ONESPAWORLD HOLDINGS Ltd (OSW) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion and analysis of our audited financial condition and results of operations should be read in conjunction with the information presented in “Selected Historical Financial Information” and our consolidated financial statements and the notes thereto included elsewhere in this report. In addition to historical information, the following discussion contains forward-looking statements, such as statements regarding our expectation for future performance, liquidity, and capital resources, that involve risks, uncertainties and assumptions that could cause actual results to differ materially from those contained in or implied by any forward-looking statements. Factors that could cause such differences include those identified below and those described in the sections entitled “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors.” We assume no obligation to update any of these forward-looking statements.
The information for the years ended December 31, 2021 and 2020 (Successor), the period from March 20, 2019, to December 31, 2019 (Successor) and the period from January 1, 2019 to March 19, 2019 (Predecessor) is derived from OSW Predecessor’s audited consolidated and combined financial statements and the notes thereto included elsewhere in this report.
Any reference to “OneSpaWorld” refers to OneSpaWorld Holdings Limited and our consolidated subsidiaries on a forward-looking basis or, as the context requires, to the historical results of OSW Predecessor. Any reference to “OSW Predecessor” refers to the entities comprising the “OneSpaWorld” business prior to the consummation of the Business Combination.
Overview
During 2021, we continued to execute our gradual resumption of our health and wellness centers operations on cruise ships and in destination resorts. As of December 31, 2021, 118 ships of our cruise line partners and 48 destination resort spas were operating as part of our gradual return to service. The extent of the effects of COVID-19 on our business are uncertain and will depend on future developments, including, but not limited to, the duration and continued severity of COVID-19 and the length of time it takes to return the company to profitability. We cannot fully predict the continuing impacts of the COVID-19 outbreak on the industry or on our business. Despite this uncertainty, we believe we have certain strengths that have positioned us as a leader in the hospitality-based health and wellness industry and to participate in the recovery of the cruise industry and the hospitality industry.
OneSpaWorld Holdings Limited (“OneSpaWorld,” the “Company,” “we,” “our, “us” and other similar terms refer to OneSpaWorld Holdings Limited and its consolidated subsidiaries) is the pre-eminent global operator of health and wellness centers onboard cruise ships and a leading operator of health and wellness centers at destination resorts worldwide. Our highly trained and experienced staff offered guests a comprehensive suite of premium health, fitness, beauty and wellness services and products onboard cruise ships and at destination resorts globally. We are the market leader at nearly 20x the size of our closest maritime competitor. Over the last 50 years, we have built our leading market position on our depth of staff expertise, broad and innovative service and product offerings, expansive global recruitment, training and logistics platform as well as decades-long relationships with cruise line and destination resort partners. Throughout our history, our mission has been simple: helping guests look and feel their best during and after their stay.
At our core, we are a global services company. We serve a critical role for our cruise line and destination resort partners, operating a complex and increasingly important aspect of our cruise line and destination resort partners’ overall guest experience. Decades of investment and know-how have allowed us to construct an unmatched global infrastructure to manage the complexity of our operations. We have consistently expanded our onboard offerings with innovative and leading-edge service and product introductions, and developed the powerful back-end recruiting, training and logistics platforms to manage our operational complexity, maintain our industry-leading quality standards, and maximize revenue and profitability per center. The combination of our renowned recruiting and training platform, deep proprietary labor pool, global logistics and supply chain infrastructure and proven health and wellness center and revenue management capabilities represents a significant competitive advantage that we believe is not economically feasible to replicate.
A significant portion of our revenues are generated from our cruise ship operations. Historically, we have been able to renew almost all of our cruise line agreements that expired or were scheduled to expire. In August 2021, we extended our current agreement with Azamara through May 2026.
We are unable to predict the course of COVID-19, but it has had, and we anticipate that it will continue to have, a material negative impact on our business performance, results of operations, financial condition and liquidity in 2022.
Matters Affecting Comparability
On March 19, 2019, we consummated the previously announced Business Combination.
34
Table of Contents
“OSW Predecessor” is comprised of the net assets and operations of (i) the following wholly-owned subsidiaries of Steiner Leisure: OneSpaWorld LLC, Steiner Spa Asia Limited, Steiner Spa Limited, and OneSpaWorld Marks Limited (formerly known as Steiner Marks Limited), (ii) the following respective indirect subsidiaries of Steiner Leisure: Mandara PSLV, LLC (subsequently dissolved), Mandara Spa (Hawaii), LLC, Florida Luxury Spa Group, LLC, Steiner Transocean U.S., Inc., Steiner Spa Resorts (Nevada), Inc., Steiner Spa Resorts (Connecticut), Inc., Steiner Resort Spas (California), Inc., OneSpaWorld Resort Spas (North Carolina), Inc. (formerly known as Steiner Resort Spas (North Carolina), Inc.), OSW SoHo LLC, OSW Distribution LLC, World of Wellness Training Limited (formerly known as Steiner Training Limited), STO Italy S.r.l., One Spa World LLC, Mandara Spa Services LLC, OneSpaWorld Limited, OneSpaWorld (Bahamas) Limited (formerly known as Steiner Transocean Limited), OneSpaWorld Medispa LLC, OneSpaWorld Medispa Limited, OneSpaWorld Medispa (Bahamas) Limited (formerly known as STO Medispa Limited), Mandara Spa (Cruise I), LLC, Mandara Spa (Cruise II), LLC, Steiner Transocean (II) Limited (subsequently dissolved), The Onboard Spa by Steiner (Shanghai) Co., Ltd. (subsequently dissolved), Mandara Spa LLC, Mandara Spa Puerto Rico, Inc., Mandara Spa (Guam), L.L.C. (subsequently dissolved), Mandara Spa (Bahamas) Limited, Mandara Spa Aruba N.V., Mandara Spa Polynesia Sarl, Mandara Spa Asia Limited, PT Mandara Spa Indonesia, Spa Services Asia Limited, Mandara Spa Palau, Mandara Spa (Malaysia) Sdn. Bhd., Mandara Spa Ventures International Sdn. Bhd., Spa Partners (South Asia) Limited, Mandara Spa (Maldives) PVT LTD, and Mandara Spa (Fiji) Limited, (iii) Medispa Limited, a majority-owned subsidiary of Steiner Leisure (the noncontrolling interest in which was subsequently purchased by OneSpaWorld), and (iv) the timetospa.com website owned by Elemis USA, Inc. (formerly known as Steiner Beauty Products, Inc.), subsequently transferred to OneSpaWorld.
At the closing of the Business Combination, OneSpaWorld became the ultimate parent company of Haymaker and OSW Predecessor. Unless the context otherwise requires, “we,” “us,” “our” and the “Company” refer to OneSpaWorld Holdings Limited and its subsidiaries.
Key Performance Indicators
In assessing the performance of our business, we consider several key performance indicators used by management. These key indicators include:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | 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. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | 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. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | 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. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | 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. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Average Weekly Revenue Per Destination Resort Health and Wellness Center. A key indicator of productivity per destination resort health and wellness center. Revenue per destination resort health and wellness center in a period can be affected by the mix of U.S. and Caribbean and Asian centers for such period because U.S. and Caribbean centers are typically larger and produce substantially more revenues per center than Asian centers. Additionally, average weekly revenue can also be negatively impacted by renovations of our destination resort health and wellness centers. |
Due to the impact of COVID-19 on our operations in 2021 and 2020, current and prior year data is not meaningful and not included.
Key Financial Definitions
Revenues. Revenues consist primarily of sales of services and sales of products to cruise ship passengers and destination resort guests. The following is a brief description of the components of our revenues:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | 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. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | 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. |
35
Table of Contents
Cost of services. Cost of services consists primarily of an allocable portion of payments to cruise lines (which are derived as a percentage of service revenues or a minimum annual rent or a combination of both), an allocable portion of wages paid to shipboard employees, an allocable portion of staff-related shipboard expenses, costs related to recruitment and training of shipboard employees, wages paid directly to destination resort employees, payments to destination resort venue owners, the allocable cost of products consumed in the rendering of a service and health and wellness center depreciation. Cost of services has historically been highly variable; increases and decreases in cost of services are primarily attributable to a corresponding increase or decrease in service revenues. Cost of services has tended to remain consistent as a percentage of service revenues.
Cost of products. Cost of products consists primarily of the cost of products sold through our various methods of distribution, an allocable portion of wages paid to shipboard employees and an allocable portion of payments to cruise lines and destination resort partners (which are derived as a percentage of product revenues or a minimum annual rent or a combination of both). Cost of products has historically been highly variable, increases and decreases in cost of products are primarily attributable to a corresponding increase or decrease in product revenues and includes impairment of inventories. Cost of products has tended to remain consistent as a percentage of product revenues.
Administrative. Administrative expenses are comprised of expenses associated with corporate and administrative functions that support our business, including fees for professional services, insurance, headquarters rent and other general corporate expenses. We expect administrative expenses to increase due to additional legal, accounting, insurance and other expenses related to becoming a public company.
Salary, benefits and payroll taxes. Salary, benefits and payroll taxes are comprised of employee expenses associated with corporate and administrative functions that support our business, including fees for employee salaries, bonuses, stock based compensation, payroll taxes, pension/401(k) and other employee costs.
Amortization of intangible assets. Amortization of intangible assets are comprised of the amortization of intangible assets with definite useful lives (e.g. retail concession agreements, destination resort agreements, licensing agreements) and amortization expenses associated with the 2015 and 2019 Transactions.
Other income (expense), net. Other income (expense) consists of royalty income, interest income, interest expense and noncontrolling interest expense.
Provision for income taxes. Provision for income taxes includes current and deferred federal income tax expenses, as well as state and local income taxes. See “—Critical Accounting Policies—Income Taxes” included elsewhere in this Annual Report on Form 10-K.
Net income. Net income consists of income from operations less other income (expense) and provision for income taxes.
Revenue Drivers and Business Trends
Our revenues and financial performance are impacted by a multitude of factors, including, but not limited to:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | The impact of COVID-19. Our health and wellness centers onboard cruise ships and in select destination resorts have been and continue to be negatively affected by the COVID-19 pandemic. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | The number of ships and destination resorts in which we operate health and wellness centers. Revenue is impacted by net new ship growth, ships out of service, unanticipated dry-docks, ships prevented from sailing due to outbreaks of illnesses, such as the COVID-19 outbreak, and the number of destination resort health and wellness centers operating in each period. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | 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. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Expansion of value-added services and products across modalities in existing health and wellness centers. We continue to expand our higher value added and price point offerings in existing health and wellness centers, including introducing premium medi-spa services, resulting in higher guest spending. |
36
Table of Contents
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | 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. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | 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. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Collaboration with cruise line partners, including targeted marketing and promotion initiatives, as well as implementation of proprietary technologies to increase center utilization via pre-booking and pre-payment. We are now directly marketing and distributing promotions to onboard passengers as a result of enhanced collaboration with select cruise line partners. We have also begun to implement proprietary pre-booking and pre-payment technology platforms that interface with our cruise line partners’ pre-cruise planning systems. These areas of increased collaboration with cruise line partners are resulting in higher revenue generation across our health and wellness centers. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | The impact of weather. Our health and wellness centers onboard cruise ships and in select destination resorts may be negatively affected by hurricanes, which may be increasing in frequency and intensity due to climate change. The negative impact of hurricanes is highest during peak hurricane season from August to October. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Other risks and uncertainties. Our revenues and financial performance may be impacted by other risks and uncertainties, including, without limitation, those set forth under the section entitled “Risk Factors”. |
The effect of each of these factors on our revenues and financial performance varies from period to period.
Results of Operations
Comparison of Results for the Years Ended December 31, 2021 and 2020
| Successor | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Consolidated | |||||||||||||||
| ($ in thousands) | Year Ended December 31, 2021 | % of Total Revenue | Year Ended December 31, 2020 | % of Total Revenue | |||||||||||
| REVENUES | |||||||||||||||
| Service revenues | $ | 115,945 | 80.5 | % | $ | 93,682 | 77.5 | % | |||||||
| Product revenues | 28,086 | 19.5 | % | 27,243 | 22.5 | % | |||||||||
| Total revenues | 144,031 | 100.0 | % | 120,925 | 100.0 | % | |||||||||
| COST OF REVENUES AND OPERATING EXPENSES | |||||||||||||||
| Cost of services | 108,939 | 75.6 | % | 107,258 | 88.7 | % | |||||||||
| Cost of products | 26,646 | 18.5 | % | 31,976 | 26.4 | % | |||||||||
| Administrative | 15,526 | 10.8 | % | 18,957 | 15.7 | % | |||||||||
| Salary, benefits and payroll taxes | 28,151 | 19.5 | % | 20,138 | 16.7 | % | |||||||||
| Goodwill and tradename intangible assets impairment | — | 0.0 | % | 190,777 | 157.8 | % | |||||||||
| Amortization of intangible assets | 16,829 | 11.7 | % | 16,823 | 13.9 | % | |||||||||
| Total cost of revenues and operating expenses | 196,091 | 136.1 | % | 385,929 | 319.1 | % | |||||||||
| Loss from operations | (52,060 | ) | -36.1 | % | (265,004 | ) | -219.1 | % | |||||||
| OTHER (EXPENSE) INCOME, NET | |||||||||||||||
| Interest expense and warrant issuance costs | (13,488 | ) | -9.4 | % | (16,089 | ) | -13.3 | % | |||||||
| Interest income | 55 | 0.0 | % | 30 | 0.0 | % | |||||||||
| Change in fair value of warrant liabilities | (2,600 | ) | -1.8 | % | (6,100 | ) | -5.0 | % | |||||||
| Total other expense, net | (16,033 | ) | -11.1 | % | (22,159 | ) | -18.3 | % | |||||||
| Loss before income tax expense (benefit) | (68,093 | ) | -47.3 | % | (287,163 | ) | -237.5 | % | |||||||
| INCOME TAX EXPENSE (BENEFIT) | 429 | 0.3 | % | 814 | 0.7 | % | |||||||||
| NET LOSS | $ | (68,522 | ) | -47.6 | % | $ | (287,977 | ) | -238.1 | % |
37
Table of Contents
Revenues. Revenues for the years ended December 31, 2021 and 2020 were $144.0 million and $120.9 million, respectively. Results in both 2021 and 2020 were substantially impacted by the COVID-19 pandemic, which resulted in the cancellation of all cruise ship voyages and closure of all destination resort health and wellness centers during mid-March 2020 through December 31, 2020. The twelve months ended December 31, 2021 revenues were derived primarily from the operations of health and wellness centers onboard ships having resumed voyages and our destination resort health and wellness centers having resumed operations primarily during the last two quarters of the year.
The break-down of revenue between service and product revenues was as follows:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Service revenues Service revenues for the year ended December 31, 2021 were $115.9 million, an increase of $22.2 million, or 24%, compared to $93.7 million for the year ended December 31, 2020. The year ended December 31, 2020 included revenues before COVID-19 was declared a pandemic on March 10, 2020. The year ended December 31, 2021 included revenues related to the resumption of service at our destination resort health and wellness centers and 118 of our health and wellness centers onboard ships which had resumed operation as of December 31, 2021, with the majority of those coming into service in the third quarter and fourth quarters. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Product revenues. Product revenues for the year ended December 31, 2021 were $28.1 million, a decrease of $0.9 million, or 3%, compared to $27.2 million for the year ended December 31, 2020. The year ended December 31, 2020 included revenues before COVID-19 was declared a pandemic on March 10, 2020. The year ended December 31, 2021 included product sales revenues related to the resumption of service at our destination resort health and wellness centers and 118 of our health and wellness centers onboard ships which had resumed operation as of December 31, 2021, with the majority of those coming into service in the third quarter and fourth quarters. |
Cost of services. Cost of services for the year ended December 31, 2021 were $108.9 million, an increase of $1.6 million, or 2%, compared to $107.3 million for the year ended December 31, 2020. The increase was primarily attributable to the resumption of cruise line health and wellness center operations in the last two quarters of 2021 compared with our cruise line operations in the first quarter of 2020 prior to the onset of the COVID-19 pandemic.
Cost of products. Cost of products for the year ended December 31, 2021 were $26.6 million, a decrease of $5.4 million, or 17%, compared to $32.0 million for the year ended December 31, 2020. The decrease was attributable to a lower amount required in 2021 versus 2020 related to the decrease in inventory write-downs for the decline in the net realizable value of inventories, principally the result of excess, slow-moving, and expiration of inventories caused by the cessation of our cruise line partners’ operations and, consequently, our operations, due to the COVID-19 pandemic and a change in business mix.
Administrative. Administrative expenses for the year ended December 31, 2021 were $15.5 million, a decrease of $3.5 million or 18%, compared to $19.0 million for the year ended December 31, 2020. The decrease was primarily attributable to a reduction in costs of recruitment and training of onboard staff as a result of the COVID-19 pandemic, structural cost savings implemented by management and higher professional fees in 2020.
Salary, benefits and payroll taxes. Salary, benefits and payroll taxes for the year ended December 31, 2021 were $28.2 million, an increase of $8.1 million, or 40%, compared to $20.1 million for the year ended December 31, 2020. The increase was primarily attributable to non-cash stock-based compensation expense and by the measured increase in Corporate head count to account for the return to sailing.
Amortization of intangible assets. Amortization of intangible assets for the year ended December 31, 2021 and 2020 were both $16.8 million, respectively.
Goodwill and trade name impairment charges. Goodwill and trade name impairment charges for the year ended December 31, 2020 were $190.8 million. This was comprised of goodwill and trade name impairment charges of $190.1 million and $0.7 million, respectively.
Other (expense) , net. Other (expense), net includes interest expense and warrants issuance costs, interest income and changes in the fair value of the warrant liabilities. Interest expense and warrants issuance cost for the year ended December 31, 2021 were $13.5 million, a increase of $2.6 million, or 16%, compared to $16.1 million for the year ended December 31, 2020. The increase was primarily attributable to the $1.4 million warrant issuance costs during the year ended December 31, 2020. During the year ended December 31, 2021 the change in fair value of the outstanding warrants was a loss of $2.6 million compared to a loss of $6.1 million during the year ended December 31, 2020. The change in fair value of warrants is the result of changes in market prices deriving the value of the financial instruments.
Income tax expense (benefit). Income tax expenses for the year ended December 31, 2021 were $0.4 million, a decrease of $0.4 million, or 47%, compared to $0.8 million for the year ended December 31, 2020. The decrease was driven by an increase in the 2020 valuation allowance offset by higher income in taxable jurisdictions in the year ended December 31, 2021.
38
Table of Contents
Net loss. Net loss for the years ended December 31, 2021 was $68.5 million, a decrease in net loss of $219.5 million, or 76%, compared to a net loss of $288.0 million for the year ended December 31, 2020. The decrease in the net loss principally resulted from the non-recurring $190.8 million goodwill and tradename intangible asset impairment charge recorded in 2020 period and the resumption of operations in the last two quarters of 2021.
Comparison of Results for the Years Ended December 31, 2020 and 2019
The following tables present operations for two periods, Predecessor and Successor, which relate to the periods preceding and the periods succeeding the Business Combination, respectively. References to the “Successor 2019 Period” in the discussion below refer to the period from March 20, 2019 to December 31, 2019. References to the “Predecessor 2019 Period” in the discussion below refers to the period from January 1, 2019 to March 19, 2019.
| Successor | Predecessor | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Consolidated | Combined | |||||||||||||||||||
| ($ in thousands) | Year ended December 31, 2020 | % of Total Revenue | March 20, 2019 to December 31, 2019 | % of Total Revenue | January 1, 2019 to March 19, 2019 | % of Total Revenue | ||||||||||||||
| REVENUES | ||||||||||||||||||||
| Service revenues | $ | 93,682 | 77.5 | % | $ | 339,793 | 76.6 | % | $ | 91,280 | 77.1 | % | ||||||||
| Product revenues | 27,243 | 22.5 | % | 103,988 | 23.4 | % | 27,172 | 22.9 | % | |||||||||||
| Total revenues | 120,925 | 100.0 | % | 443,781 | 100.0 | % | 118,452 | 100.0 | % | |||||||||||
| COST OF REVENUES AND OPERATING EXPENSES | ||||||||||||||||||||
| Cost of services | 107,258 | 88.7 | % | 292,844 | 66.0 | % | 76,836 | 64.9 | % | |||||||||||
| Cost of products | 31,976 | 26.4 | % | 90,353 | 20.4 | % | 23,957 | 20.2 | % | |||||||||||
| Administrative | 18,957 | 15.7 | % | 13,986 | 3.2 | % | 2,498 | 2.1 | % | |||||||||||
| Salary, benefits and payroll taxes | 20,138 | 16.7 | % | 32,300 | 7.3 | % | 29,349 | 24.8 | % | |||||||||||
| Amortization of intangible assets | 16,823 | 13.9 | % | 13,174 | 3.0 | % | 755 | 0.6 | % | |||||||||||
| Goodwill and tradename intangible assets impairment | 190,777 | 157.8 | % | — | 0.0 | % | — | 0.0 | % | |||||||||||
| Total cost of revenues and operating expenses | 385,929 | 319.1 | % | 442,657 | 99.7 | % | 133,395 | 112.6 | % | |||||||||||
| Loss from operations | (265,004 | ) | -219.1 | % | 1,124 | 0.3 | % | (14,943 | ) | -12.6 | % | |||||||||
| OTHER (EXPENSE) INCOME, NET | ||||||||||||||||||||
| Interest expense and warrant issuance costs | (16,089 | ) | -13.3 | % | (13,522 | ) | -3.0 | % | (6,316 | ) | -5.3 | % | ||||||||
| Loss on extinguishment of debt | — | 0.0 | % | — | 0.0 | % | (3,413 | ) | 0.0 | % | ||||||||||
| Interest income | 30 | 0.1 | % | 43 | 0.0 | % | — | 0.0 | % | |||||||||||
| Change in fair value of warrant liabilities | (6,100 | ) | -5.0 | % | (19,700 | ) | -4.4 | % | — | 0.0 | % | |||||||||
| Total other expense, net | (22,159 | ) | -18.3 | % | (33,179 | ) | -7.5 | % | (9,729 | ) | -8.2 | % | ||||||||
| (Loss) income before income tax expense (benefit) | (287,163 | ) | -237.5 | % | (32,055 | ) | -7.2 | % | (24,672 | ) | -20.8 | % | ||||||||
| INCOME TAX EXPENSE (BENEFIT) | 814 | 0.7 | % | (120 | ) | 0.0 | % | 109 | 0.1 | % | ||||||||||
| NET (LOSS) INCOME | (287,977 | ) | -238.1 | % | (31,935 | ) | -7.2 | % | (24,781 | ) | -20.9 | % | ||||||||
| Net income attributable to noncontrolling interest | - | 0.0 | % | 3,334 | 0.8 | % | 678 | 0.6 | % | |||||||||||
| NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS AND PARENT, RESPECTIVELY | $ | (287,977 | ) | -238.1 | % | $ | (35,269 | ) | -7.9 | % | $ | (25,459 | ) | -21.5 | % |
Revenues. Revenues for the year ended December 31, 2020, Successor 2019 Period and Predecessor 2019 Period were $120.9 million, $443.8 million and $118.5 million, respectively. The decrease was driven by the COVID-19 pandemic, which resulted in the cancellation of most cruise ship voyages and the closure of many destination resort health and wellness centers where we operate during mid-March 2020 through December 31, 2020. The break-down of revenue between service and product revenues was as follows:
•Service revenues Service Revenues for the year ended December 31, 2020, the Successor 2019 Period and Predecessor 2019 Period were $93.7 million, $339.8 million and $91.3 million, respectively.
•Product revenues. Product revenues for the year ended December 31, 2020, the Successor 2019 Period and Predecessor 2019 Period were $27.2 million, $104.0 million and $27.2 million, respectively.
39
Table of Contents
Cost of services. Cost of services for the year ended December 31, 2020, Successor 2019 Period and Predecessor 2019 Period were $107.3 million, $292.8 million, and $76.8 million, respectively. The decrease for the year ended December 31, 2020 compared to the combined Successor 2019 Period and Predecessor 2019 Period was $262.4 million, or 71%. The decrease was primarily attributable to the impact of the COVID-19 pandemic.
Cost of products. Cost of products for the year ended December 31, 2020, Successor 2019 Period and Predecessor 2019 Period were $32.0 million, $90.4 million and $24.0 million, respectively. The decrease was attributable to a lower amount required in 2021 versus 2020 related to the decrease in inventory write-downs for the decline in the net realizable value of inventories, principally the result of excess, slow-moving, and expiration of inventories caused by the cessation of our cruise line partners’ operations and, consequently, our operations, due to the COVID-19 pandemic and a change in business mix.
Administrative. Administrative expenses for the year ended December 31, 2020, the Successor 2019 Period and Predecessor 2019 Period were $19.0 million, $14.0 million, and $2.5 million, respectively. The year ended December 31, 2020 included a full year of public company cost and higher legal expenses. The Successor 2019 Period and Predecessor 2019 Period had expenses incurred in connection with the Business Combination and costs associated with being a public company.
Salary, benefits and payroll taxes. Salary, benefits and payroll taxes for the year ended December 31, 2020, the Successor 2019 Period and Predecessor 2019 Period were $20.1 million, $32.3 million, and $29.3 million, respectively. The decrease for the year ended December 31, 2020 compared to the combined Successor 2019 Period and Predecessor 2019 Period was $41.5 million, or 67%. The decrease was driven by $20.7 million related to stock options that fully vested upon grant to certain directors and executives in the Successor 2019 Period and $26.6 million in change in control payments pursuant to agreements entered into in 2016 that were earned upon consummation of the Business Combination for services rendered prior to the Business Combination in the Predecessor 2019 Period. The year ended December 31, 2020 had $5.0 million of non-cash stock-based compensation expense and included management’s actions to preserve liquidity due to the COVID-19 pandemic by enacting salary reductions, furloughs and terminations, which reduced salary expense for the period.
Amortization of intangible assets. Amortization of intangible assets for the year ended December 31, 2020, the Successor 2019 Period and Predecessor 2019 Period were $16.8 million, $13.2 million, and $0.8 million, respectively. The increase for the year ended December 31, 2020 compared to the combined Successor 2019 Period and Predecessor 2019 Period was $2.9 million, or 21%. The increase was a result of the new basis of intangible assets identified in the Business Combination.
Other income (expense), net. Other income (expense) for the year ended December 31, 2020, the Successor 2019 Period and Predecessor 2019 Period were $(22.2) million, $(33.2) million, and $(9.7) million, respectively. The decrease for the year ended December 31, 2020 compared to the combined Successor 2019 Period and Predecessor 2019 Period was $20.8 million, or 48%. The decrease was attributable primarily to the $13.6 million change in fair value of warrant liabilities and the fact that the 2019 Predecessor Period included extinguishment of debt associated with the payoff of the pre-existing debt by the Parent of the Company’s predecessor.
Income tax expense (benefit). Income tax expense (benefit) for the year ended December 31, 2020, the Successor 2019 Period and Predecessor 2019 Period were $0.8 million, $(0.1) million, and $0.1 million, respectively. The increase for the year ended December 31, 2020 compared to the combined Successor 2019 Period and Predecessor 2019 Period was $0.8 million. The increase was driven primarily by the increase in valuation allowance related to the Company’s beginning-of-year deferred tax assets that are not realizable during the year ended December 31, 2020.
Net income. Net (loss) income for the year ended December 31, 2020, the Successor 2019 Period and Predecessor 2019 Period were $(288.0) million, $(31.9) million, and $(24.8) million, respectively. The decrease for the year ended December 31, 2020 compared to the combined Successor 2019 Period and Predecessor 2019 Period was $231.3 million, or 408%. The decrease was as a result of $190.8 million in goodwill and trade name impairment charges recognized during the three months ended March 31, 2020, the $13.6 million change in fair value of warrant liabilities and the impact of the COVID-19 pandemic in the year ended December 31, 2020, partially offset by $20.7 million in expenses related to stock-based compensation during the Successor 2019 Period, and $26.6 million in change in control payments earned upon consummation of the Business Combination during the Predecessor 2019 Period.
Liquidity and Capital Resources
Overview
Due to the impact of COVID-19, we have taken prudently aggressive actions to increase our financial flexibility. We have increased financial flexibility by securing and reallocating capital resources, including: (i) eliminating all non-essential operating and capital expenditures, (ii) withdrawing the Company dividend program until further notice, (iii) deferring payment of a dividend declared on February 26, 2020 until approved by the Board of Directors, (iv) the completion of the 2020 Private Placement on June 12, 2020; (v) borrowing $7 million, net, on our revolving credit facility, leaving $13 million available and undrawn; and (vi) entering into an agreement to allow for the Company to operate its ATM Program, which permits the Company to sell, from time to time,
40
Table of Contents
common shares up to an aggregate offering price of $50.0 million. We have historically funded our operations with cash flow from operations, except prior to March 19, 2019 with respect to certain expenses and operating costs that had been paid in the Predecessor Periods prior to the Business Combination by Steiner Leisure on our behalf, and, when needed, with borrowings under our credit facility. Steiner Leisure has paid on our behalf expenses associated with the allocation of Parent corporate overhead and costs associated with the purchase of products from related parties and forgiven by Steiner Leisure. Historical operating cash flows exclude OSW Predecessor’s expenses and operating costs paid by Steiner Leisure on our behalf. Consequently, our combined historical cash flows may not be indicative of cash flows had we been a separate stand-alone entity, or of our future cash flows.
The ATM Program described above is an At-The-Market Offering Sales Agreement with Stifel Nicolaus & Company, entered into on December 7, 2020. Under the ATM Program, we may offer and sell, from time to time, common shares having an aggregate offering price of up to $50.0 million (the “ATM Shares”). Any ATM Shares sold under the ATM Program will be issued pursuant to the Company’s registration statement on Form S-3 (File No. 333-239628), which was declared effective by the SEC on July 22, 2020, the base prospectus filed as part of such registration statement, and the prospectus supplement, dated December 7, 2020 and filed by the Company with the SEC. During the year ended December 31, 2020, we issued and sold an aggregate of 1.3 million common shares at an average price of $9.18 per share for aggregate net proceeds of $11.1 million, which were net of equity issuance costs of $0.6 million. During the year ended December 31, 2021, we issued and sold an aggregate of 2.6 million common shares at an average price of $10.88 per share for aggregate net proceeds of $27.5 million, which were net of equity issuance costs of $0.9 million.
Our principal uses for liquidity have been debt service and working capital. We expect that as our cruise line partners resume operations, we will have increased costs related to redeployment of employees to sailing locations and other costs associated with resuming our operations.
Taking into account the costs described above and our current resources, we have concluded that we will have sufficient liquidity to satisfy our obligations over the next twelve months and comply with all debt covenants as required by our debt agreements.
41
Table of Contents
Cash Flows
The following table shows summary cash flow information for the years ended December 31, 2021, December 31, 2020, periods from March 20, 2019 to December 31, 2019 (Successor) and January 1, 2019 to March 19, 2019 (Predecessor).
| Successor | Predecessor | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Consolidated | Combined | |||||||||||
| Year Ended December 31, | Year Ended December 31, | March 20,2019 to December 31, | January 1, 2019 to March 19, | |||||||||
| (in thousands) | 2021 | 2020 | 2019 | 2019 | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net loss | $ | (68,522 | ) | $ | (287,977 | ) | (31,935 | ) | $ | (24,781 | ) | |
| Depreciation and amortization | 22,468 | 24,453 | 19,606 | 1,989 | ||||||||
| Goodwill and trade name impairment charges | — | 190,777 | — | — | ||||||||
| Stock-based compensation | 10,646 | 4,950 | 20,683 | — | ||||||||
| Amortization of deferred financing costs | 1,026 | 1,026 | 841 | 213 | ||||||||
| Warrant issuance costs | — | 1,386 | — | — | ||||||||
| Change in fair value of warrant liabilities | 2,600 | 6,100 | 19,700 | — | ||||||||
| Provision for doubtful accounts | 453 | 172 | — | 8 | ||||||||
| Inventories impairment charges | 3,977 | 6,000 | — | — | ||||||||
| Loss from write-offs of property and equipment | 177 | 90 | — | — | ||||||||
| Loss on extinguishment of debt | — | — | — | 3,413 | ||||||||
| Deferred income taxes | 89 | 1,575 | (643 | ) | — | |||||||
| Change in working capital | (8,018 | ) | 14,898 | (31,426 | ) | 22,891 | ||||||
| Net cash (used in) provided by operating activities | (35,104 | ) | (36,550 | ) | (3,174 | ) | 3,733 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Capital expenditures | (2,868 | ) | (2,132 | ) | (2,909 | ) | (517 | ) | ||||
| Acquisition of OSW Predecessor, net of cash acquired | — | — | (676,453 | ) | — | |||||||
| Net cash used in investing activities | (2,868 | ) | (2,132 | ) | (679,362 | ) | (517 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Proceeds from the issuance of common shares | — | — | 122,510 | — | ||||||||
| Net proceeds from Haymaker and private placement investors | — | — | 349,390 | — | ||||||||
| Proceeds from 2020 private placement, net of issuance costs paid | — | 68,602 | — | — | ||||||||
| Proceeds from At-the Market Equity Offering, net of issuance costs paid | 27,474 | 11,090 | — | — | ||||||||
| Proceeds from the term loan and revolver facilities | — | 20,000 | 245,900 | — | ||||||||
| Repayment on term loan and revolver facilities | — | (13,000 | ) | (18,442 | ) | — | ||||||
| Dividend paid on common stock | — | (2,445 | ) | — | — | |||||||
| Purchase of public warrants | — | (879 | ) | — | — | |||||||
| Proceeds from conversion of public warrants into common shares | — | — | 11 | — | ||||||||
| Payment of deferred financing costs | — | — | (6,892 | ) | — | |||||||
| Proceeds from amounts due from related party | — | — | 3,187 | — | ||||||||
| Net distributions to Parent and its affiliates (1) | — | — | — | (4,262 | ) | |||||||
| Distribution to noncontrolling interest | — | (4,011 | ) | (834 | ) | (267 | ) | |||||
| Cash paid to acquire noncontrolling interest | — | (10,810 | ) | — | — | |||||||
| Net cash provided by (used in) financing activities | 27,474 | 68,547 | 694,830 | (4,529 | ) | |||||||
| Effect of exchange rate changes on cash | (117 | ) | (280 | ) | (205 | ) | 649 | |||||
| Net (decrease) increase in cash and cash equivalents and restricted cash | (10,615 | ) | 29,585 | 12,089 | (664 | ) | ||||||
| Cash and cash equivalents and restricted cash, Beginning of period | 43,448 | 13,863 | 1,774 | 15,302 | ||||||||
| Cash and cash equivalents and restricted cash, End of period | $ | 32,833 | $ | 43,448 | $ | 13,863 | $ | 14,638 |
Comparison of Results for the Years Ended December 31, 2021 and 2020
Operating activities. Our net cash used in operating activities for the year ended December 31, 2021 and 2020, were $(35.1) million and $(36.6) million, respectively. For the year ended December 31, 2021, the Company incurred a cash flow deficit from operations principally due to the Net Loss for the period caused by the negative impact of the COVID-19 pandemic on revenue generation on cruise ships, while the Company continued to incur substantial operating expenses to prepare for and execute the resumption of operations on cruise ships and in destination resorts occurring in 2021.
42
Table of Contents
Investing activities. Our net cash used in investing activities for the year ended December 31, 2021 and 2020 were $(2.9) million and $(2.1) million, respectively. In the years ended December 31, 2021 and 2020, the Company incurred low capital expenditures due to the COVID-19 pandemic and eliminating all non-essential capital expenditures. The $0.8 million increase in 2021 primarily resulted in capital expenditures for return to service onboard vessels during the latter part of 2021.
Financing activities. Our net cash provided by financing activities for the year ended December 31, 2021 and 2020 were $27.5 million and $68.5 million, respectively. For the year ended December 31, 2021, the Company sold 2.6 million common shares under the ATM Program, resulting in $27.5 million in net proceeds. In the year ended December 31, 2020, the Company closed the 2020 Private Placement ($68.6 million proceeds through December 31, 2020, net of issuance costs paid), paid $2.4 million in dividends on common stock, purchased the 40% noncontrolling interest of Medispa Limited for $12.3 million in a combination of $10.8 million in cash and 98,753 shares of the Company’s common stock at a share price of $15.26, and borrowed a net $7.0 million under the First Lien Revolving Facility due to COVID-19.
Comparison of Results for the Years Ended December 31, 2020 to the Periods from March 20, 2019 to December 31, 2019 (Successor) and January 1, 2019 to March 19, 2019 (Predecessor)
Operating activities. Our net cash (used in) provided by operating activities for the year ended December 31, 2020, Successor 2019 Period, and the Predecessor 2019 Period were $(36.5) million, $(3.2) million and $3.7 million, respectively. In the year ended December 31, 2020, the Company ceased meaningful revenue generation at the end of the first quarter, while incurring significant costs related to the housing and repatriation costs of Company personnel onboard cruise ships, as well as costs incurred in preparation for cruise ship layups. Subsequently, the Company continued to pay repatriation costs and corporate expenses leading to a cash deficit. Also, in 2020 the Company included a $6.0 million charge for the write down of inventory that is likely to expire as a result of the extended pause in operations caused by the COVID-19 pandemic. In the Successor 2019 Period, the Company incurred stock-based compensation payments of $20.7 million related to stock options to certain directors and executives. In the Predecessor 2019 Period, the Company incurred change of control payments of $26.6 million payable upon consummation of the Business Combination.
Investing activities. Investing activities for the year ended December 31, 2020, the Successor 2019 period, and the Predecessor 2019 period were $(2.1) million, $(679.4) million and $(0.5) million, respectively. In the Successor 2019 Period, cash payments of $676.5 million were made to consummate the Business Combination.
Financing activities. Financing activities for the year ended December 31, 2020, the Successor 2019 period, and the Predecessor 2019 period were $68.5 million, $694.8 million and $(4.5) million, respectively. In the year ended December 31, 2020, the Company closed the 2020 Private Placement ($68.6 million proceeds, net of issuance costs paid), through the ATM Program, issued and sold 1.3 million shares of common stock for an average price of $9.18, for a total of $11.7 million, paid $2.4 million in dividends on common stock, and purchased the 40% noncontrolling interest of Medispa Limited for $12.3 million in a combination of $10.8 million in cash and 98,753 shares of the Company’s common stock at a share price of $15.26. In the Successor 2019 period, financing activities of $122.5 million, $349.4 million and $245.9 million, related to proceeds from the issuance of common shares, Haymaker cash contributions, and proceeds related to the term loan and revolver facilities, net of repayments, respectively, were undertaken in connection with the Business Combination.
Seasonality
A significant portion of our revenues are generated onboard cruise ships. Certain cruise lines, and, as a result, we have experienced varying degrees of seasonality as the demand for cruises is stronger in the Northern Hemisphere during the summer months and during holidays. Accordingly, the third quarter and holiday periods generally result in the highest revenue yields for us. Further, cruises and destination resorts have been negatively affected by the frequency and intensity of hurricanes. The negative impact of hurricanes in the Northern Hemisphere is highest during peak hurricane season from August to October.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). We have identified the policies outlined below as critical to our business operations and an understanding of our results of operations and that require the most difficult, subjective and complex judgments. This discussion is not intended to be a comprehensive description of all accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management’s judgment in their application. The impact on our business operations and any associated risks related to these policies is discussed under results of operations, below, where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other significant accounting policies, please see Note 2 in the Notes to the Consolidated Financial Statements. Note that our preparation of our consolidated financial statements included in this Annual Report on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our
43
Table of Contents
financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will be consistent with those estimates. Our consolidated financial statements include the assets, liabilities, revenues and expenses specifically related to our operations. We believe the assumptions and allocations underlying the accompanying consolidated financial statements and notes to the consolidated financial statements are reasonable, appropriate, and consistently applied for the periods presented.
Revenue Recognition. We recognize revenues when customers obtain control of goods and services promised by the Company. The amount of revenue recognized is based on the amount that reflects the consideration that is expected to be received in exchange for those respective goods and services. Amounts recognized are gross of commissions to cruise line or destination resort partners, which typically withhold commissions from customer payments. We have elected to present sales taxes on a net basis and, as such, sales taxes are excluded from revenue. Revenue is reported net of discounts and net of any estimated refund liability, which is determined based on historical experience. We also issue gift cards for future goods or services; revenue is recognized when they are redeemed; we also recognize revenue for breakage based on past experience for gift card amounts we expect to go unredeemed.
Prior to adoption of Accounting Standard Codification (“ASC”) Topic 606, Revenues from Contracts with Customers, as discussed in Revenue Recognition section in Note 2, Summary of Significant accounting policies to our consolidated financial statements, we recognized revenues earned as services are provided and as products are sold, following legacy accounting guidance under ASC Topic 605, Revenue Recognition. Generally, this led to recognition that is consistent with our new policy. Under legacy guidance, we had also elected to recognize revenue on a net-of-tax basis, which is similar to our election under ASC Topic 606. For gift card breakage, the Company uses the redemption recognition method for recognizing breakage related to certain gift certificates for which it has sufficient historical information; this pattern is relatively consistent with our recognition pattern under ASC Topic 606.
Cost of Revenues. We make certain assumptions to allocate cost of revenues which includes:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Cost of services. Cost of services consists primarily of the cost of product consumed in the rendering of a service, an allocable portion of wages paid to shipboard employees, an allocable portion of payments to cruise lines (which are derived as a percentage of service revenues or a minimum annual rent or a combination of both), an allocable portion of staff-related shipboard expenses, costs related to recruitment and training of shipboard employees, wages paid directly to destination resort employees, payments to destination resort venue owners, and health and wellness facility depreciation. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Cost of products. Cost of products consists primarily of the cost of products sold through our various methods of distribution, an allocable portion of wages paid to shipboard employees, an allocable portion of payments to cruise lines and destination resort partners (which are derived as a percentage of product revenues or a minimum annual rent or a combination of both). Cost of products includes the cost of products sold through various methods of distribution. |
Cost of revenues may be affected by, among other things, sales mix, production levels, exchange rates, changes in supplier prices and discounts, purchasing and manufacturing efficiencies, tariffs, duties, freight and inventory costs, including impairment charges to reduce inventory to net realizable value, and increases in fuel costs. Certain cruise line and destination resort health and wellness center agreements provide for increases in the percentages of services and products revenues and/or, as the case may be, the amount of minimum annual payments over the terms of those agreements. These payments may also be increased under new agreements with cruise lines and destination resort health and wellness center owners that replace expiring agreements.
Inventories. Inventories, consisting principally of personal care products, are stated at the lower of cost, as determined on a first-in, first-out basis, or market. All inventory balances are comprised of finished goods used in beauty and health and wellness services or held for resale for sale to customers. Inventory reserve is recorded to write down the cost of inventory to the estimated net realizable value. The Company’s evaluation of net realizable value requires judgment and is based on specific assumptions. The establishment of inventory reserves involves the estimate of the amount of inventories that will be used in health and wellness services on cruises when they return to sailing, which is uncertain and dependent on our cruise line partners and their customers who use our services. During the years ended December 31, 2021 and 2020 (Successor), we recorded inventory impairment charges of $4.0 million (of which approximately $2.0 million was recorded in the three months ended December 31, 2021) and $6.0 million, respectively, for the decline in the net realizable value of inventories, which is included in Cost of products in the accompanying consolidated statement of operations. This loss principally is the result of excess, slow-moving, expiration of products and damaged inventories held at our Maritime segment caused by the cessation of our cruise line partners’ operations and, consequently, our Maritime segment operations, due to the COVID 19 pandemic. The establishment of inventory reserves involves estimating the amount of inventories that will be sold at or used in health and wellness services on cruises when they return to sailing, which is uncertain and dependent on our cruise line partners and its customers that use our services and purchase our products
44
Table of Contents
Goodwill and Indefinite-Lived Intangible Assets. Goodwill represents the excess of cost over the fair value of net tangible and identifiable intangible assets acquired. The Company has two operating segments: (1) Maritime and (2) Destination Resorts. The Maritime and Destination Resorts operating segments each have associated goodwill, and each has been determined to be a reporting unit.
Goodwill and other intangible assets with indefinite useful lives are not amortized, but rather, are tested for impairment at least annually, each October or, more frequently, when events or circumstances dictate an interim test is necessary. We review goodwill for impairment at the reporting unit level annually or, when events or circumstances dictate, more frequently. The impairment review for goodwill consists of a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount, and if necessary, a two-step goodwill impairment test. Factors to consider when performing the qualitative assessment primarily include general economic conditions and changes in forecasted operating results. If the qualitative assessment demonstrates that it is more-likely-than-not that the estimated fair value of the reporting unit exceeds its carrying value, it is not necessary to perform the goodwill impairment test. We may elect to bypass the qualitative assessment and proceed directly to step one, for any reporting unit, in any period. The Company can resume the qualitative assessment for any reporting unit in any subsequent period. When performing the goodwill impairment test, if the fair value of the reporting unit exceeds its carrying value, no write-down of goodwill is required. As amended by ASU No. 2017-04, Intangibles- Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment, if the fair value of the reporting unit is less than the carrying value of its net assets, an impairment is recognized based on the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to such reporting unit. As a result of the effect of COVID-19 on our expected future operating cash flows and our evaluation of the economic and market conditions, and its impact on the Company’s common share price, we concluded it is more likely than not that goodwill was impaired, and performed, including work performed by third-party valuation specialists, interim impairment tests as of March 31, 2020. As a result, we concluded that the goodwill associated with our reporting units was fully impaired. We recognized goodwill impairment charges of approximately $190 million during the year ended December 31, 2020. Significant assumptions used in the income approach included the estimated future net annual cash flows for each reporting unit and the discount rate.
Long-Lived Assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate, based on estimated future cash flows, that the carrying amount of these assets may not be fully recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset (asset group) to future undiscounted cash flows expected to be generated by the asset (asset group). An asset group is the lowest level of assets and liabilities for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. When estimating future cash flows, the Company considers:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | only the future cash flows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset (asset group); |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | potential events and changes in circumstance affecting key estimates and assumptions; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | the existing service potential of the asset (asset group) at the date tested. |
If an asset (asset group) is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset (asset group) exceeds our fair value. When determining the fair value of the asset (asset group), we consider the highest and best use of the assets from a market-participant perspective. The fair value measurement is generally determined through the use of independent third-party appraisals or an expected present value technique, both of which may include a discounted cash flow approach, which reflects assumptions of what market participants would utilize to price the asset (asset group).
Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Assets to be abandoned, or from which no further benefit is expected, are written down to zero at the time that the determination is made and the assets are removed entirely from service.
As a result of the effect of COVID-19 on our expected future operating cash flows and our evaluation of the economic and market conditions, and its impact on the Company’s common share price, interim impairment evaluation of our trade name indefinite-lived intangible asset was performed as of March 31, 2020 and determined that the estimated fair value of one of our trade names was less than carrying value. As a result, we recognized an impairment charge of $0.7 million during the year ended December 31, 2020. As of October 1, 2021 and 2020, we performed our annual trade name indefinite-lived intangible asset impairment quantitative test and determined there was no incremental impairment. The trade name was valued through application of the relief from royalty method. Under this method, a royalty rate is applied to the revenues associated with the trade name to capture value associated with use of the name as if licensed. The resulting royalty savings are then discounted to present fair value at rates reflective of the risk and return expectations of the interests to derive its fair value as of the impairment testing date.
Recently Issued Accounting Pronouncements
Refer to Note 2 to the Consolidated Financial Statements in this report for a discussion of recent accounting pronouncements.
Inflation and Economic Conditions
45
Table of Contents
We do not believe that inflation has had a material adverse effect on our revenues or results of operations. However, public demand for activities, including cruises, is influenced by general economic conditions, including inflation, global health epidemics/pandemics and customer preferences. Periods of economic softness could have a material adverse effect on the cruise industry and hospitality industry upon which we are dependent. Such a slowdown could adversely affect our results of operations and financial condition. The COVID-19 pandemic has negatively impacted our business, operations, results of operations and financial condition in 2021. Recurrence of the more severe aspects of the recent adverse economic conditions, including a further escalation of the COVID-19 outbreak, as well as periods of inflation, interest rate increases, and fuel price increases, could have a material adverse effect on our results of operations and financial condition during the period of such recurrence. Weakness in the U.S. Dollar compared to the U.K. Pound Sterling and the Euro also could have a material adverse effect on our results of operations and financial condition.
U.S. Tax Reform and Recent Tax Legislation
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020 in response to the COVID-19 pandemic and includes certain business and economic provisions. As a result, the Company has deferred $421,356 in payroll taxes and expects to benefit from the Employer Retention Credit. Additionally, the Consolidated Appropriations Act (“CAA”), enacted on December 27, 2020, which extended and modified certain provisions under the CARES Act, introduced new relief provisions, and extended or made permanent certain tax provisions set to expire after December 31, 2020 through 2021. The expected outcome is not expected to be material to the Company’s consolidated financial statements. The Company is continuing to analyze the impact of this recent legislation.