| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Basis of Presentation, Principles of Consolidation and Principles of Combination Successor: The accompanying unaudited condensed consolidated financial statements as of and for the period March 20, 2019 to September 30, 2019, includes the condensed consolidated balance sheet and statements of operations, comprehensive income (loss), equity, and cash flows of OneSpaWorld. All significant intercompany items and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted pursuant to the SEC’s rules and regulations. However, management believes that the disclosures contained herein are adequate to make the information presented not misleading. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (which are of a normal recurring nature) necessary to present fairly our unaudited financial position, results of operations and cash flows. The unaudited results of operations and cash flows for the period from March 20, 2019 to September 30, 2019 are not necessarily indicative of the results of operations or cash flows that may be expected for the remainder of 2019. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Predecessor: The condensed combined OSW financial statements (the “OSW financial statements”) include the accounts of the wholly-owned and indirect subsidiaries of Steiner Leisure listed in Note 1 and include the accounts of a company majority-owned by OneSpaWorld Medispa (Bahamas) Limited, in which OneSpaWorld (Bahamas) Limited (100% owner of OneSpaWorld Medispa (Bahamas) Limited) had a controlling interest. The OSW condensed combined financial statements also include the accounts and results of operations associated with the timetospa.com website owned by Elemis USA, Inc. The OSW condensed financial statements do not represent the financial position and results of operations of a legal entity but rather a combination of entities under common control of Steiner Leisure that have been “carved out” of the Steiner Leisure consolidated financial statements and reflect significant assumptions and allocations. All significant intercompany transactions and balances have been eliminated in combination. The accompanying condensed combined OSW financial statements may not be indicative of what they would have been had OSW actually been a separate stand-alone entity. The accompanying OSW financial statements include the assets, liabilities, revenues and expenses specifically related to OSW’s operations. OSW receives services and support from various functions performed by Steiner Leisure and costs associated with these functions have been allocated to OSW. These allocations are necessary to reflect all of the costs of doing business and include costs related to certain Steiner Leisure corporate functions, including, but not limited to, senior management, legal, human resources, finance, IT and other shared services that have been allocated to OSW based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis determined by an estimate of the percentage of time Steiner Leisure employees devoted to OSW, as compared to total time available or by the headcount of employees at Steiner Leisure corporate headquarters that are fully dedicated to the OSW entities in relation to the total employee headcount. These allocated costs are reflected in salaries and payroll taxes and administrative expenses in the accompanying condensed combined OSW statements of operations. Management considers these allocations to be a reasonable reflection of the utilization of services by or benefit provided to OSW. However, the allocations may not be indicative of the actual expenses that would have been incurred had OSW operated as an independent, stand-alone entity. Net Parent investment represents the Steiner Leisure controlling interest in the recorded net assets of OSW, specifically, the cumulative net investment by Steiner Leisure in OSW and cumulative operating results through the date presented. The net effect of the settlement of transactions between OSW, Steiner Leisure, and other affiliates of Steiner Leisure are reflected in the accompanying condensed combined statements of cash flows as a financing activity and in the condensed combined balance sheet as Net Parent investment. Certain expenses and operating costs were paid by Steiner Leisure on behalf of OSW. The Parent has paid on behalf of OSW expenses associated with the allocation of Steiner Leisure corporate overhead and costs associated with the purchase of products from related parties. Operating cash flows for the predecessor periods exclude OSW expenses and operating costs paid by Steiner Leisure on behalf of OSW. Consequently, OSW’s historical cash flows may not be indicative of cash flows had OSW actually been a separate stand-alone entity or future cash flows of OSW. As of December 31, 2018, OSW had assumed long-term debt of the Parent. Such debt was paid-off Management believes the assumptions and allocations underlying the accompanying condensed combined OSW financial statements and notes to the OSW condensed combined financial statements are reasonable, appropriate and consistently applied for the periods presented. Management believes the accompanying condensed combined OSW financial statements reflect all costs of doing business. The accompanying OSW condensed combined financial statements have been prepared in conformity with U.S. GAAP. b) Emerging Growth Company The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”). As modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), the Company may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemption from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Further, section 102(b) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Act) are required to comply with new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt-out non-emerging opt-out non-emerging opted-out c) 2019 Equity Incentive Plan and Stock-Based Compensation The Company’s board of directors approved the 2019 Equity Incentive Plan (the “2019 Plan”) on March 18, 2019 and the Company’s shareholders approved the 2019 Plan on March 18, 2019. The purpose of the 2019 Plan is to make available incentives that will assist the Company to attract, retain, and motivate employees, including officers, consultants and directors. The Company 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. The Equity Plan provides participants an option to defer compensation on a tax-deferred basis. Awards may be granted under the 2019 Plan to OneSpaWorld 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 have been authorized and reserved for issuance under the 2019 Plan. Non-cash stock-based compensation expense is included within general and administrative expense in the consolidated statements of operations. Share-based payments, to the extent they are compensatory, are recognized based on their grant date fair values. Forfeitures are recorded as they occur. On March 26, 2019 (the “Grant Date”), a total of 4,547,076 options were granted by the Company under the 2019 Plan to executive officers of the Company. The options have an exercise price of $12.99 and expire on the sixth anniversary of the Grant Date. The options were 100% vested on the Grant Date. The options become exercisable upon the five day volume weighted average price of Compensation – Stock Compensation Hurdle price per share $ 20.00 Strike price per share $ 12.99 Average period for hurdle price, in days 5 End of simulation term 3/26/2025 Term of simulation 6.00 years Stock price as of the Measurement Date $ 12.99 Volatility 37.5 % Risk-free rate (continuous) 2.2 % Dividend yield (quarterly after 3 years) 3.0 % Suboptimal exercise multiple 2.8 x On July 30, 2019, the Company granted the board of directors a total of 60,902 OneSpaWorld Restricted Stock Units (“RSU’s”) RSU’s one-year . (Successor) RSU’s d) Property and Equipment Property and equipment are stated at cost, less accumulated depreciation and amortization. Expenditures for maintenance and repairs, which do not add to the value of the related assets or materially extend their original lives, are expensed as incurred. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the terms of the respective leases and the estimated useful lives of the respective assets. Depreciation and amortization expense for the three months ended September 30, 2019 (Successor) and the three months ended September 30, 2018 (Predecessor) was $1.9 million and $1.7 million, respectively. Depreciation and amortization expense for the periods from March 20, 2019 to September 30, 2019 (Successor), January 1, 2019 to March 19, 2019 (Predecessor) and the nine months ended September 30, 2018 (Predecessor) was $4.2 million, $1.2 million and $4.9 million, respectively. e) Income Taxes Successor: As part of the process of preparing the condensed consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves estimating the Company’s actual current income tax exposure together with an assessment of temporary differences resulting from differing treatment of items for tax purposes and accounting purposes, respectively. These differences result in deferred income tax assets and liabilities which are included in the accompanying condensed consolidated balance sheet. The Company must then assess the likelihood that its deferred income tax assets will be recovered from future taxable income and, to the extent that the Company believes that recovery is not likely, the Company must establish a valuation allowance. Predecessor: OSW accounts for income taxes under the separate return method of accounting. This method requires the allocation of current and deferred taxes to OSW as if it were a separate taxpayer. Under this method, the resulting portion of current income taxes payable that is not actually owed to the tax authorities is written-off write-off f) Earnings (Loss) Per Share Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average number of diluted shares, as calculated under the treasury stock method, which includes the potential effect of dilutive common stock equivalents, such as options and warrants to purchase common shares, and contingently issuable shares. If the entity reports a net loss, rather than net income for the period, the computation of diluted loss per share excludes the effect of dilutive common stock equivalents, as their effect would be anti-dilutive. The following table provides details underlying OneSpaWorld’s earnings (loss) per basic and diluted share calculation for the three months ended September 30, 2019 (Successor) and the period from March 20, 2019 to September 30, 2019 (Successor) (in thousands except per share data): Successor Three Months Ended March 20, 2019 to September 30, 2019 September 30, 2019 Net income (loss) attributable to OneSpaWorld (a) $ 2,362 $ (16,712 ) Weighted average shares issued and outstanding - basic 61,118 61,118 Weighted average shares issued and outstanding - diluted (b) (c) 75,012 61,118 Earnings (loss) per share: Basic $ 0.04 ($ 0.27 ) Diluted $ 0.03 ($ 0.27 ) (a) Calculated as total net income (loss) less amounts attributable to noncontrolling interest. (b) For the three months ended September 30, 2019, weighted average shares issued and outstanding – diluted includes 7,294 potential dilutive shares under the treasury stock method and 6,600 contingently issuable dilutive shares. (c) For the period from March 20, 2019 to September 30, 2019, potential common shares under the treasury stock method were antidilutive because the Company reported a net loss in this period. Consequently, the Company did not have any adjustments in these periods between basic and diluted loss per share related to stock options, warrants, deferred shares and restricted stock. The following is a reconciliation of the denominator of the basic and diluted per share computation for the three months ended September 30, 2019 (in thousands): Successor Three Months Ended September 30, 2019 Weighted average shares outstanding - basic 61,118 Common share warrants 6,526 Deferred shares 6,600 Employee stock options 759 Board of directors RSU’s 9 Weighted average shares outstanding - diluted 75,012 The table below presents the weighted-average number of antidilutive potential common shares that are not considered in the calculation of diluted loss per share (in thousands): Successor March 20, 2019 to Common share warrants 24,500 Deferred shares 6,600 Employee stock options 4,493 Board of directors RSU’s 19 35,612 g) Intangible Assets As a result of the Business Combination on March 19, 2019, and the related application of acquisition accounting, the Company completed a preliminary valuation of the identifiable intangible assets as of that date. As of September 30, 2019 (Successor), the trade name intangible asset, the Company’s only identified intangible asset with an indefinite life, had carrying values of $6.2 million. As of September 30, 2019, the definite-lived intangible assets had a carrying value of $614.5 million. Prior to the Business Combination and application of acquisition accounting, the trade name intangible asset, and the definite-lived intangible assets had carrying values of $5.0 million and $126.5 million, respectively, as of December 31, 2018 (Predecessor). The Company amortizes intangible assets with definite lives on a straight-line basis over their estimated useful lives. Amortization expense related to intangible assets for the three months ended September 30, 2019 (Successor) and three months ended September 30, 2018 (Predecessor) was $4.0 million and $0.9 million, respectively. Amortization expense for the periods from March 20, 2019 to September 30, 2019 (Successor), January 1, 2019 to March 19, 2019 (Predecessor) and the nine months ended September 30, 2018 (Predecessor) was $9.1 million, $0.8 million and $2.6 million, respectively. Amortization expense is estimated to be $16.8 million in each of the next five years beginning in 20 20 Retail concession agreement s At September 30, 2019 (Successor), the cost, accumulated amortization, and net balance of the definite-lived intangible assets were as follows (in thousands): Successor: Cost Accumulated Net Balance Weighted Retail concession agreements $ 604,700 $ (8,399 ) $ 596,301 39 Destination resort agreements 17,900 (646 ) 17,254 15 Licensing agreement 1,000 (68 ) 932 8 $ 623,600 $ (9,113 ) $ 614,487 At December 31, 2018 (Predecessor), the cost, accumulated amortization, and net balance of the definite-lived intangible assets were as follows (in thousands): Predecessor: Cost Accumulated Net Weighted Retail concession agreements $ 130,000 $ (10,210 ) $ 119,790 36 Destination resort agreements 7,300 (573 ) 6,727 36 $ 137,300 $ (10,783 ) $ 126,517 h) Goodwill Goodwill represents the excess of cost over the fair value of net tangible and identifiable intangible assets acquired. The Company has two operating segments: (1) Maritime and (2) Destination Resorts. The Maritime and Destination Resorts operating segments each have associated goodwill, and each has been determined to be a reporting unit. The Company reviews goodwill for impairment at the reporting unit level annually or, when events or circumstances dictate, more frequently. The impairment review for goodwill consists of a qualitative assessment of whether it is more-likely-than-not two-step more-likely-than-not two-step two-step As a result of the Business Combination on March 19, 2019, and the related application of acquisition accounting, the Company completed an initial preliminary valuation of goodwill as of that date of $199.4 million. As of September 30, 2019 (Successor), goodwill was adjusted to $185.6 million, a decrease of $13.8 million (see Note 1). i) Derivative Instruments and Hedging Activities The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. Gains and losses on derivatives that are designated as cash flow hedges are recorded as a component of Accumulated other comprehensive loss until the underlying hedged transactions are recognized in earnings. During the third quarter of 2019, the Company early-adopted ASU 2017-12 j) Recent Accounting Pronouncements With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2019 that are of significance, or potential significance, to the Company based on its current operations. The following summary of recent accounting pronouncements is not intended to be an exhaustive description of the respective pronouncement. In May 2014, the FASB issued ASU 2014-09. 2014-09 2014-09 605-35, In periods subsequent to the initial issuance of this ASU, the FASB has issued additional ASU’s clarifying items within Topic 606, as follows: • In March 2016, the FASB issued ASU 2016-08, 2016-08”). 2016-08 • In April 2016, the FASB issued ASU 2016-10, 2016-10”). 2016-10 • In May 2016, the FASB issued ASU 2016-12, 2016-12”). 2016-12 non-cash 2016-08, 2016-10 2016-12 2014-09. 2016-08, 2016-10 2016-12 2015-14, 2014-09 In February 2016, the FASB issued ASU 2016-02, 2016-02”) right-of-use k) Accounting for Business Combinations In accordance with ASC 805, when accounting for business combinations, the Company is required to recognize the assets acquired, liabilities assumed, contractual contingencies, noncontrolling interests and contingent consideration at their fair value as of the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets and/or pre-acquisition As part of the Company’s accounting for business combinations, the Company is required to determine the useful lives of identifiable intangible assets recognized separately from goodwill. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the acquired business. An intangible asset with a finite useful life shall be amortized; an intangible asset with an indefinite useful life shall not be amortized. The Company bases the estimate of the useful life of an intangible asset on an analysis of all pertinent factors, including but not limited to the expected use of the asset, the expected useful life of another asset or a group of assets to which the useful life of the intangible asset may relate, any legal, regulatory, or contractual provisions that may limit the useful life, the Company’s own historical experience in renewing or extending similar arrangements, consistent with the Company’s intended use of the asset, regardless of whether those arrangements have explicit renewal or extension provisions, the effects of obsolescence, demand, competition, and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the asset. If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of an intangible asset to the reporting entity, the useful life of the asset shall be considered to be indefinite. The term indefinite does not mean the same as infinite or indeterminate. The useful life of an intangible asset is indefinite if that life extends beyond the foreseeable horizon—that is, there is no foreseeable limit on the period of time over which it is expected to contribute to the cash flows of the acquired business. Although the Company believes the assumptions and estimates it has made have been reasonable and appropriate, such assumptions and estimates are based in part on historical experience and information obtained from the management of the acquired entity and are inherently uncertain. Examples of critical estimates in accounting for acquisitions include, but are not limited to, the future expected cash flows from sales of products and services, and related contracts and agreements, and discount and long-term growth rates. Unanticipated events and circumstances may occur which could affect the accuracy or validity of the Company’s assumptions, estimates or actual results . l) Correction of Immaterial Errors The Company corrected errors that were immaterial to the previously reported condensed consolidated financial statements as of March 31, 2019. These errors were identified and corrected in connection with the preparation of our condensed consolidated financial statements for the second quarter of 2019 and relate to the period from March 20, 2019 to March 31, 2019 (Successor). As of September 30, 2019, goodwill decreased by $23.0 million due to the net effect of adjusting for (i) a decrease of $26.6 million attributable to incorrectly including as consideration transferred change in control payments pursuant to employment agreements entered into in 2016 that were earned upon consummation of the Business Combination for services rendered prior to the Business Combination for which an assumed liability had been recorded in the purchase accounting treatment of the Business Combination; (ii) a decrease of $3.2 million attributable to a receivable due from Parent for the reimbursement of cash payments made by the Company on behalf of the Parent that had not been recorded in the purchase accounting treatment of the Business Combination; and (iii) an increase of $6.8 million attributable to contract acquisition costs that had incorrectly been recorded as an intangible asset in the purchase accounting of the Business Combination. Additionally, the Company corrected for $3.7 million of accrued expenses associated with Haymaker that had not been recorded upon consummation of the Business Combination and to reclassify $0.6 million of accumulated other comprehensive loss as additional paid in capital as of September 30, 2019. The effect of correcting these errors decreased additional paid in capital and stockholders’ equity by $24.1 million and $23.5 million, respectively , September 30, 2019. The condensed consolidated statement of cash flows for the period from March 20, 2019 to September The corrections of these errors did not have any effect on the condensed consolidated statements of operations for any of the periods previously presented. Additionally, these errors did not have any effect on cash and cash equivalents at March 31, 2019. |
