UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): March 19, 2019

 

 

OneSpaWorld Holdings Limited

(Exact name of registrant as specified in its charter)

 

 

 

Commonwealth of The Bahamas		001-38843		Not Applicable
(State or other jurisdiction of incorporation)		(Commission File Number)		(IRS Employer Identification No.)

 

Office of Lennox Paton Corporate Services Limited Bayside Executive Park, Buildings 3, West Bay Street, P.O. Box N-4875 City of Nassau, Island of New Providence, Commonwealth of The Bahamas		N/A
(Address of principal executive offices)		(Zip Code)

Tel: (242) 502-5000

(Registrant’s telephone number, including area code)

 

 

Check the appropriate box below if the Form 8-K is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

☐	Written communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

☐	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

☐	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

☐	Pre-commencements communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

☒	Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

 

 

Introductory Note

On March 19, 2019, OneSpaWorld Holdings Limited (“OneSpaWorld”) 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, 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 (Saipan), Inc., 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.

 

Item 1.01

Entry into a Material Definitive Agreement.

Credit Agreement

On March 19, 2019, Dory Intermediate LLC (“Dory Intermediate”) entered into (i) senior secured first lien credit facilities (the “First Lien Credit Facilities”) with Dory Acquisition Sub, Inc. (“Dory Acquisition”), Goldman Sachs Lending Partners LLC, as administrative agent, and certain lenders, consisting of (x) a term loan facility of $208.5 million (of which $20 million was borrowed by Dory Acquisition) (the “First Lien Term Loan Facility”), (y) a revolving loan facility of up to $20 million (the “First Lien Revolving Facility”) and (z) a delayed draw term loan facility of $5 million (the “First Lien Delayed Draw Facility”), and (ii) a senior secured second lien term loan facility of $25 million (the “Second Lien Term Loan Facility” and, together with the First Lien Term Loan Facility, the “Term Loan Facilities”; the New Term Loan Facilities, together with the First Lien Revolving Facility and the First Lien Delayed Draw Facility, are referred to as the “New Credit Facilities”) with Cortland Capital Market Services LLC, as administrative agent, and Neuberger Berman Alternative Funds, Neuberger Berman Long Short Fund, as lender. The New First Lien Revolving Facility included borrowing capacity available for letters of credit up to $5 million. Any issuance of letters of credit reduces the amount available under the New First Lien Revolving Facility. The New First Lien Term Loan Facility matures seven years after March 19, 2019, the New First Lien Revolving Facility matures five years after March 19, 2019 and the New Second Lien Term Loan Facility matures eight years after March 19, 2019.

 

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

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

The Term Loan Facilities require Dory Intermediate to make certain mandatory prepayments, with (i) 100% of net cash proceeds of all non-ordinary course asset sales or other dispositions of property, subject to the ability to reinvest such proceeds and certain other exceptions, and subject to step downs if certain leverage ratios are met and (ii) 100% of the net cash proceeds of any debt incurrence, other than debt permitted under the definitive agreements (but excluding debt incurred to refinance the Credit Facilities). Dory Intermediate also is required to make quarterly amortization payments equal to .25% of the original principal amount of the First Lien Term Loan Facility commencing after the first full fiscal quarter after the closing date of the Credit Facilities (subject to reductions by optional and mandatory prepayments of the loans). Dory Intermediate may prepay (i) the First Lien Credit Facilities at any time without premium or penalty, subject to payment of customary breakage costs and a customary “soft call,” and (ii) the Second Lien Term Loan Facility at any time without premium or penalty, subject to a customary make-whole premium for any voluntary prepayment prior to the date that is 30 months following the closing date of the Credit Facilities (the “Callable Date”), following by a call premium of (x) 4.0% on or prior to the first anniversary of the Callable Date, (y) 2.50% after the first anniversary but on or prior to the second anniversary of the Callable Date, and (z) 1.50% after the second anniversary but on or prior to the third anniversary of the Callable Date.

The First Lien Revolving Facility contains a financial covenant and the Credit Facilities contain a number of traditional negative covenants including negative covenants related to the following subjects: consolidations, mergers, and sales of assets; limitations on the incurrence of certain liens; limitations on certain indebtedness; limitations on the ability to pay dividends; and certain affiliate transaction.

The Credit Facilities also contain certain customary representations and warranties, affirmative covenants and events of default. If an event of default occurs, the lenders under the Credit Facilities are entitled to take various actions, including the acceleration of amounts due under the Credit Facilities and all actions permitted to be taken by a secured creditor, subject to customary intercreditor provisions among the first and second lien secured parties.

The foregoing descriptions of the First Lien Term Loan Facility, First Lien Revolving Facility, First Lien Delayed Draw Facility and Second Lien Term Loan Facility do not purport to be complete and are qualified in their entirety by the terms and conditions of the First Lien Term Loan Facility, First Lien Revolving Facility and Second Lien Term Loan Facility, which are attached hereto as Exhibits 10.1 and 10.2, respectively, and are incorporated herein by reference.

Registration Rights Agreement

On March 19, 2019, in connection with the closing of the Business Combination (the “Closing”), OneSpaWorld, Steiner Leisure and Haymaker Sponsor, LLC (“Haymaker Sponsor”), entered into a Registration Rights Agreement (the “Registration Rights Agreement”). The Registration Rights Agreement provides for customary registration rights, including demand and piggyback rights subject to cut-back provisions. In addition, OneSpaWorld has agreed to use its commercially reasonable efforts to file a shelf registration statement to register Steiner Leisure’s and Haymaker Sponsor’s shares within 45 days of the Closing. At any time, and from time to time, after the shelf registration statement has been declared effective by the Securities and Exchange Commission (“SEC”), Steiner Leisure will be entitled to make up to three demands, and Haymaker Sponsor will be entitled to make up to three demands per year, that a resale of shares of OneSpaWorld reasonably expected to exceed $10,000,000 in gross offering price pursuant to such

 

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shelf registration statement be made pursuant to an underwritten offering. Pursuant to the Registration Rights Agreement, Steiner Leisure and Haymaker Sponsor will agree not to sell, transfer, pledge or otherwise dispose of their OneSpaWorld Shares (as defined in the Registration Rights Agreement) during the seven days before and 90 days after the pricing of any underwritten offering of OneSpaWorld, subject to certain exceptions, and Steiner Leisure and Haymaker Sponsor will enter into a customary lock-up agreement to such effect. Steiner Leisure and Haymaker Sponsor will agree not to assign or delegate their rights, duties or obligations under the Registration Rights Agreement for a period of six months following the Closing, subject to certain exceptions.

The foregoing description of the Registration Rights Agreement does not purport to be complete and is qualified in its entirety by the terms and conditions of the Registration Rights Agreement, which is attached hereto as Exhibit 10.3 and is incorporated herein by reference.

Lock-up Agreement

On March 19, 2019, in connection with the Business Combination, Haymaker Sponsor, Steiner Leisure, and directors and officers of OneSpaWorld and Haymaker, and (solely for the purpose of certain provisions thereof) Haymaker (the “Lock-up Parties”), entered into a Lock-up Agreement (the “Lock-up Agreement”) with OneSpaWorld that, among other things, modifies that certain lock-up agreement, dated as of October 24, 2017, by and among Haymaker, Haymaker Sponsor, and the directors and officers of Haymaker. Pursuant to the Lock-up Agreement, the Lock-up Parties agreed that they would not, subject to certain limited exceptions, transfer or sell their OneSpaWorld Shares for a period of six months after the consummation of the Business Combination.

The foregoing description of the Lock-up Agreement does not purport to be complete and is qualified in its entirety by the terms and conditions of the Lock-up Agreement, which is attached hereto as Exhibit 10.4 and is incorporated herein by reference.

Warrant Agreement

On March 19, 2019, in connection with the Closing, OneSpaWorld entered into an Amended and Restated Warrant Agreement (the “Warrant Agreement”), by and between OneSpaWorld and Continental Stock Transfer & Trust Company pursuant to which the obligations of Haymaker under the Original Warrant Agreement (as defined in the Warrant Agreement) are now obligations of OneSpaWorld and are no longer obligations of Haymaker.

The foregoing description of the Warrant Agreement does not purport to be complete and is qualified in its entirety by the terms and conditions of the Warrant Agreement, which is attached hereto as Exhibit 10.5 and is incorporated herein by reference.

2019 Equity Incentive Plan

The OneSpaWorld board of directors approved the 2019 Equity Incentive Plan (the “2019 Plan”) on March 18, 2019 and our shareholder approved the 2019 Plan on March 18, 2019. The purpose of the 2019 Plan is to make available incentives that will assist OneSpaWorld to attract, retain, and motivate employees, including officers, consultants and directors. OneSpaWorld may provide these incentives through the grant of share options, share appreciation rights, restricted shares, restricted share units, performance shares and units and other cash-based or share-based awards. Awards may be granted under the 2019 Plan to OneSpaWorld’s employees, including officers, directors or consultants or those of any present or future parent or subsidiary corporation or other affiliated entity. A total of 7,000,000 OneSpaWorld Shares will be initially authorized and reserved for issuance under the plan.

The foregoing description of the 2019 Plan does not purport to be complete and is qualified in its entirety by the terms and conditions of the 2019 Plan, which is attached hereto as Exhibit 10.6 and is incorporated herein by reference.

 

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Indemnity Agreements

On March 19, 2019, we entered into indemnity agreements with each of our directors and executive officers. Each indemnity agreement provides for indemnification and advancement by the Company of certain expenses and costs relating to claims, suits or proceedings arising from service to the Company or, at our request, service to other entities, as officers or directors to the maximum extent permitted by applicable law.

The foregoing description of the indemnity agreements does not purport to be complete and is qualified in its entirety by the terms and conditions of the indemnity agreements, a form of which is attached hereto as Exhibit 10.7 and is incorporated herein by reference.

 

Item 2.01

Completion of Acquisition or Disposition of Assets.

The disclosure set forth in the “Introductory Note” above is incorporated into this Item 2.01 by reference. On March 6, 2019, the Business Combination was approved by the shareholders of Haymaker at a special meeting (the “Special Meeting”). The Business Combination was completed on March 19, 2019.

Consideration to Haymaker’s Shareholders and Warrant Holders in the Business Combination

Upon completion of the Business Combination, the public stockholders of Haymaker received an aggregate of 31,713,387 common shares par value $0.0001 per share, of OneSpaWorld ( the “OneSpaWorld Shares”), with each public stockholder receiving one OneSpaWorld Share in exchange for each share of Class A common stock, par value $0.0001 per share, of Haymaker (“Class A Shares”) held at the Closing; in addition, each warrant to purchase Class A Shares (the “Haymaker Warrants”) became exercisable for one OneSpaWorld Share, on the same terms and conditions as those applicable to the warrants to purchase Class A Shares.

In addition, 3,000,000 OneSpaWorld Shares and the right to receive 1,600,000 OneSpaWorld Shares upon the occurrence of certain events were issued to Haymaker Sponsor and other former holders of Class B common stock of Haymaker (the “Founders”), in exchange for such shares of Class B common stock of Haymaker, and the Haymaker Warrants held by Haymaker Sponsor became exercisable for 3,408,186 OneSpaWorld Shares, after giving effect to the forfeiture of warrants to purchase 4,591,814 OneSpaWorld Shares.

Consideration Payable to Steiner Leisure in the Business Combination

The consideration paid to Steiner Leisure in connection with the Business Combination consisted of: (i) 14,155,274 OneSpaWorld Shares (valued at $141,552,740 based on a $10.00 per share price), (ii) 1,486,520 OneSpaWorld Warrants, (iii) $611,671,249 in cash and (iv) the right to receive up to an additional 5,000,000 OneSpaWorld Shares upon the occurrence of certain events.

The material terms and conditions of the Merger Agreement are described in the section entitled “The Transaction Agreement and Related Agreements” starting on page 127 of Amendment No. 4 to the Registration Statement on Form S-4, filed by OneSpaWorld with the SEC on February 14, 2019 (the “Registration Statement”), and is incorporated herein by reference.

On March 20, 2019, Steiner Leisure completed the sales of 5,607,144 OneSpaWorld Shares to certain investors in a private placement for total proceeds of $56,071,440.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Current Report on Form 8-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for the post- combination business. Specifically, forward-looking statements may include statements relating to:

 

•

the benefits of the Business Combination;

 

•

the future financial performance of the Company following the Business Combination;

 

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•

changes in the market for our services;

 

•

expansion plans and opportunities; and

 

•

other statements preceded by, followed by or that include the words “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words or phrases.

These forward-looking statements are based on information available as of the date of this Current Report on Form 8-K and our management’s current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. OneSpaWorld undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include:

 

•

the outcome of any legal proceedings that may be instituted against OneSpaWorld following announcement of the consummated Business Combination and transactions contemplated thereby;

 

•

the inability to obtain or maintain the listing of our common shares or warrants on The Nasdaq Stock Market following the Business Combination;

 

•

the risk that the Business Combination disrupts current plans and operations as a result of the announcement and consummation of the transactions described herein;

 

•

the inability to recognize the anticipated benefits of the Business Combination, which may be affected by, among other things, competition and the ability of the combined business to grow and manage growth profitably;

 

•

costs related to the Business Combination;

 

•

changes in applicable laws or regulations;

 

•

the possibility that OneSpaWorld may be adversely affected by other economic, business, and/or competitive factors; and

 

•

other risks and uncertainties indicated or incorporated by reference in this Current Report on Form 8-K, including those set forth in the section entitled “Risk Factors” beginning on page 45 of the Registration Statement, and are incorporated herein by reference.

Business

The business of OneSpaWorld is described in the section entitled “Business of OneSpaWorld after the Business Combination” beginning on page 166 of the Registration Statement and is incorporated herein by reference.

 

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Risk Factors

The risk factors related to our business and operations are described in the section entitled “Risk Factors” beginning on page 45 of the Registration Statement and is incorporated herein by reference.

Selected Historical Financial Information

The following tables contain selected historical financial data for OSW Predecessor as of and for the years ended December 31, 2018, 2017 and 2016, derived from the audited combined financial statements of OSW Predecessor incorporated herein by reference. The selected historical financial data of OSW Predecessor is not intended to be an indicator of its or OneSpaWorld’s financial condition or results of operations in the future.

The information below is only a summary and should be read in conjunction with the section entitled “OSW Predecessor Management’s Discussion and Analysis of Financial Condition and Results of Operations” included below in this Current Report on Form 8-K and the audited combined financial statements of OSW Predecessor, and the notes related thereto, included as Exhibit 99.2 to this Current Report on Form 8-K.

 

		Year Ended December 31,
(In thousands)		2018				2017				2016
Revenues
Service Revenues		$	410,927			$	383,686			$	362,698
Product Revenues			129,851				122,999				113,586
Total Revenues			540,778				506,685				476,284
Cost of Revenue and Operating Expenses
Cost of Services			352,382				332,360				318,001
Cost of Products			110,793				107,990				106,259
Administrative			9,937				9,222				10,432
Salary and Payroll Taxes			15,624				15,294				14,454
Amortization of Intangible Assets			3,521				3,521				3,521
Total Cost of Revenues and Operating Expenses			492,257				468,387				452,667
Income from Operations			48,521				38,298				23,617
Other Income (Expense), net
Interest Expense			(34,099	)			—				—
Interest Income			238				408				340
Other (Expense) / Income			171				(217	)			(178	)
Total Other Income (Expense), net			(33,690	)			191				162
Income Before Provision for Income Taxes			14,831				38,489				23,779
Provision for Income Taxes			1,088				5,263				5,615
Net Income		$	13,743			$	33,226			$	18,164
Adjusted EBITDA(1)		$	58,622			$	55,902			$	51,746
Unlevered After-Tax Free Cash Flow		$	52,913			$	52,774			$	48,020
% Conversion			90.3	%			94.4	%			92.8	%

 

		As of December 31,
(In thousands)		2018				2017
Balance Sheet Data (At Period End):
Working Capital(2)		$	22,419			$	17,252
Total Assets			272,659				267,072
Total Liabilities			400,242				41,791
Total Equity (Deficit)			(127,583	)			225,281

 

(1)

OSW Predecessor defines Adjusted EBITDA as Net Income plus Provision for Income Taxes, Other Income, Non-Controlling Interest, Interest Expense, and Depreciation & Amortization, with adjustments for non-recurring items, related party transactions, contribution from the historical timetospa.com channel, purchase price accounting adjustments relating to the 2015 Transaction (as defined below), discrepancies between cash and booked Provision for Income Taxes and non-cash contract expenses. See “Unaudited Pro Forma Condensed Combined Financial Statements.” OSW Predecessor defines Unlevered After-Tax Free Cash Flow as Adjusted EBITDA minus capital expenditures and cash taxes paid.

(2)	Working capital calculated as current assets less current liabilities, less cash and cash equivalents.

 

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The following table reconciles Net Income to Adjusted EBITDA and Unlevered After-Tax Free Cash Flow for the years ended December 31, 2018, 2017 and 2016:

 

(In thousands)		Year Ended December 31,
		2018				2017				2016
Net Income		$	13,743			$	33,226			$	18,164
Provision for Income Taxes			1,088				5,263				5,615
Other Income			(409	)			(191	)			(162	)
Non-Controlling Interest(a)			(3,857	)			(2,109	)			(3,261	)
Interest Expense			34,099				—				—
Non-GAAP Management Adjustments(b)			—				(1,208	)			270
Related Party Adjustments(c)			2,860				9,925				18,953
timetospa.com Adjustments(d)			—				(805	)			(1,388	)
Depreciation & Amortization			10,055				9,829				12,884
Addback for Non-Cash Prepaid Expenses(e)			1,043				1,972				671
Adjusted EBITDA		$	58,622			$	55,902			$	51,746
Capital Expenditures			(4,983	)			(2,683	)			(3,081	)
Cash Taxes(f)			(726	)			(445	)			(645	)
Unlevered After-Tax Free Cash Flow		$	52,913			$	52,774			$	48,020
% Conversion(g)			90.3	%			94.4	%			92.8	%

 

(a)	Non-Controlling Interest refers to amounts paid to a joint venture partner of OSW Predecessor.

(b)	Non-GAAP Management Adjustments refers to adjustments for certain one-time income or expenses and reflects timing discrepancies for certain cash income or expense items.

(c)	Related Party Adjustments refers to adjustments to reflect the impact of agreements with related parties for the full periods presented.

(d)

As a result of its planned separation from Steiner Leisure, OSW Predecessor is no longer operating timetospa.com as a standalone e-commerce business with focused marketing efforts and paid search advertising, as it had operated the channel through December 31, 2017. timetospa.com is now a post-cruise sales tool where guests may continue their wellness journey after disembarking. This adjustment removes the impact of timetospa.com in the historical financial period due to this change in business model and to assist in comparing such periods with later periods.

(e)	Addback for Non-Cash Prepaid Expenses refers to non-cash expenses incurred in connection with certain contracts.

(f)	Cash Taxes refers to cash taxes paid or payable.

(g)	Unlevered After-Tax Free Cash Flow Conversion is calculated as Adjusted EBITDA less Capital Expenditures and Provision for Income Taxes, divided by Adjusted EBITDA.

 

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Unaudited Pro Forma Condensed Combined Financial Information

The following unaudited pro forma condensed combined financial information is provided to aid you in your analysis of the financial aspects of the Business Combination. Upon consummation of the Business Combination, Haymaker became an indirect wholly-owned subsidiary of OneSpaWorld.

The historical combined financial statements of OSW Predecessor are included in this Current Report on Form 8-K. Further, prior to the Business Combination, OneSpaWorld had no material operations, assets or liabilities.

The unaudited pro forma condensed combined income statement for the year ended December 31, 2018 was derived from OSW Predecessor’s audited combined income statement for the year ended December 31, 2018 and Haymaker’s audited statement of operations for the year ended December 31, 2018.

The unaudited pro forma condensed combined income statement for the year ended December 31, 2018 gives pro forma effect to the Business Combination as if it had occurred on January 1, 2018. The unaudited pro forma condensed combined balance sheet as of December 31, 2018 gives effect to the Business Combination as if it was completed on December 31, 2018.

This information should be read together with (i) Haymaker’s historical financial statements and related notes for the year ended December 31, 2018, as well as “Haymaker’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in Haymaker’s Annual Report on Form 10-K, and (ii) OSW Predecessor’s historical consolidated financial statements and related notes for the year ended December 31, 2018 as well as “OSW Predecessor Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this Current Report on Form 8-K.

The unaudited pro forma condensed combined financial statements give effect to the Business Combination in accordance with the acquisition method of accounting for business combinations, with Haymaker deemed to be the accounting acquirer because, among other reasons:

 

•

cash consideration was transferred from Haymaker to the Sellers; and

 

•

former Haymaker stockholders and Haymaker Sponsor in connection with the Business Combination, own, in the aggregate, 56.8% of the OneSpaWorld Shares, which represents a controlling interest in OneSpaWorld, immediately after giving effect to the Business Combination.

The unaudited pro forma condensed combined financial statements reflect adjustments to the historical financial information that are expected to have a continuing impact on the results of the combined company, factually supportable and directly attributable to the following events and transactions:

 

•

the Business Combination;

 

•

the payment of the cash consideration to the Sellers;

 

•

the closing of the Primary Private Placement;

 

•

the conversion of each Class A Share into the right to receive one fully paid and non-assessable OneSpaWorld Share;

 

•

each Haymaker Public Warrant becoming exercisable for one OneSpaWorld Share, on the same terms and conditions as those applicable to the Haymaker Public Warrants;

 

•

the Founder Shares converting into 6.7 million OneSpaWorld Shares (3.7 million, subject to certain adjustments, of which were transferred and forfeited to OneSpaWorld) and the right to receive 1.6 million OneSpaWorld Shares upon the occurrence of certain events. Such deferred OneSpaWorld shares are not included in the EPS calculations set forth below;

 

•

the repayment of $352.4 million of outstanding indebtedness, of OSW Predecessor as of December 31, 2018 and the entry into the Debt Financing at the time of the Business Combination;

 

•

each of the Founder Warrants becoming exercisable for one OneSpaWorld Share; and

 

•

the redemption of 1,286,613 Class A Shares by Haymaker’s public stockholders in accordance with Haymaker’s amended and restated certificate of incorporation.

Haymaker provided its public stockholders with the opportunity to redeem, upon the closing of the Business Combination, each Class A Share then held by them for cash equal to their pro rata share of the aggregate amount on deposit (as of two business days prior to the closing of the Business Combination) in the Trust Account, which held the proceeds (including interest, which was net of taxes payable) of the Haymaker IPO.

 

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The unaudited pro forma condensed combined financial information is for illustrative purposes only. The actual results may differ significantly from those reflected in the pro forma financial statements for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma financial statements and actual amounts. The financial results may have been different had the companies always been combined. You should not rely on the unaudited pro forma condensed combined financial information as being indicative of the historical results that would have been achieved had the companies always been combined or the future results that the combined company will experience. OSW Predecessor and Haymaker have not had any historical relationship prior to the Business Combination. Accordingly, no pro forma adjustments were required to eliminate activities between the companies.

 

9

PRO FORMA CONDENSED COMBINED INCOME STATEMENT

For the year ended December 31, 2018

(Dollars in thousands, except per share amounts)

(unaudited)

 

		Haymaker				OSW Predecessor				Pro Forma Adjustments						Pro Forma
Service revenues		$	—			$	410,927			$	—					$	410,927
Product revenues			—				129,851				—						129,851
Total revenues			—				540,778				—						540,778
Cost of services			—				352,382				(235	)		(a.)			352,147
Cost of products			—				110,793				—						110,793
Administrative			4,691				9,937				(3,862	)		(a.), (g.)			10,766
Salary and payroll taxes			—				15,624				—						15,624
Amortization of intangible assets			—				3,521				13,950			(b.)			17,471
Total cost of revenues and operating expenses			4,691				492,257				9,853						506,801
Income (loss) from operations			(4,691	)			48,521				(9,853	)					33,977
Unrealized gain on securities held in Trust			449				—				(449	)		(c.)			—
Interest expense			—				(34,099	)			19,247			(d.)			(14,852	)
Interest income			5,656				238				(5,656	)		(c.)			238
Other income			—				171				—						171
Total other income (expense), net			6,105				(33,690	)			13,142						(14,443	)
Income from continuing operations before provision for income taxes			1,414				14,831				3,289						19,534
Provision for income taxes			1,017				1,088				—			(e.)			2,105
Net income from continuing operations		$	397			$	13,743			$	3,289					$	17,429
Net Income attributable to non-controlling interest			—				3,857				—						3,857
Net income attributable to parent		$	397			$	9,886			$	3,289					$	13,572
Earnings per common share (f.)
Basic		$	(0.44	)*												$	0.22
Diluted		$	(0.44	)*												$	0.20
Weighted average common shares
Basic			9,911,510														61,118,298
Diluted			9,911,510														68,118,298

 

*	Net loss per common share – basic and diluted excludes interest income attributable to common stock subject to redemption of $4,773,466 for the year ended December 31, 2018.

 

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PRO FORMA CONDENSED COMBINED BALANCE SHEETS

As of December 31, 2018

(Dollars in thousands, except per share data)

(unaudited)

 

		Haymaker				OSW Predecessor				Pro Forma Adjustments						Pro Forma
ASSETS
Current assets:
Cash and cash equivalents		$	221			$	15,302			$	(3,196	)		(a.)		$	12,327
Accounts receivable, net			—				25,352				—						25,352
Inventories, net			—				32,265				2,295			(b.)			34,560
Other current assets			93				8,041				—						8,134
Total current assets			314				80,960				(901	)					80,373
Note receivable due from affiliate of the Parent			—				—				—						—
Investments held in Trust Account			336,671				—				(336,671	)		(a.)			—
Property and equipment, net			—				16,239				11,815			(c.)			28,054
Intangible assets, net			—				131,517				493,483			(d.)			625,000
Goodwill			—				33,864				78,171			(e.)			112,035
Deferred tax assets			—				4,265				(4,172	)		(f.)			93
Other noncurrent assets, net			—				5,814				731			(i.)			6,545
Total assets		$	336,985			$	272,659			$	242,456					$	852,100
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	—			$	7,595			$	—					$	7,595
Accounts payable - related parties			—				6,553				—						6,553
Accrued expenses			3,805				27,211				(3,684	)		(g.)			27,332
Income tax payable			1,012				670				—						1,682
Other current liabilities			—				1,210				—						1,210
Total current liabilities			4,817				43,239				(3,684	)					44,372
Deferred rent			—				645				—						645
Deferred tax liabilities			94				—				77			(f.)			171
Income tax contingency			—				3,918				—						3,918
Long-term debt			—				352,440				(113,347	)		(i.)			239,093
Deferred underwriting fees			12,150				—				(12,150	)		(j.)			—
Total liabilities		$	17,061			$	400,242			$	(129,104	)				$	288,199
Shareholders’ equity:
Common stock subject to possible redemption		$	314,924			$	—			$	(314,924	)		(k.)		$	—
Preferred stock, $0.0001 par value			—				—				—						—
Class A common stock, $0.0001 par value			—				—				4			(k.), (m.)			4
Class B convertible common stock, $0.0001 par value			1				—				(1	)		(m.)			—
Additional paid-in capital			4,266				—				556,952			(o.)			561,218
Non-controlling interest			—				3,586				2,169			(n.)			5,755
Accumulated earnings (loss)			733				(130,520	)			126,711			(l.), (h.)			(3,076	)
Accumulated Other Comprehensive Loss			—				(649	)			649			(l.)			—
Total shareholders’ equity		$	319,924			$	(127,583	)		$	371,560					$	563,901
Total liabilities and shareholders’ equity		$	336,985			$	272,659			$	242,456					$	852,100

 

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Notes to Unaudited Pro Forma Combined Financial Statements

1. Basis of Pro Forma Presentation

Overview

The unaudited pro forma condensed combined financial statements have been prepared assuming the Business Combination is accounted for using the acquisition method of accounting with Haymaker as the acquiring entity and OSW Predecessor as the acquiree. Under the acquisition method of accounting, Haymaker’s assets and liabilities will retain their carrying assets and the assets and liabilities of OSW, including its predecessor’s assets and liabilities, will be recorded at their fair values measured as of the acquisition date. The excess of the purchase price over the estimated fair values of net assets acquired will be recorded as goodwill. The pro forma adjustments have been prepared as if the Business Combination and the other related transactions had taken place on December 31, 2018 in the case of the unaudited pro forma condensed combined balance sheet and on January 1, 2018 in the case of the unaudited pro forma condensed combined income statements.

The acquisition method of accounting is based on Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 805, Business Combinations (“ASC 805”), and uses the fair value concepts defined in FASB ASC 820, Fair Value Measurements (“ASC 820”). ASC 805 requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date by Haymaker, who was determined to be the accounting acquirer.

Under ASC 805, acquisition-related transaction costs are not included as a component of consideration transferred but are accounted for as expenses in the periods in which such costs are incurred, or if related to the issuance of debt, capitalized as debt issuance costs. Acquisition-related transaction costs expected to be incurred as part of the business combination, include estimated fees related to the issuance of long-term debt, as well as advisory, legal and accounting fees.

The unaudited pro forma condensed combined financial statements should be read in conjunction with (i) Haymaker’s historical financial statements and related notes for the year ended December 31, 2018, as well as “Haymaker’s Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in Haymaker’s Annual Report on Form 10-K, (ii) OSW Predecessor’s historical combined financial statements and related notes for the year ended December 31, 2018 as well as “OSW Predecessor Management’s “Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this Current Report on Form 8-K.

The pro forma adjustments represent management’s estimates based on information available as of the date of this Current Report on Form 8-K and are subject to change as additional information becomes available and additional analyses are performed. The unaudited pro forma condensed combined financial statements do not reflect possible adjustments related to restructuring or integration activities that have yet to be determined or transaction or other costs following the Business Combination that are not expected to have a continuing impact. In addition, the unaudited pro forma condensed combined financial statements do not reflect additional costs and expenses that OneSpaWorld may incur as a public company (other than those incurred by Haymaker and reflected in the unaudited pro forma condensed combined financial statements). Further, one-time transaction-related expenses anticipated to be incurred prior to, or concurrent with, closing the Business Combination and the other related transactions are not included in the unaudited pro forma condensed combined income statements. However, the impact of such transaction expenses is reflected in the unaudited pro forma condensed combined balance sheet as a decrease to retained earnings and a decrease to cash, unless otherwise noted.

 

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2. Preliminary Allocation of Purchase Price

The total purchase consideration for the Business Combination has been allocated to the assets acquired, liabilities assumed, and non-controlling interest for purposes of the unaudited pro forma condensed combined financial information based on their estimated relative fair values. The allocation of the purchase consideration herein is preliminary. The final allocation of the purchase consideration for the Business Combination will be determined after the completion of a thorough analysis to determine the fair value of all assets acquired, liabilities assumed and non-controlling interest but in no event later than one year following the completion of the Business Combination.

Accordingly, the final acquisition accounting adjustments could differ materially from the preliminary amounts presented in these unaudited pro forma condensed combined financial statements.

Any increase or decrease in the fair value of the assets acquired, liabilities assumed and non-controlling interest, as compared to the information shown herein, could also change the portion of the purchase consideration allocable to goodwill and could impact the operating results of OneSpaWorld following the Business Combination due to differences in the allocation of the purchase consideration, depreciation and amortization related to some of these assets and liabilities. The purchase consideration was preliminarily allocated as follows:

 

(In thousands)
Cash paid to Selling Equityholders		$	659,065
Equity consideration paid to Selling Equityholders			141,552
		$	800,617
Cash and cash equivalents		$	15,302
Accounts receivable, net			25,352
Inventories, net			34,560
Other current assets			8,041
Property and equipment, net			28,054
Intangible assets, net			625,000
Other noncurrent assets, net			5,814
Deferred tax asset			93
Goodwill			112,035
Current liabilities			(43,239	)
Deferred tax liabilities			(77	)
Other long-term liabilities			(4,563	)
Non-controlling interest			(5,755	)
Net assets acquired		$	800,617

The estimated value of the equity consideration paid, or deemed paid, to the Sellers includes OneSpaWorld Shares with an assumed fair value of approximately $141.6 million. The estimated value of the aggregate equity consideration issued to the Sellers of $85.5 million reflects an assumed per share market value of common shares of OneSpaWorld of $10.00.

The consideration above does not include five million of deferred shares, with an assumed value of $50.0 million (reflecting an assumed per share value of $10.0 per share), issued to the Sellers.

Preliminary identifiable intangible assets in the unaudited pro forma condensed combined financial information consist of intangibles derived from retail concession agreements, lease agreements, a trade name and a licensing agreement. Retail concession agreements and lease agreements (collectively, “agreements”) were valued through application of the multi-period excess earnings method. Under this method, revenues, operating expenses and other costs associated with these agreements were estimated in order to derive cash flows attributable to the existing agreements. The resulting cash flows were then discounted to present value at rates reflective of the risk and return expectations of the agreements to arrive at the fair value of the agreements

 

13

as of December 31, 2018. The amortization related to the agreements is reflected as unaudited pro forma adjustments to the unaudited pro forma condensed combined income statements using the straight line method of amortization. Company management has determined the estimated remaining useful lives of the retail concession agreements and lease agreements based on the projected economic benefits associated with these interests. The tradename and licensing agreement were valued through application of the relief from royalty method. Under this method a royalty rate is applied to the revenues associated with the tradename to capture value associated with use of the name as if licensed. The resulting royalty savings are then discounted to present value at rates reflective of the risk and return expectations of the interests to derive their respective fair values as of December 31, 2018. Company management has determined that the trade name is preliminarily estimated to have an indefinite useful life while the licensing agreement life is estimated based on the projected economic benefits associated with this interest.

The preliminary allocation of the purchase consideration to property and equipment was based on the fair value of such assets determined using the trending method of the cost approach. Depreciation expense for property and equipment was preliminarily estimated based on a straight line methodology, which approximates the remaining weighted useful life of such underlying assets. The fair value of the inventory was determined through use of the replacement cost approach.

The amount that will ultimately be allocated to these identified intangible assets, property and equipment and inventory and the related amount of amortization and depreciation, may differ materially from this preliminary allocation.

Goodwill represents the excess of the total purchase consideration over the fair value of the underlying net assets, largely arising from the workforce and extensive efficient distribution network that has been established by OSW Predecessor.

 

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3. Pro Forma Adjustments and Assumptions

The unaudited pro forma condensed combined financial information has been prepared to illustrate the effect of the Business Combination and other transactions described above and has been prepared for informational purposes only. The unaudited pro forma condensed combined income statements are not necessarily indicative of what the actual results of operations would have been had the Business Combination taken place on the date indicated, nor is it indicative of the future consolidated results of operations of the combined company. The unaudited pro forma condensed combined financial information is based upon the historical consolidated financial statements of Haymaker and OSW Predecessor and should be read in conjunction with their historical financial statements included elsewhere in Haymaker’s Annual Report on Form 10-K and this Current Report on Form 8-K.

The historical consolidated financial statements have been adjusted in the unaudited pro forma condensed combined financial information to give effect to pro forma events that are (1) directly attributable to the Business Combination, the Primary Private Placement and the Debt Financing, (2) factually supportable, and (3) with respect to the income statements, expected to have a continuing impact on the results of OneSpaWorld.

There were no intercompany balances or transactions between Haymaker and OSW Predecessor as of the dates and for the periods of these unaudited pro forma combined financial statements.

The pro forma combined consolidated provision for income taxes does not necessarily reflect the amounts that would have resulted had the companies filed consolidated income tax returns during the periods presented.

The pro forma basic and diluted earnings per share amounts presented in the unaudited pro forma condensed combined income statements are based upon the number of OneSpaWorld’s shares outstanding, assuming the Business Combination and the Primary Private Placement occurred on January 1, 2018.

 

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Pro Forma Adjustments to the Income Statements:

 

(a)	Represents the adjustment to depreciation of $0.2 million for the year ended December 31, 2018. The adjustment is reflecting the impact of the changes in fair values of property and equipment, based on the preliminary purchase price allocation.

 

(b)

Represents the adjustment to amortization of $14.0 million for the year ended December 31, 2018 reflecting the impact of the changes in fair value of intangible assets based on the preliminary purchase price allocation. Amortization of the acquired intangible assets will be recognized on a straight line basis over the estimated useful life, which represents the projected economic benefits associated with the acquired intangible assets.

 

(c)	Represents the adjustment to eliminate the historical interest income and unrealized gains of Haymaker associated with the funds that were held in the Trust Account, which were used to fund portions of the cash consideration and debt refinancing in connection with the Business Combination.

 

(d)	Represents the removal of previous interest on the OSW Predecessor debt repaid at the closing by the Seller. An adjustment has also been made that represents the increased interest expense related to the issuance of new debt in connection with the Business Combination.

The pro forma interest expense assumes a weighted average interest rate of approximately 5.59% on the Initial Term Facility ($208.5 million), Second Lien Term Facility ($25.0 million) and Revolving Credit Facility ($12.4 million). Each 1/8% change in the assumed rate would create a $0.3 million change in annual interest expense.

Included in the adjustments to interest expense is deferred financing expense of $1.1 million for the year ended December 31, 2018.

 

(e)

This adjustment represents the estimated income tax effect of the pro forma adjustments. The tax effect of the pro-forma adjustments was calculated using the historical statutory rates in effect for the periods presented. The blended statutory rate is 0% due to the fact that the pro forma adjustments predominately relate to businesses that are in zero tax rate jurisdictions.

 

(f)

Pro forma basic earnings per share was computed by dividing pro forma net income attributable to OneSpaWorld common shareholders by the weighted average of Class A Shares, as if such shares were issued and outstanding as of January 1, 2018. Basic shares outstanding were calculated based on the following common shares outstanding:

 

		At December 31, 2018
OneSpaWorld Shares held by Haymaker Public Stockholders			31,713,387
OneSpaWorld Shares held by Haymaker Sponsor			3,000,000
OneSpaWorld Shares held by Private Placement Investors			12,249,637
OneSpaWorld Shares held by Sellers			14,155,274
Total common shares outstanding			61,118,298
Equity consideration - Employee option pool			7,000,000
Diluted shares outstanding			68,118,298

 

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Pro forma dilutive earnings per share was computed using the “treasury stock buyback” method to determine the potential dilutive effect of its outstanding options. The employee option pool is the number of options available for issue at the time of closing, but no options were issued at that time.

The currently outstanding Haymaker Public Warrants, the Founder Warrants and the Private Placement Warrants with an exercise price of $11.50 per share became exercisable for one OneSpaWorld Share. The Haymaker Public Warrants, the Founder Warrants and the Private Placement Warrants are not dilutive on a pro forma basis and have been excluded from the diluted number of OneSpaWorld Shares outstanding at the time of closing; however, the potential dilutive impact will ultimately be recognized based on the actual market price on the date of measurement.

Similarly, the Founder Shares that became converted into the right to receive 1,600,000 OneSpaWorld Shares upon the occurrence of certain events are not dilutive on a pro forma basis and would have been excluded from the diluted number of OneSpaWorld Shares outstanding at the time of the closing.

 

(g)

The adjustment represents the removal of $3.9 million of transaction fees incurred in the year ended December 31, 2018. Transaction costs are eliminated from pro forma income statements because they are nonrecurring charges that are directly attributable to the transaction.

 

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Pro Forma Adjustments to the Balance Sheet:

 

(a)

Represents the net adjustment to cash associated with Haymaker’s payment of cash consideration in the Business Combination:

Pro forma net adjustment to cash associated with purchase adjustments (in thousands):

 

(In thousands)		Scenario 1
Haymaker cash previously held in Trust Account (1)		$	336,671
Proceeds from the primary private placement (2)			122,496
Proceeds from new debt (3)			245,900
Shareholder redemptions (4)			(12,866	)
Cash consideration (5)			(659,065	)
Payment of transaction costs (6)			(36,332	)
Net adjustment to cash		$	(3,196	)

 

(1)

Represents the adjustment related to the reclassification of the cash equivalents held in the Trust Account in form of investments to cash and cash equivalents to reflect the fact that these investments were available for use in connection with the Business Combination and the payment of a portion of the cash consideration.

(2)	Represents the shares and warrants OneSpaWorld issued and sold to the Private Placement Investors for gross proceeds of approximately $122.5 million.

(3)	Represents additional funds raised through the new loans.

(4)	Represents cash paid for redemptions of Haymaker common shares.

(5)	Represents the cash consideration portion of the total consideration that is expected to be paid to effectuate the Business Combination prior to any Sellers’ costs and amounts to be paid under the escrow agreement.

(6)	Reflects the impact of estimated transaction costs of $36.3 million including fees and costs attributable to debt and equity consideration.

 

(b)

Represents the adjustment to inventory to reflect their estimated fair values on the preliminary purchase price allocation (see Note 2).

 

(c)

Represents the adjustment to property and equipment to (i) reflect the adjustment to the respective fixed asset category to reflect their estimated fair values based on the preliminary purchase price allocation, and (ii) to eliminate the historical accumulated depreciation (see Note 2).

 

(d)

Represents the adjustment to intangible assets to reflect their estimated fair values on the preliminary purchase price allocation (see Note 2).

 

(e)

Represents the adjustment to goodwill based on the preliminary purchase price allocation (see Note 2).

 

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(In thousands)
Concession Agreements		$	598,300
Lease Agreements			19,300
Trade Name			5,900
Licensing Agreement			1,500
		$	625,000

 

(f)

Represents the adjustment to the deferred tax assets and liability. The deferred taxes are primarily related to the difference between the financial statement and tax basis for depreciation and amortization. The basis difference primarily results from the Business Combination where Haymaker receives a step-up value adjustment on certain assets for financial accounting purposes.

 

(g)

Represents the payment of accrued transaction expenses of $3.7 million.

 

(h)

Represents the transaction cost expense at closing going against retained earnings. Of the $36.3 million, $3.8 million has been recognized in retained earnings. This figure represents the total estimated transaction expense net of deferred financing fees (note i), the Private Placement fee that reduces additional paid in capital (note o), the accrued transaction expenses (note g) and the deferred underwriting costs accrued by Haymaker (note j).

 

(i)

Represents the repayment of OSW Predecessor debt ($352.4 million) at the closing by the Seller and the issuance of $245.9 million of new long-term debt in the form of an Initial Term Facility ($208.5 million) and Second Lien Term Facility ($25.0 million) and Revolving Credit Facility of ($12.4 million). The adjustment reflects related deferred financing costs of $7.5 million, of which $0.7 million has been allocated to other non-current assets as it relates to the Revolving Credit Facility, and the remainder has been netted against long-term debt. These unaudited pro forma condensed combined financial statements are presented as such to better reflect indebtedness following the Business Combination.

 

(j)

Represents the payment of deferred underwriting costs of $12.2 million.

 

(k)

Represents an adjustment to reflect that at the time of issuance, certain Haymaker common stock was subject to a possible redemption and, as such, an amount of $314.9 million was classified as redeemable equity in Haymaker’s historical consolidated balance sheet as of December 31, 2018. As of the balance sheet, $12.9 million of common stock of Haymaker was redeemed at an assumed redemption price of $10.00 per Class A Share and the remaining outstanding common stock of $302.0 million has been reclassified from redeemable equity to additional paid-in capital and Class A common stock, $0.0001 par value.

 

(l)

Represents the elimination of OSW Predecessor’s accumulated deficit of $130.5 million and accumulated other comprehensive loss of $0.6 million.

 

(m)

Represents the Founder Shares being converted into 6.7 million OneSpaWorld Shares (3.7 million, subject to certain adjustments, of which were transferred and forfeited to OneSpaWorld) and the right to receive 1.6 million OneSpaWorld Shares upon the occurrence of certain events. Such deferred OneSpaWorld shares are not included in the EPS calculations set forth above.

 

(n)

Represents the adjustment to non-controlling interest to reflect the estimated fair values on the preliminary purchase price allocation (see Note 2).

 

(o)

Represents the pro forma adjustment to additional paid-in capital.

 

19

(In thousands)
Reverse Haymaker historical APIC		$	—
Conversion of redeemable shares held by Haymaker’s public stockholders to APIC, net of par amount			302,054
Increase to APIC attributable to the stock issued to the Selling Equityholders			141,552
Increase to APIC attributable to the Private Placement			122,496
Reduction to APIC attributable to the Private Placement fee			(9,150	)
Pro forma adjustment to APIC		$	556,952

OSW Predecessor Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of OSW Predecessor’s audited financial condition and results of operations should be read in conjunction with the information presented in “Selected Historical Financial Information” included above in this Current Report on Form 8-K and the audited combined financial statements of OSW Predecessor, and the notes related thereto, included as Exhibit 99.2 to this Current Report on Form 8-K. In addition to historical information, the following discussion contains forward-looking statements, such as statements regarding OneSpaWorld’s expectation for future performance, liquidity and capital resources that involve risks, uncertainties and assumptions that could cause actual results to differ materially from OneSpaWorld’s expectations. OneSpaWorld’s actual results may 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 Note Regarding Forward-Looking Statements” and “Unaudited Pro Forma Condensed Combined Financial Statements,” included above in this Current Report on Form 8-K, and in the section entitled “Risk Factors” beginning on page 45 of the Registration Statement, which is incorporated herein by reference. OneSpaWorld assumes no obligation to update any of these forward-looking statements.

 

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The information for the years ended December 31, 2018, 2017 and 2016 are derived from OSW Predecessor’s audited combined financial statements and the notes thereto included elsewhere in this Current Report on Form 8-K.

Any reference to “OneSpaWorld” refers to OneSpaWorld Holdings Limited and its 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

OneSpaWorld 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. OneSpaWorld’s highly-trained and experienced staff offer guests a comprehensive suite of premium health, fitness, beauty and wellness services and products onboard 163 cruise ships and at 67 destination resorts globally. With over 80% market share in the highly attractive outsourced maritime health and wellness market, OneSpaWorld is the unquestioned market leader at approximately 10x the size of its closest maritime competitor. Over the last 50 years, OneSpaWorld has built its leading market position on its 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 its history, OneSpaWorld’s mission has been simple—helping guests look and feel their best during and after their stay.

At its core, OneSpaWorld is a global services company. OneSpaWorld serves a critical role for its cruise line and destination resort partners, operating a highly complex and increasingly important aspect of its cruise line and destination resort partners’ overall guest experience. Decades of investment and know-how have allowed OneSpaWorld to construct an unmatched global infrastructure to manage the complexity of its operations, which in 2017 included nearly 8,000 annual voyages with visits to over 1,100 ports of call around the world. OneSpaWorld has consistently expanded its onboard offering with innovative and leading-edge service and product introductions, and developed the powerful back-end recruiting, training and logistics platforms to manage its operational complexity, maintain its industry-leading quality standards, and maximize revenue per center. The combination of its 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 OneSpaWorld believes is not economically feasible to replicate.

Matters Affecting Comparability

Supply Agreement

OSW Predecessor purchases beauty products for resale from an entity (the “Supplier Entity”) that was, during the periods presented, a wholly-owned subsidiary of Steiner Leisure. OSW Predecessor and the Supplier Entity entered into an agreement, effective as of January 1, 2017 (subsequently amended in 2018), which established the prices at which beauty products will be purchased by OSW Predecessor from the Supplier Entity for a term of 10 years (the “Supply Agreement”). The Supply Agreement has had a positive impact on OSW Predecessor’s business as it has reduced the cost of products for retail goods and has lowered the cost of products used in services. The prices of beauty products purchased by OSW Predecessor from the Supplier Entity prior to 2017 were not comparable to those set forth under the Supply Agreement and applicable to future periods. As a result, OSW Predecessor’s operations and financial condition in periods prior to January 1, 2017 differ materially from those ended after that date.

The Supply Agreement was effective as of January 1, 2017, however, existing inventories of products purchased prior to the effectiveness of the Supply Agreement were not fully depleted until the end of the third quarter of 2017. Beginning October 1, 2017, the cost of products used in services and cost of products reflect the actual pricing under the Supply Agreement because, at that time, all inventory on hand was purchased under the terms of the Supply Agreement.

 

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In order to quantify the impact of the Supply Agreement on the comparability of OSW Predecessor’s financial statements between periods, the following table sets forth the decrease in cost of products used in services and cost of products that would have been reflected in the financial statements of OSW Predecessor for the periods presented if all inventory on hand during such periods was purchased under the terms of the Supply Agreement (i.e., as if no existing inventories of products purchased prior to the effectiveness of the Supply Agreement were sold during the periods presented):

 

(in thousands)		2018				2017				2016
Decrease in Cost of Products Used in Services		$	—			$	4,170			$	7,824
Decrease in Cost of Products			—				5,214				10,589
Total		$	—			$	9,384			$	18,413

In order to further quantify the impact of the Supply Agreement on the comparability of OSW Predecessor’s financial statements between periods, the following table sets forth the increase in cost of products used in services and cost of products that would have been reflected in the financial statements of OSW Predecessor for the periods presented if all inventory on hand during such periods was purchased prior to the effectiveness of the Supply Agreement:

 

		For the Year Ended December 31,
		2018				2017
Increase in Cost of Products Used in Services		$	8,886			$	3,282
Increase in Cost of Products			13,844				5,897
Total		$	22,730			$	9,179

timetospa.com Business Model

As a result of its planned separation from Steiner Leisure, OSW Predecessor is no longer operating timetospa.com as a standalone e-commerce business with focused marketing efforts and paid search advertising, as it had operated the channel through December 31, 2017. timetospa.com is now a post cruise sales tool where guests may continue their wellness journey after disembarking. Revenue and net income in the years ended December 31, 2017 and 2016 are not directly comparable to revenue and net income in the year ended December 31, 2018 due to this change in the timetospa.com business model.

Key Performance Indicators

In assessing the performance of its business, OSW Predecessor considers 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 OSW Predecessor operates 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 OSW Predecessor serves.

 

•

Average Revenue Per Shipboard Staff Per Day. OSW Predecessor utilizes this performance metric to assist in determining the productivity of its onboard staff, which OSW Predecessor believes is a critical element of its operations.

 

22

•

Destination Resort Count. The number of destination resorts, both on average during the period and at period end, on which OSW Predecessor operates 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 revenues per center than Asian centers. Additionally, average weekly revenue can also be negatively impacted by renovations of OSW Predecessor’s destination resort health and wellness centers.

The following table sets forth the above key performance indicators for the periods presented:

 

		As of and for the Year Ended December 31,
		2018				2017				2016
Average Ship Count			156.7				154.0				151.0
Period End Ship Count			163				157				156
Average Weekly Revenue Per Ship		$	60,421			$	56,999			$	53,741
Average Revenue Per Shipboard Staff Per Day		$	474			$	446			$	427
Average Resort Count			61.9				51.6				48.1
Period End Resort Count			67				54				50
Average Weekly Revenue Per Resort		$	13,927			$	16,400			$	18,765

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 OSW Predecessor’s revenues:

 

•

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

 

•

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

Cost of services. Cost of services consists primarily of an allocable portion of payments to cruise lines (which are derived as a percentage of service revenues or a minimum annual rent or a combination of both), an allocable portion of wages paid to shipboard employees, an allocable portion of staff-related shipboard expenses, 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 OSW Predecessor’s 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.

 

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Administrative. Administrative expenses are comprised of expenses associated with corporate and administrative functions that support OSW Predecessor’s business, including fees for professional services, insurance, headquarter rent and other general corporate expenses. OSW Predecessor expects 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 OSW Predecessor’s business, including fees for employee salaries, bonuses, payroll taxes, pension/401K 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. customer contracts, trade names, long-term leases) and amortization expenses associated with the acquisition of Steiner Leisure Limited on December 9, 2015 by certain investment vehicles managed by Catterton Management Company, L.L.C. (the “2015 Transaction”).

Other income (expense), net. Other income (expense) consists of royalty income, interest income, interest expense and minority 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.”

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

Revenue Drivers and Business Trends

OSW Predecessor’s 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 OSW Predecessor operates 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 offering of new health and wellness centers. OSW Predecessor has focused its 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 OSW Predecessor’s cruise line partners continue to invest in new ships with enhanced health and wellness centers that allows for more advanced treatment rooms and larger staff sizes, OSW Predecessor is 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. OSW Predecessor continues to expand its higher value added and price point offerings in existing health and wellness centers, including introducing premium medi-spa services, resulting in higher guest spend.

 

•

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 impact center utilization, as well as the geographic sailing region which may impact the offering of services and products to best address guest preferences.

 

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•

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. OSW Predecessor is now directly marketing and distributing promotions to onboard passengers as a result of enhanced collaboration with select cruise line partners. OSW Predecessor has also begun to implement proprietary pre-booking and pre-payment technology platforms that interface with its cruise line partners’ pre-cruise planning systems. These areas of increased collaboration with cruise line partners are resulting in higher revenue generation across its health and wellness centers.

 

•

The impact of weather. OSW Predecessor’s 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 OSW Predecessor’s revenues and financial performance varies from period to period.

Results of Operations

Comparison of Results for the Years Ended December 31, 2018 (audited) and December 31, 2017 (audited)

 

($ in thousands)		Year Ended December 31,																Change
		2018				% of Total Revenue				2017				% of Total Revenue				$				%
Revenues
Service Revenues		$	410,927				76.0	%		$	383,686				75.7	%		$	27,241				7.1	%
Product Revenues			129,851				24.0	%			122,999				24.3	%			6,852				5.6	%
Total Revenues			540,778				100.0	%			506,685				100.0	%			34,093				6.7	%
Cost of Revenues and Operating Expenses
Cost of Services			352,382				65.2	%			332,360				65.6	%			20,022				6.0	%
Cost of Products			110,793				20.5	%			107,990				21.3	%			2,803				2.6	%
Administrative			9,937				1.8	%			9,222				1.8	%			715				7.8	%
Salary and Payroll Taxes			15,624				2.9	%			15,294				3.0	%			330				2.2	%
Amortization of Intangible Assets			3,521				0.7	%			3,521				0.7	%			0				0.0	%
Total Cost of Revenues and Operating Expenses			492,257				91.0	%			468,387				92.4	%			23,870				5.1	%
Income from Operations			48,521				9.0	%			38,298				7.6	%			10,223				26.7	%
Other Income (Expense), net
Interest Expense			(34,099	)			6.3	%			0				0.0	%			(34,099	)			NM
Interest Income			238				0.0	%			408				0.1	%			(170	)			(41.4	%)
Other (Expense)/Income			171				0.0	%			(217	)			0.0	%			388				NM
Total Other Income, net			(33,690	)			6.2	%			191				0.0	%			(33,881	)			NM
Income Before Provision for Income Taxes			14,831				2.7	%			38,489				7.6	%			(23,658	)			(61.5	%)
Provision for Income Taxes			1,088				0.2	%			5,263				1.0	%			(4,175	)			(79.3	%)
Net Income		$	13,743				2.5	%		$	33,226				6.6	%		$	(19,483	)			(58.6	%)

Revenues. Revenues increased approximately 6.7%, or $34.1 million, to $540.8 million in 2018, from $506.7 million in 2017. The increase was driven by six incremental net new shipboard health and wellness centers added to the fleet, 14 incremental net new destination resort health and wellness centers opened, a continued trend towards larger and enhanced shipboard health and wellness centers as well as increased guest spend on higher-priced services, product innovation and improved collaboration with partners such as the continued rollout of new direct marketing initiatives onboard. The revenue increase was offset by one-time changes in the business model for the timetospa.com website.

For the year ended December 31, 2018, the 20 incremental net new health and wellness centers contributed $20.1 million, the increase in average price of services and products sold contributed $15.3 million and the increase in the volume of services sold at existing health and wellness centers contributed $1.0 million in increased revenue, respectively, offset by a decrease of $2.2 million due to the change in timetospa.com website business model. The revenue growth over this time period was relatively proportional between service and product revenues:

 

•

Service revenues. Service revenues increased approximately 7.1%, or $27.2 million, to $410.9 million in 2018, from $383.7 million in 2017.

 

•

Product revenues. Product revenues increased approximately 5.6%, or $6.9 million, to $129.9 million in 2018, from $123.0 million in 2017.

 

25

The productivity of shipboard health and wellness centers increased for 2018 compared to 2017 as evidenced by an increase in both average weekly revenues and revenues per shipboard staff per day. Average weekly revenues increased by 6.0% to $60,421 in 2018, from $56,999 in 2017, and revenues per shipboard staff per day increased by 6.3% over the same time period. OSW Predecessor had an average of 2,852 shipboard staff members in service in 2018 compared to an average of 2,809 shipboard staff members in service in 2017.

The productivity of destination resort health and wellness centers, measured by average weekly revenues, decreased 12.9% to $13,927 in 2018, from $16,400 in 2017. The decrease in productivity was primarily driven by one large destination resort health and wellness center being under renovation as well as the addition of smaller health and wellness centers in Asia that generate lower revenue and the closure of a large health and wellness center in Las Vegas.

Cost of services. Cost of services increased $20.0 million in 2018 compared to 2017. The increase was primarily attributable to an increase in service revenues which accounted for an increase of $23.6 million, offset by the effect of reduced costs under the Supply Agreement which decreased cost of services by $4.2 million. Cost of services as a percentage of service revenues decreased to 85.8% in 2018, from 86.6% in 2017. The decrease was primarily attributable to the effect of the Supply Agreement.

Cost of products. Cost of products increased $2.8 million in 2018 compared to 2017. The increase was primarily attributable to an increase in product revenues which accounted for an increase of $6.1 million and an increase in payments to cruise and destination resort partners of $3.0 million, offset by the effect of the Supply Agreement which decreased cost of products by $5.2 million. Cost of products as a percentage of product revenues decreased to 85.3% in 2018, from 87.8% in 2017. The decrease was attributable to the effect of reduced costs under the Supply Agreement.

Administrative. Administrative expenses increased $0.7 million in 2018 compared to 2017. The increase in administrative expenses was driven primarily by expenses incurred in connection with the Business Combination.

Salary and payroll taxes. Salary and payroll taxes increased $0.3 million in 2018 compared to 2017. The increase was primarily related to additional merit-based compensation.

Amortization of intangible assets. Amortization of intangible assets remained flat at $3.5 million in 2018 and 2017.

Other income (expense), net. Other income (expense), net decreased $33.9 million in 2018 compared to 2017. This decrease was primarily attributable to an increase in interest expense related to internal restructuring, which resulted in debt previously held at the parent level being assigned to OSW Predecessor in anticipation of the Business Combination.

Provision for income taxes. Provision for income taxes decreased $4.2 million in 2018 compared to 2017. This decrease was primarily due to a favorable impact of the Tax Cuts and Jobs Act of 2017 (the “Act”) which resulted in a lower U.S. federal tax rate effective January 1, 2018. Cash taxes as a percentage of income before provision for income taxes for the years ended December 31, 2018 and 2017 were 4.9% and 1.2%, respectively.

Net income. Net income was $13.7 million in 2018 compared to net income of $33.2 million in 2017. This increase in net income was due to all of the factors described above.

 

26

Comparison of Results for the Years Ended December 31, 2017 (audited) and December 31, 2016 (audited)

 

($ in thousands)		Year Ended December 31,																Change
		2017				% of Total Revenue				2016				% of Total Revenue				$				%
Revenues
Service Revenues		$	383,686				75.7	%		$	362,698				76.2	%		$	20,988				5.8	%
Product Revenues			122,999				24.3	%			113,586				23.9	%			9,413				8.3	%
Total Revenues			506,685				100.0	%			476,284				100.0	%			30,401				6.4	%
Cost of Revenues and Operating Expenses
Cost of Services			332,360				65.6	%			318,001				66.8	%			14,359				4.5	%
Cost of Products			107,990				21.3	%			106,259				22.3	%			1,731				1.6	%
Administrative			9,222				1.8	%			10,432				2.2	%			(1,210	)			(11.6	%)
Salary and Payroll Taxes			15,294				3.0	%			14,454				3.0	%			840				5.8	%
Amortization of Intangible Assets			3,521				0.7	%			3,521				0.7	%			0				0.0	%
Total Cost of Revenues and Operating Expenses			468,387				92.4	%			452,667				95.0	%			15,720				3.5	%
Income from Operations			38,298				7.6	%			23,617				5.0	%			14,681				62.2	%
Other Income (Expense), net
Interest Income			408				0.1	%			340				0.1	%			68				20.0	%
Other (Expense)/Income			(217	)			0.0	%			(178	)			0.0	%			(39	)			21.9	%
Total Other Income, net			191				0.0	%			162				0.0	%			29				17.9	%
Income Before Provision for Income Taxes			38,489				7.6	%			23,779				5.0	%			14,710				61.9	%
Provision for Income Taxes			5,263				1.0	%			5,615				1.2	%			(352	)			(6.3	%)
Net Income		$	33,226				6.6	%		$	18,164				3.8	%		$	15,062				82.9	%

Revenues. Revenues increased approximately 6.4%, or $30.4 million, to $506.7 million in 2017, from $476.3 million in 2016. The increase was driven by one incremental net new shipboard health and wellness center added to the fleet, four net new destination health and wellness resort centers opened, a continued trend towards larger and enhanced health and wellness centers as well as increased guest spending on higher-priced services, product innovation and improved collaboration with partners such as continued rollout of new direct marketing initiatives onboard.

For the year ended December 31, 2017, the five incremental net new health and wellness centers contributed $5.7 million, the increase in average price of services and products sold contributed $12.6 million and the increase in the volume of services sold at existing health and wellness centers contributed $12.0 million in increased revenue, respectively. The revenue growth over this time period was driven more from products than services:

 

•

Service revenues. Service revenues increased approximately 5.8%, or $21.0 million, to $383.7 million in 2017, from $362.7 million in 2016.

 

•

Product revenues. Product revenues increased approximately 8.3%, or $9.4 million, to $123.0 million in 2017, from $113.6 million in 2016.

The productivity of shipboard health and wellness centers increased for 2017 compared to 2016 as evidenced by an increase in both average weekly revenues and revenues per shipboard staff per day. Average weekly revenues increased by 6.1% to $56,999 in 2017, from $53,741 in 2016, and revenues per shipboard staff per day increased by 4.3% over the same time period. OSW Predecessor had an average of 2,809 shipboard staff members in service in 2017 compared to an average of 2,708 shipboard staff members in service in 2016.

The productivity of destination resort health and wellness centers, measured by average weekly revenues, decreased 12.6% to $16,400 in 2017, from $18,765 in 2016. The decrease in productivity was primarily driven by one large destination resort health and wellness center being under renovation, the addition of smaller health and wellness centers in Asia that generate lower revenue and the impact of hurricanes in 2017.

Cost of services. Cost of services increased $14.4 million in 2017 compared to 2016. The increase was primarily attributable to an increase in service revenues which accounted for an increase of $18.4 million, offset by the effect of reduced costs under the Supply Agreement which decreased cost of services by $3.6 million. Cost of services as a percentage of service revenues decreased to 86.6% in 2017, from 87.7% in 2016. The decrease was primarily attributable to the effect of reduced costs under the Supply Agreement and an increase in higher margin services.

 

27

Cost of products. Cost of products increased $1.7 million in 2017 compared to 2016. The increase was primarily attributable to an increase in product revenues which accounted for an increase of $7.1 million, offset by the effect of reduced costs under the Supply Agreement which decreased cost of products by $5.4 million. Cost of products as a percentage of product revenues decreased to 87.8% in 2017, from 93.5% in 2016. The decrease was attributable to the effect of reduced costs under the Supply Agreement.

Administrative. Administrative expenses decreased $1.2 million in 2017 compared to 2016. The decrease in administrative expenses was driven partially by a continued decrease in corporate marketing expenses and corporate overhead related to the timetospa.com business.

Salary and payroll taxes. Salary and payroll taxes increased $0.8 million in 2017 compared to 2016. The increase in salary and payroll taxes was driven primarily by additional merit-based compensation and headcount additions to support growth in the business.

Amortization of intangible assets. Amortization of intangible assets remained flat at $3.5 million in 2017 and 2016.

Other income (expense), net. Other income (expense), net remained flat at income of $0.2 million in 2017 and 2016.

Provision for income taxes. Provision for income taxes decreased $0.4 million in 2017 compared to 2016, driven primarily by the reevaluation of deferred tax assets in 2017 in connection with a decrease in the U.S. federal tax rate, offset by the effect of a reduction in tax reserves related to an examination by a foreign taxing authority of dividends paid by a wholly-owned subsidiary of Steiner Leisure. Cash taxes as a percentage of income before provision for income taxes for the years ended December 31, 2017 and 2016 was 1.2% and 2.7%, respectively.

Net income. Net income was $33.2 million in 2017 compared to net income of $18.2 million in 2016. This increase in net income was due to all of the factors described above.

Liquidity and Capital Resources

Overview

OSW Predecessor has historically funded its operations with cash flow from operations, except with respect to certain expenses and operating costs that had been paid by Steiner Leisure on behalf of OSW Predecessor, and, when needed, with borrowings under its credit facility. Steiner Leisure has paid on behalf of OSW Predecessor 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 the OSW Predecessor’s expenses and operating costs paid by Steiner Leisure on behalf of OSW Predecessor. Consequently, OSW Predecessor’s combined historical cash flows may not be indicative of cash flows had actually OSW Predecessor been a separate stand-alone entity or future cash flows of OSW Predecessor.

OSW Predecessor’s principal uses for liquidity have been distributions to Steiner Leisure, debt service and working capital. OSW Predecessor believes its sources of liquidity and capital will be sufficient to finance its continued operations, growth strategy and additional expenses it expects to incur as a public company for at least the next twelve months.

 

28

Cash Flows

The following table shows summary cash flow information for the years ended December 31, 2018, 2017 and 2016 (audited).

 

		Year Ended December 31,
(in thousands)		2018				2017				2016
Net Income		$	13,743			$	33,226			$	18,164
Depreciation & Amortization			10,055				9,829				12,884
Amortization of Deferred Financing Costs			1,243				—				—
Provision for Doubtful Accounts			18				18				18
Allocation of Parent Corporate Overhead1			11,731				11,666				11,250
Deferred Income Taxes			(1	)			3,350				(472	)
Change in Working Capital1			(4,402	)			12,029				34,807
Cash Flow from Operating Activities1			32,387				70,118				76,651
Capital Expenditures			(4,983	)			(2,683	)			(3,081	)
Note Receivable from Parent			—				—				(5,446	)
Cash Flow Used in Investing Activities			(4,983	)			(2,683	)			(8,527	)
Net Distributions to Parent1			(15,690	)			(60,893	)			(70,348	)
Distribution to NCI			(4,867	)			(4,606	)			(1,159	)
Cash Flow Used in Financing Activities1			(20,557	)			(65,499	)			(71,507	)
Effect of Exchange Rates			(216	)			124				(480	)
Net Increase (Decrease) in Cash and Cash Equivalents		$	6,631			$	2,060			$	(3,863	)

 

(1)

Allocation of Parent Corporate Overhead was paid by Steiner Leisure on behalf of OSW Predecessor. Additionally, Change in Working Capital was benefited by costs associated with the purchase of inventory from related parties and forgiven by Steiner Leisure, which were reported as a non-cash reduction to accounts payable-related parties of $0, $0 and $32,987, for the years ended December 31, 2018, 2017 and 2016, respectively. The amounts related to the allocation of Parent corporate overhead and costs associated with the purchase of products from related parties and forgiven by Steiner Leisure were considered non-cash contributions and enabled OSW Predecessor to make increased cash distributions to Steiner Leisure, which are classified in financing cash outflows.

Comparison of Results for the Years Ended December 31, 2018 (audited) and December 31, 2017 (audited)

Operating activities. OSW Predecessor’s net cash provided by operating activities decreased $37.7 million to $32.4 million in 2018, from $70.1 million in 2017. This decrease was due primarily to an unfavorable change in operating assets and liabilities as well as a lower net income. The unfavorable change in operating assets and liabilities was largely driven by a change in the payment terms, the effect of reduced costs under the Supply Agreement and the depletion of existing inventories of products purchased prior to the effectiveness of the Supply Agreement of $9.4 million in 2017. The unfavorable change in net income was primarily due to interest expense of $34.1 million in 2018 related to an internal restructuring, which resulted in debt previously held at the parent level being assigned to OSW Predecessor in anticipation of the Business Combination.

Investing activities. OSW Predecessor’s net cash used by investing activities increased $2.3 million to $5.0 million in 2018, from $2.7 million in 2017. This increase was largely driven by the renovation of a destination resort health and wellness center.

Financing activities. OSW Predecessor’s net cash used by financing activities decreased $44.9 million to $20.6 million in 2018, from $65.5 million in 2017. This decrease was largely due to a decrease in distributions to Steiner Leisure and its affiliates.

 

29

Comparison of Results for the Years Ended December 31, 2017 (audited) and December 31, 2016 (audited)

Operating activities. OSW Predecessor’s net cash provided by operating activities decreased $6.5 million to $70.1 million in 2017, from $76.7 million in 2016. This decrease was due primarily to an unfavorable change in operating assets and liabilities, partially offset by higher net income. The unfavorable change in operating assets and liabilities was largely driven by a change in the payment terms, the effect of reduced costs under the Supply Agreement and the depletion of existing inventories of products purchased prior to the effectiveness of the Supply Agreement of $9.4 million in 2017. The increase in net income was due to the reasons described above under “—Results of Operations—Comparison of Results for the Years Ended December 31, 2017 (audited) and December 31, 2016 (audited).”

Investing activities. OSW Predecessor’s net cash used by investing activities decreased $5.8 million to $2.7 million in 2017, from $8.5 million in 2016. This decrease was due to a loan from OSW Predecessor to a wholly-owned subsidiary of Steiner Leisure for €5.0 million in 2016.

Financing activities. OSW Predecessor’s net cash used by financing activities decreased $6.0 million to $65.5 million in 2017, from $71.5 million in 2016. This decrease was due to distributions to Steiner Leisure and its affiliates.

Seasonality

A significant portion of OSW Predecessor’s revenues are generated onboard cruise ships. Certain cruise lines, and, as a result, OSW Predecessor, 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 OSW Predecessor. Further, cruises and destination resort health and wellness centers have been negatively affected by the frequency and intensity of hurricanes. The negative impact of hurricanes is highest during peak hurricane season from August to October.

Off-Balance Sheet Arrangements

Other than the operating lease arrangements described below, OSW Predecessor has no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its financial condition, changes in financial condition, income or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations

The following table summarizes certain of OSW Predecessor’s obligations as of December 31, 2018 and the estimated timing and effect that such obligations are expected to have on liquidity and cash flows in future periods (in millions):

 

		Payment due by period
		Total				2019				2020-2021				2022-2023				Thereafter
Cruise Line Agreements(1)(3)		$	130,677			$	122,677			$	8,000			$	—			$	—
Operating Leases(2)(3)			23,444				3,443				5,341				4,397				10,263
Total		$	154,121			$	126,120			$	13,341			$	4,397			$	10,263

 

(1)

Cruise Line Agreements. A large portion of OSW Predecessor’s revenues are generated on cruise ships. OSW Predecessor has entered into agreements of varying terms with the cruise lines under which services and products are paid for by cruise passengers. These agreements provide for OSW Predecessor to pay the cruise line commissions for use of their shipboard facilities, as well as fees for staff shipboard meals and accommodations. These commissions are based on a percentage of revenue, a minimum annual amount, or a combination of both. Some of the minimum commissions are calculated as a flat dollar amount, while others are based upon minimum passenger per diems for passengers actually embarked on each cruise of the respective vessel. Staff shipboard meals and accommodations are charged by the cruise lines on a per staff per day basis. OSW Predecessor recognizes all expenses related to cruise line commissions, minimum arrears payment, and staff shipboard meals and accommodations, generally, as they are incurred and includes such expenses in cost of revenues in the accompanying combined statements of income. For cruises in process at period end, an accrual is made to record such expenses in a manner that approximates a pro-rata basis. In addition, staff-related expenses such as shipboard employee commissions are recognized in the same manner.

 

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