when compared to the prior year periods, building upon the positive net operating cash flows we began to generate for the first time in the second quarter of 2022 since the onset of COVID-19. Taking into account the actions described above and our current resources, we have concluded that we will have sufficient liquidity to satisfy our obligations over the next twelve months and comply with all debt covenants as required by our debt agreements.

Cash Flows

The following table shows summary cash flow information for the nine months ended September 30, 2022 and 2021.



(in thousands)	Nine Months Ended September 30, 2022			Nine Months Ended September 30, 2021

Net income (loss)	$	55,489		$	(57,605	)
Depreciation and amortization		15,974			16,859
Amortization of deferred financing costs		770			770
Change in fair value of warrant liabilities		(62,200	)		(500	)
Stock-based compensation		9,296			7,419
Provision for doubtful accounts		13			32
Loss from inventories write-downs		—			2,000
Loss from write-offs of property and equipment		10			178
Deferred income taxes		70			107
Change in working capital		(2,536	)		(720	)
Net cash provided by (used in) operating activities		16,886			(31,460	)
Capital expenditures		(3,268	)		(1,306	)
Net cash used in investing activities		(3,268	)		(1,306	)
Proceeds from At-the Market Equity Offering, net of issuance costs paid		—			24,003
Repayment on revolving facility		(7,000	)		—
Repayment on term loan facilities		(1,255	)		—
Proceeds from exercise of public warrants		59			—
Net cash (used in) provided by financing activities		(8,196	)		24,003
Effect of exchange rate changes on cash		(1,113	)		(107	)
Net increase (decrease) in cash and cash equivalents and restricted cash	$	4,309		$	(8,870	)

Comparison of Results for the Nine Months Ended September 30, 2022 and 2021

Operating activities. Our net cash provided by (used in) operating activities for the nine months ended September 30, 2022 and 2021 were $16.9 million and $(31.5) million, respectively. The nine months ended September 30, 2022 net operating cash flows were significantly impacted by the ongoing resumption of our health and wellness operation onboard vessels and in destination resorts. In the nine months ended September 30, 2021, the Company incurred a deficit in net cash provided by (used in) operating activities as the Company had substantially reduced revenues from operations onboard cruise ships and substantially reduced revenues from operations in destination resorts due to the COVID-19 pandemic, while still incurring operating expenses.

Investing activities. Our net cash used in investing activities for the nine months ended September 30, 2022 and 2021 were $3.3 million and $1.3 million, respectively. In the nine months ended September 30, 2022, the Company incurred more capital expenditures than in the nine months ended September 30, 2021, during which the Company incurred more limited capital expenditures due to the COVID-19 pandemic.

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Financing activities. Our net cash provided by (used in) financing activities for the nine months ended September 30, 2022 and 2021 were $(8.2) million and $24.0 million, respectively. 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. For the nine months ended September 30, 2021, the Company sold 2.3 million common shares under the ATM Program, resulting in $24.0 million in net proceeds.

Seasonality

A significant portion of our revenues are generated onboard cruise ships. The demand for cruises is stronger in the Northern Hemisphere during the summer months and during holidays, resulting in varying degrees of seasonality experienced by certain cruise lines and by us. Accordingly, the third quarter and holiday periods generally result in the highest revenue yields for us. Further, cruises and destination resorts have been negatively affected by the frequency and intensity of hurricanes. The negative impact of hurricanes in the Northern Hemisphere is highest during peak hurricane season from August to October. However, notwithstanding the periods of suppressed hurricane activity during the first nine months of each of 2022 and 2021, we experienced low revenue yields during these periods as a result of the COVID-19 pandemic.

Contractual Obligations

As of September 30, 2022, our future contractual obligations have not changed significantly from the amounts disclosed in our 2021 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 2021 Form 10-K. We believe that there have been no significant changes during the nine months ended September 30, 2022 to the critical accounting policies disclosed in our 2021 Form 10-K.

Off-Balance Sheet Arrangements

Other than the operating lease arrangements described in our 2021 10-K, 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 has negatively impacted our business, operations, results of operations and financial condition in 2022 and 2021. Recurrence of the more severe aspects of the recent adverse economic conditions, including a further escalation of the COVID-19 outbreak, increases in inflation rates and interest rates, as well as periods of fuel price increases, could have a material adverse effect on our results of operations and financial condition during the period of such recurrence. Weakness in the U.S. Dollar compared to the U.K. Pound Sterling and the Euro also could have a material adverse effect on our results of operations and financial condition.

Cautionary Statement Regarding Forward-Looking Statements

From time to time, including in this report and other disclosures, we may issue “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views about future events and are subject to known and unknown risks, uncertainties and other factors which may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We

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attempt, whenever possible, to identify these statements by using words like “will,” “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “forecast,” “future,” “intend,” “plan,” “estimate” and similar expressions of future intent or the negative of such terms.

Such forward-looking statements include, but are not limited to, statements regarding:

•

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

•

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

•

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

•

changes in applicable laws or regulations;

•

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

•

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 2021 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 risks and other risks are detailed in our 2021 Form 10-K filed with the Securities and Exchange Commission. That report contains important cautionary statements and a discussion of many of the factors that could materially affect the accuracy of our forward-looking statements and/or adversely affect our business, results of operations and financial condition.

As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these risks. For a discussion of the risks involved in our business and investing in our common shares, see the section entitled “Risk Factors” in our 2021 Form 10-K.

These risks 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 2021 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, 2022.

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, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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 2021 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 2021 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, particularly in light of the uncertainties associated with the COVID-19 pandemic, containment measures implemented in response thereto, the potential for future waves of outbreaks and the related impacts to our business, results of operations and financial condition, including our liquidity.

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

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits


Exhibit No.

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

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

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

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

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

101.SCH*		Inline XBRL Taxonomy Extension Schema Document

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document

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

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: November 3, 2022


ONESPAWORLD HOLDINGS LIMITED

By:		/s/ Leonard Fluxman
		Leonard Fluxman
		Executive Chairman, President, Chief Executive Officer and Director
		Principal Executive Officer

By:		/s/ STEPHEN B. LAZARUS
		Stephen B. Lazarus
		Chief Operating Officer and Chief Financial Officer
		Principal Financial and Accounting Officer