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spk02: and earnings growth across the global expanse of our operations, always seeking to enhance value for our One Spa World stakeholders. Our performance during the initial return to service confirms that we are positioned powerfully to capitalize on the strength of our team, operating platform, and business model to drive long-term profitable growth as cruise ship and destination resort spa operations fully resume. With that, I will hand the call over to Steven, who will comment on our third quarter 2021 results and liquidity position.
spk05: Steven. Thank you, Leonard. Good morning, ladies and gentlemen.
spk03: Thank you for joining us today. As Leonard mentioned, the third quarter saw sales and operating performance accelerate from the second quarter of the year, reflecting our team's expert ability to prepare, and returns to service under extraordinary conditions. I will now share just a few of the third quarter 2021 highlights. For the third quarter, total revenues were $43.6 million compared to $1.8 million in the third quarter of 2020. The three months ended September 30th, 2021 revenues were derived primarily from our 78 health and wellness centers onboard ships having resumed voyages and our 45 open and operating destination resort health and wellness centers. Cost of services were $33.2 million compared to $7.2 million in the 2020 third quarter. The increase was primarily attributable to costs associated with the increased service revenue of $34.8 million in the quarter from our operating health and wellness centers at sea and on land, and increased costs related to the resumption of operations at our health and wellness centers at sea and on land. Cost of products were $8.4 million compared to $1.5 million in the 2020 third quarter. The increase was primarily attributable to costs associated with increased product revenue of $8.1 million in the quarter from our operating health and wellness centers at sea and on land, together with a $2 million inventory reserve recorded in the current quarter to reflect the write-down of inventory that is expected to expire due to the extended pause in operations caused by the COVID-19 pandemic. Net loss was $12.3 million compared to a net loss of $47.5 million in the third quarter of 2020. The $35.2 million improvement was primarily a result of a $7.2 million reduction in our loss from operations, plus the $28.2 million positive change in the fair value of warrants. The change in fair value of warrants is the result of changes in market prices deriving the value of the financial instruments. Adjusted EBITDA, which includes the negative impact of the $2 million inventory reserve was a loss of $4.6 million as compared to an adjusted EBITDA loss of $12.2 million in the third quarter of 2020. We ended the quarter with total liquidity of $47.6 million. At quarter end, $13.6 million remained available under the ATM program, and as of today, $10 million remains available under that program. Availability under our line of credit was $13 million at quarter end. The cash burn rate for the quarter of $12.7 million was slightly above our expectations, driven by the timing of receipts. We expect cash burn between $8 and $10 million in the fourth quarter as revenue generated from an increasing number of voyages offset some of the higher cash expenditure in anticipation of these sailings. As it relates to our outlook for 2021, Due to the ongoing business disruption and uncertainty surrounding the continued impact to our business from the COVID-19 pandemic, we will continue to not provide guidance. Notwithstanding the foregoing, we expect to record a sequential improvement in revenue and profitability in the fourth quarter as compared to the third quarter 2021 results and generate positive cash flow from operations in December. We continue to expect to incur a net loss on a gap and adjusted basis for the fourth quarter and fiscal year. With that, we'll open up the call for questions. Operator, please.
spk09: Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. Please limit yourself to one question and one follow-up Should you have further questions, please rejoin the queue. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will pause for a moment as callers join the queue. Our first question comes from Sharon Zacfia of William Blair. Please go ahead.
spk08: Hi, good morning. It sounds like you're seeing really good metrics as to you so far. you can maybe contextualize and expand on that a bit more. I know originally, you know, a lot of the passengers who have come on board are more seasoned sailors. So I'm wondering, you know, how that's influenced your ability to kind of penetrate that passenger base. And maybe if you're seeing more normalization on that penetration as more new to cruise kind of comes on board as well. Also just curious if you're seeing, favorability versus 2019 across all geographies. And then lastly, on the discounting dynamic, can you kind of help us understand, I guess, what pricing looks like in terms of discounting or full price selling today relative to 2019? Thanks.
spk02: Thanks, Sharon. I can take a few, Steve, and you can jump in on some of the other stuff that may be financially oriented. Look, Susan, at least Sharon, I think you're right. We are seeing really positive momentum here. With sort of Delta subsiding here in the summer, clearly I would say occupancies were somewhat negatively impacted across all the brands. Some brands have had stronger occupancies than others. Some have had better marketing initiatives in place to drive better occupancies. But there have been challenges on some of the other ones. On some of the banners, they've been sailing at less than 40%. So overall, the occupancies have been below 50% in the third quarter. Having said that, though, every single one of our metrics, bar occupancy, which we don't control, is up versus 2019. And in some cases, up double digits. You know, we're not going to get into every one of those metrics right now until we sort of settle into normalized operations, which I expect we'll start to see by the end of the first quarter of 2022. But spend is healthy, as I said. I mean, we're seeing very healthy spend. We're seeing utilization, frequency, and most importantly, we see pre-booking up very dynamically. And some of that's a function of the experienced cruisers knowing exactly what they want to do when they want to get on the ship and when they want to spend their time in the spar. But also, we did a huge drive towards the end of 2019, beginning of 2020 with some of the banners who were not on our pre-booking platform, and that has also helped drive pre-bookings up significantly. We're very pleased to see, you know, we're clicking on every single one of the metrics that we set out to do and that we analyze every single week, and we continue to be, you know, very satisfied. If not, I would say our scorecard is reflecting very well. Just our recent flash reports, even October, continue to improve. So as Stephen said, you know, operations and revenue will continue to develop and improve in the fourth quarter, and we roll out, you know, a bunch of new ships I've got 40 ships to roll out here in the fourth quarter. And I have to say, I think the worst is behind us. I think the cruise lines in every single geography that we operate presently have done a remarkable job of inserting new protocols, in fact, making them as seamless and as uncomfortable for passengers as possible. And I think the experience across all the banners has been a very, very positive one. From all that we can tell, cruise lines are positioned well. Their safety protocols are working. Their contact tracing is working. They are really doing an amazing job of protecting the guest experience. We're going to see better and better occupancies here in the fourth quarter and the first quarter of 2022, which bodes well, obviously, for us because it allows us to penetrate and get more guests into the spa, and obviously produce more revenues.
spk04: Thank you.
spk09: Our next question comes from Steve Wisinski of Stiefel. Please go ahead.
spk00: Yeah, hey guys, good morning. So kind of adding on to some of those comments, Leonard, could you give us, or maybe give us a little bit of a look into what add-on sales look like post-treatment? Just trying to get a better feel for, you made a comment around some of your metrics are up handily relative to 2019. I'm just, you know, handily means a lot of different things to a lot of different folks. I don't know if that's, you just mentioned that's a double-digit increase in some cases, but Just trying to get a better sense for, you know, really the add-on sales and then, you know, how those progress maybe through the quarter and into or through October as well.
spk02: Levi, you know, I don't want you to trip me up here by pointing out any single metric because I know you hold me to it, but I can tell you across 12 different metrics outside of occupancy, we're up versus 2019. some cases they're up nicely, particularly in areas such as guest spend, which is up virtually double digits. Pre-bookings are up more than double digits. All of that bodes well for utilization and penetration with lower guest counts. So we're continuing to see better occupancies on some of the banners that have struggled, and that too will bode well for generating higher revenues. I don't want to get into the specifics of any of the metrics that we measure because we don't publish them, Steve, as you know. But I can tell you every single one of those metrics that we now, with incredible data that we have developed during the pandemic period to monitor, discuss these metrics, channel better performance from each of our spa directors and banner directors, such that they're watching every one of those metrics. And I think that's helped us Now I improve what we're doing, how we're doing it, and week to week I see improvements across the board. So it's working. We've got an incredible team. They hyper-focused on these metrics, and thus far I can tell you, you know, we are seeing really positive performance from our team.
spk00: Okay, gotcha. And then obviously, I mean, when you look at your three major partners, I think at this point all three of them are talking about having, their entire fleet back in service sometime in the second quarter of next year. Based on that, I would assume at that point you guys are going to be starting to generate a decent amount of free cash flow. I guess the question is the priority of that free cash flow from here. This was historically supposed to be a very strong dividend distribution story. You know, how do you think about that now versus paying down some of your debt?
spk02: So I think, you know, I don't think our position has changed. And you're right. By the end of the second quarter, we'll start to generate nice positive cash flow. To the extent that we're able to firstly pay down debt, particularly the second lien, we're going to do that. That's certainly been sort of something that's a higher focus for us because of its unfavorable interest rate. We'd love to get rid of it as soon as we can. And then following that, obviously, all of the other options are open to us to consider. And we consider that at every single board meeting. And Stephen and I talk about the options, what we're going to do with our free cash flow going forward post-second quarter of 2022. Okay. Gotcha.
spk04: Thanks, guys. Appreciate it. Sure.
spk09: Our next question comes from Steph Wissink of Jefferies. Please go ahead.
spk01: Thank you. Good morning, everyone. I want to follow up comments on the increased cost of operation. If you could just share with us a little bit about what you're seeing from a costing perspective as you bring labor back, anything we should be thinking about. And then same question with respect to menu pricing, any price advancement that you're taking to help cover if there is any labor inflation.
spk02: So Steph, as you know, the two models on land and sea differ enormously with respect to cost and infrastructure costs. On land, we are seeing some creep in wages. We will be offsetting that later on this year with some price increases that we're going to take and we'll implement. That being said, we're not manning up full. We're starting to get more manning on the ground. Clearly, there's hyper-competition out there for staff. But I will say that staffing less and opening less hours has actually helped us improve EBITDA performance across the land-based platform. At sea, we're not seeing any kind of labor pressure that we're seeing or others are seeing on land. And that model remains very, very insulated and protected from some of the inflationary pressures that perhaps are hitting other leisure providers or restaurants, et cetera, et cetera, that you're seeing across the economy. We have put in place some price increases across certain banners, and we continue to roll out and review where we can take pricing up. So that continues to be fluid, and we've been successful thus far. And as you can tell, based on the fact that Frequencies up, demands up, spends up, none of the increases that we have taken have impacted us in a negative manner. So we're very pleased with what we've done so far.
spk01: Okay, that's great. One follow-up for you on the cash neutrality, and I think you mentioned Q2 cash flow positive. I want to just understand a little bit how that benchmarks back to some of the historic framework you've given us around 50% of 2019 capacity was kind of the threshold for that you were looking forward to break even on a cash flow basis. Are you finding that you're able to turn cash a bit sooner in part because of the KPIs that you just referenced? Or is there something else structural that's happening in the body of the P&L that we should be conscious of that's helping you get there a little bit sooner maybe than what that 50% capacity would have assumed?
spk05: I'll take that.
spk03: There are a couple of things that are playing into that. The most important of which is, yes, overall performance is better even at lower occupancy levels. And so the expectation is that as you move into next year, you would move to cash neutrality and then very quickly into generating positive cash flow on an enterprise basis, which obviously we're all excited about and want to get back to the point of not burning cash anymore. The biggest piece of it comes from improved operating performance. We are seeing at the moment some benefit from continued reduction in some of our corporate costs. However, over time, as more vessels return to service on a step basis, we will need to start increasing some of this corporate overhead in order to support those increased sailings. And so some of that benefit will go away. However, despite that, It is our expectation that in December, we'll be EBITDA positive, and as we move into next year, we'll be cash flow neutral and then cash flow positive very quickly in the year.
spk06: Thank you. Very helpful.
spk09: Once again, if you have a question, please press star, then 1. Our next question comes from Asir Jirjiva of Infinity Research. Please go ahead.
spk07: Good morning, guys. Very glad that things are starting to get closer to normal. I had a couple of questions. The first one relates to FCC. Do you think that those have been a significant driver in terms of the higher spend and penetration rates? I imagine those have been helpful. And as we go through 2022, probably a lot of those will have been spent. But then the offset is that we'll have hopefully a more normal environment in the second half of next year. Is that a fair assessment?
spk02: It's very hard for us to track that because what happens with those onboard credits or the credits that any one guest has, it's posted as a credit to their portfolio or their statement onboard. We don't get to see where they utilize it. It's just a credit used against spend. I mean, we'd love to see how much of that's being used towards spend in the spa, but it's just a credit against their total spend on board. We don't have the ability to track where or target how they've spent their onboard credits. Clearly, onboard credits is helping spend, but how much it's helping us, we have no idea.
spk07: Okay. I think Stephen had mentioned that you would try to be able to track that, but I can understand how it's very difficult to go through that barrier and dig deeper into each customer's portfolio.
spk02: We've tried, and we can't get the utilization of their onboard credits by department spend, and the cruise lines are not going to give that to us.
spk07: Yeah, I know. They tend to be like that. My second question was on the ATM, do you anticipate... continuing to use that program given that you're so close to you know being either that positive and soon um cash neutral um should we anticipate further use of the remaining 10 million no definitive decision has been reached with regards to utilizing the remaining 10 million asia obviously
spk03: to the extent we do, it would just enable us to use those proceeds and pay off the 2L quicker, which would be accretive to shareholders and certainly at these stock prices, it would be. So we'll be opportunistic if we feel that it's appropriate, we'll take in the cash. And really what that will translate into, though, is just an earlier pay down on the debt. So I think we'll leave it out there and we'll kind of play it by ear and see how it goes as opposed to committing to whether or not we're going to use it at this point in time.
spk07: Okay, that's fair enough. But at this point, it would be an accretive transaction if you continue to use that program.
spk05: Yes. Correct.
spk06: Okay, good. Okay, well, thank you so much. Have a great day.
spk05: Thank you, you too.
spk09: This concludes the question and answer session. I would like to turn the conference back over to Mr. Flexman for any closing remarks.
spk02: All right. Thank you all for joining us today on our third quarter call. We want to take this opportunity to wish you all a very happy, healthy, and safe holiday season. And we look forward to speaking with you at our upcoming investor conferences in the next few weeks and when we report our fourth quarter results next year. Thank you all.
spk09: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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