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Aug. 15, 2019, 12:21 p.m. EDT

10-Q: ONESPAWORLD HOLDINGS LTD

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

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 164 cruise ships and at 70 destination resorts globally. With over 80% market share in the highly attractive outsourced maritime health and wellness market, we are the market leader at approximately 10x 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 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, which in 2018 included nearly 8,000 annual voyages with visits to over 1,100 ports of call around the world. We have consistently expanded our onboard offerings with innovative and leading-edge service and product introductions, and developed powerful back-end recruiting, training and logistics platforms to manage our operational complexity, maintain our industry-leading quality standards, and maximize revenue per center. The combination of our renowned recruiting and training platform, deep labor pool, global logistics and supply chain infrastructure and proven 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. Recently, we extended our current agreement with Norwegian Cruise Lines through 2024, won a contract with the new lifestyle brand Virgin Voyages to operate the spa and wellness offerings onboard the first three Virgin vessels, planned to launch in 2020, 2021 and 2022, won a contract with Celebrity Cruise Lines to design and operate the health and wellness centers onboard their four new mega ships commissioned in 2018 and being commissioned between 2019 and 2022, and entered into an amended agreement with P&O Cruises to extend our operations on P&O's vessels for the next five years.

Our success and our growth are dependent to a significant extent on the success and growth of the travel, leisure and hospitality industries, and particularly on the cruise industry.

The success of the cruise and hospitality industries, as well as our business, is impacted by geopolitical events and economic conditions, as well as the perception by consumers of such conditions. Prior adverse economic factors, including periodic increases in fuel prices, experienced in the United States and other world economies have presented challenges for the cruise and hospitality industries and our business, including the potential for reduced spending by consumers on discretionary items, such as our services and products. The recurrence of the more severe aspects of these challenging conditions could have a material adverse effect on the cruise and hospitality industries and also could have a material adverse effect on our results of operations and financial condition for 2019 and thereafter.

Despite the general historic trend of growth in the volume of cruise passengers, in 2019 and future years, the global economic environment could cause the number of cruise passengers to decline or be maintained through discounting, which could result in an increased number of passengers with limited discretionary spending ability. A significant decrease in passenger volume could have a material adverse effect on our results of operations and financial condition.

Other factors also can adversely affect our financial results. Fluctuations in currency exchange rates compared to the U.S. Dollar can impact our results of operations, most significantly because we pay for the administration of recruitment and training of our shipboard personnel and the ingredients and manufacturing of many of our products in U.K. Pounds Sterling and Euros, respectively. Accordingly, while the relative strength of the U.S. Dollar has improved recently, renewed weakness of the U.S. Dollar against those currencies can adversely affect our results of operations, as has occurred from time to time in recent years.

On March 19, 2019, we consummated the previously announced business combination (the "Business Combination") pursuant to that certain Business Combination Agreement, dated as of November 1, 2018 (as amended, supplemented or otherwise modified from time to time, the "Transaction Agreement"), by and among Steiner Leisure Limited, an international business company incorporated under the laws of the Commonwealth of The Bahamas ("Steiner Leisure"), Steiner U.S. Holdings, Inc., a Florida corporation, Nemo (UK) Holdco, Ltd., a limited company formed under the laws of England and Wales, Steiner UK Limited,

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a limited company formed under the laws of England and Wales, Steiner Management Services, LLC, a Florida limited liability company, Haymaker Acquisition Corp., a Delaware corporation ("Haymaker"), Dory US Merger Sub, LLC, a Delaware limited liability company, Dory Acquisition Sub, Limited, an international business company incorporated under the laws of the Commonwealth of The Bahamas, Dory Intermediate LLC, a Delaware limited liability company, and Dory Acquisition Sub, Inc., a Delaware corporation.

"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 Steiner Marks Limited, (ii) the following respective indirect subsidiaries of Steiner Leisure: Mandara PSLV, LLC, 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., Steiner Resort Spas (North Carolina), Inc., OSW SoHo LLC, OSW Distribution LLC, 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, Mandara Spa (Cruise I), LLC, Mandara Spa (Cruise II), LLC, Steiner Transocean (II) Limited, The Onboard Spa by Steiner (Shanghai) Co., Ltd., Mandara Spa LLC, Mandara Spa Puerto Rico, Inc., Mandara Spa (Guam), L.L.C., 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, and (iv) the timetospa.com website owned by Elemis USA, Inc. (formerly known as Steiner Beauty Products, Inc.).

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:

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 North American and Asian centers for such period because North American centers are typically larger and produce substantially more revenue per center than Asian centers. Additionally, average weekly revenue can also be negatively impacted by renovations of our destination resort health and wellness centers.

For the six months ended June 30, 2019, we have combined the results of the successor entity, OneSpaWorld Holdings Limited, for the period from March 20, 2019 to June 30, 2019 with the results of OSW Predecessor for the period from January 1, 2019 to March 19, 2019 (the "2019 Combined Period") in the following table which sets forth the above key performance indicators for the periods presented:







                                                             Three Months Ended            Six Months Ended
                                                                  June 30,                     June 30,
                                                             2019           2018          2019          2018
        Selected Statistics
        Period End Ship Count                                    164           160           164           160
        Average Ship Count (1)                                   161           155           160           155
        Average Weekly Revenue Per Ship                   $   61,317      $ 61,150      $ 60,888      $ 60,104
        Average Revenue Per Shipboard Staff Per Day       $      479      $    479      $    474      $    473
        Period End Resort Count                                   70            65            70            65
        Average Resort Count (2)                                  68            61            68            58
        Average Weekly Revenue Per Resort                 $   12,292      $ 14,403      $ 12,095      $ 15,057
        Capital Expenditures ($ thousands)                $    1,243      $  1,581      $  1,760      $  2,936
        


(1) Average Ship Count reflects the fact that during the period ships were in and out of service and is calculated by adding the total number of days that each of the ships generated revenue during the period, divided by the number of calendar days during the period.

(2) Average Resort Count reflects the fact that during the period destination resort health and wellness centers were in and out of service and is calculated by adding the total number of days that each destination resort health and wellness center generated revenue during the period, divided by the number of calendar days during the period.

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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 medispa 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, hair care, orthotics and nutritional 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, 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. 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 and payroll taxes. Salary 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/401K, stock based awards and other employee costs.

Amortization of intangible assets. Amortization of intangible assets is comprised of the amortization of intangible assets with definite useful lives (e.g., customer contracts, trade names, long-term leases) and amortization expenses associated with the transaction in 2015 in which a consortium led by L Catterton acquired Steiner Leisure, the then-holding company of OneSpaWorld.

Other income (expense), net. Other income (expense) consists of royalty income, interest income and 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 in our Annual Report on Form 10-K for the year ended December 31, 2018.

Net income. Net income consists of income from operations less other income (expense) and provision for income taxes.

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Revenue Drivers and Business Trends

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

The number of ships and destination resorts in which we operate health and wellness centers. Revenue is impacted by net new ship growth and the increase in the number of destination resort health and wellness centers 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 medispa 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.

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 medispa services, resulting in higher guest spending.

The mix of ship count across contemporary, premium, luxury and budget categories. Revenue generated per shipboard health and wellness center differs across contemporary, premium, luxury and budget ship categories due to the size of the health and wellness centers, services offered, 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 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-paymenttechnology 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 select destination resorts may be negatively affected by hurricanes. 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 and Combined Financial Statements in this report for a discussion of recent accounting pronouncements.

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Results of Operations

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 June 30, 2019. References to the "Predecessor 2019 Period" in the discussion below refers to the period from January 1, 2019 to March 19, 2019 (amounts in thousands, except per share data).







                                                                Successor                                            Predecessor
                                                               Consolidated                                            Combined
                                                      Three Months                                          Three Months
                                                     Ended June 30,        % of Total                      Ended June 30,        % of Total
                                                          2019              Revenue                             2018              Revenue
        REVENUES:
        Service revenues                            $        107,285                76 %                  $        102,845                76 %
        Product revenues                                      33,145                24 %                            32,550                24 %
        Total revenues                                       140,430               100 %                           135,395               100 %
        COST OF REVENUES AND OPERATING EXPENSES:
        Cost of services                                      90,642                65 %                            88,092                65 %
        Cost of products                                      28,604                20 %                            27,535                20 %
        Administrative                                         4,346                 3 %                             2,796                 2 %
        Salary and payroll taxes                               4,249                 3 %                             3,680                 3 %
        Amortization of intangible assets                      4,491                 3 %                               893                 1 %
        Total cost of revenues and operating
        expenses                                             132,332                94 %                           122,996                91 %
        Income from operations                                 8,098                 6 %                            12,399                 9 %
        OTHER INCOME (EXPENSE), NET:
        Interest expense                                      (4,271 )              -3 %                            (8,780 )              -6 %
        Interest income                                           -                 -                                  205                 0 %
        Other income (expense)                                    -                 -                                   14                 0 %
        Total other income (expense), net                     (4,271 )              -3 %                            (8,561 )              -6 %
        Income before (benefit) provision for
        income taxes                                           3,827                 3 %                             3,838                 3 %
        (BENEFIT) PROVISION FOR INCOME TAXES                    (732 )               0 %                               141                 0 %
        Net income                                             4,559                 3 %                             3,697                 3 %
        Net income attributable to noncontrolling
        interest                                                 950                 1 %                             1,044                 1 %
        Net income attributable to common
        shareholders and Parent, respectively       $          3,609                 3 %                  $          2,653                 2 %
        


Comparison of Results for the Three Months Ended June 30, 2019 (Successor) and the Three Months Ended June 30, 2018 (Predecessor)

Revenues. Revenues for the three months ended June 30, 2019 and 2018 were $140.4 million and $135.4 million, respectively. The increase for the three months ended June 30, 2019 was attributable to six incremental net new shipboard health and wellness centers added to the fleet of cruise line partners, a continued trend towards larger and enhanced shipboard health and wellness centers, and continued collaboration with cruise line partners. The split of revenue growth between service and product revenues was as follows:

Service revenues. Service Revenues for the three months ended June 30, 2019 and 2018 were $107.3 million and $102.8 million, respectively.

Product revenues. Product Revenues for the three months ended June 30, 2019 and 2018 were $33.1 million and $32.6 million, respectively.

The productivity of shipboard health and wellness centers increased for the three months ended June 30, 2019 as compared to the three months ended June 30, 2018 as evidenced by an increase in average weekly revenues per ship, which increased to $61,317 for the three months ended June 30, 2019 from $61,150 in the three months ended June 30, 2018. The productivity of destination resort health and wellness centers, measured by average weekly revenues, decreased 15% to $12,292 for the three months ended June 30, 2019, from $14,403 for the three months ended June 30, 2018, primarily due to a larger number of managed centers in our mix, which generate less revenue per facility.

Cost of services. Cost of services as a percentage of service revenues for the three months ended June 30, 2019 and 2018 were 84.5%, and 85.7%, respectively. The $2.6 million increase in cost of services for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 is primarily attributable to an increase in service revenues.

Cost of products. Cost of products as a percentage of product revenues for the three months ended June 30, 2019 and 2018 were 86.3%, and 84.6%, respectively. Cost of products increased $1.1 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 primarily due to an increase in product revenues and the non-cash impact of purchase price accounting adjustments related to inventory "step-up" in connection with the Business Combination.

Administrative. Administrative expenses for the three months ended June 30, 2019 and 2018 were $4.3 million and $2.8 million, respectively. The increase of $1.5 million in administrative expenses for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 was primarily attributable to expenses incurred in support of the Company's operations as a public company and the non-cash impact of the purchase price accounting adjustment related to Property and Equipment in connection with the Business Combination.

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Salary and payroll taxes. Salary and payroll taxes for the three months ended June 30, 2019 and 2018 were $4.3 million and $3.7 million, respectively. The increase of $0.6 million in salary and payroll taxes for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 was attributable to increased headcount necessitated by being a publicly traded company.

Amortization of intangible assets. Amortization of intangible assets for the three months ended June 30, 2019 and 2018 were $4.5 million and $0.9 million, respectively. Amortization expense for the three months ended June 30, 2019 reflects the new basis of intangible assets identified in the Business Combination.

Other income (expense), net. Other income (expense) for the three months ended June 30, 2019 and 2018 were ($4.3) million and ($8.6) million, respectively. The decrease of $4.3 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 was attributable to lower interest expense related to the new debt financing in connection with the Business Combination compared to the preexisting debt in the second quarter of fiscal 2018.

(Benefit) provision for income taxes. (Benefit) provision for income taxes for the three months ended June 30, 2019 and 2018 were ($0.7 million) and . . .

Aug 15, 2019

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