Overview
In addition to historical information, the following discussion contains forward-looking statements, such as statements regarding our expectation for future performance, liquidity and capital resources that involve risks, uncertainties and assumptions that could cause actual results to differ materially from those contained in or implied by any forward-looking statements. Factors that could cause such differences include those identified below and those described in the sections entitled "Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors" and in "Risk Factors" in our Form 10-K for the fiscal year endedDecember 31, 2022 . We assume no obligation to update any of these forward-looking statements. During the first quarter of 2023, we continued to execute the resumption of our health and wellness center operations on cruise ships and in destination resorts, and have substantially returned to normal operations. Despite the impacts of the recent pandemic on the travel leisure industry and our business, we believe we have certain strengths that have positioned us as a leader in the hospitality-based health and wellness industry and as a participant in the continued recovery of the cruise and hospitality industries.OneSpaWorld Holdings Limited ("OneSpaWorld ," the "Company," "we," "our, "us" and other similar terms refer toOneSpaWorld Holdings Limited and its consolidated subsidiaries) is the pre-eminent global operator of health and wellness centers onboard cruise ships and a leading operator of health and wellness centers at destination resorts worldwide. Our highly trained and experienced staff offer guests a comprehensive suite of premium health, fitness, beauty and wellness services and products onboard cruise ships and at destination resorts globally. We are the market leader at more than 20x the size of our closest maritime competitor. Over the last 50 years, we have built our leading market position on our depth of staff expertise, broad and innovative service and product offerings, expansive global recruitment, training and logistics platform, as well as decades-long relationships with cruise line and destination resort partners. Throughout our history, our mission has been simple: helping guests look and feel their best during and after their stay. At our core, we are a global services company. We serve a critical role for our cruise line and destination resort partners, operating a complex and increasingly important aspect of our cruise line and destination resort partners' overall guest experience. Decades of investment and know-how have allowed us to construct an unmatched global infrastructure to manage the complexity of our operations. We have consistently expanded our onboard offerings with innovative and leading-edge service and product introductions, and developed the powerful back-end recruiting, training and logistics platforms to manage our operational complexity, maintain our industry-leading quality standards, and maximize revenue and profitability per center. The combination of our renowned recruiting and training platform, deep proprietary labor pool, global logistics and supply chain infrastructure, and proven health and wellness center and revenue management capabilities represents a significant competitive advantage that we believe is not economically feasible to replicate. A significant portion of our revenues are generated from our cruise ship operations. Historically, we have been able to renew almost all of our cruise line agreements that expired or were scheduled to expire.
Key Performance Indicators
In assessing the performance of our business, we consider key performance indicators used by management, including, among others:
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Average Ship Count. The number of ships, on average during the period, on which we operate health and wellness centers. This is a key metric that impacts revenue and profitability and reflects the fact that during the period ships were in and out of service, and is calculated by adding the total number of days that each of the ships generated revenue during the period, divided by the number of calendar days during the period.
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Period End Ship Count: The number of ships at period end on which we operate health and wellness centers. This is a key metric that impacts revenue and profitability.
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Average Weekly Revenue Per Ship. A key indicator of productivity per ship. Revenue per ship can be affected by the various sizes of health and wellness centers and categories of ships on which we serve.
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Average Revenue Per Shipboard Staff Per Day. We utilize this performance metric to assist in determining the productivity of our onboard staff, which we believe is a critical element of our operations.
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Average Resort Count. The number of destination resorts on average during the period in which we operate the health and wellness centers. This is a key metric that impacts revenue and profitability and reflects the fact that during the period destination resort health and wellness centers were in and out of service, and is calculated by adding the total number of days that each destination resort health and wellness center generated revenue during the period, divided by the number of calendar days during the period.
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Period End Resort Count. The number of destination resorts at period end on which we operate the health and wellness centers. This is a key metric that impacts revenue and profitability.
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Average Weekly Revenue Per Destination Resort . 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 geographic mix of health and wellness centers in operation for such period. Typically ourU.S. andCaribbean health and wellness centers are larger and produce substantially more revenues per location than our Asian centers. Additionally, average weekly revenue can also be negatively impacted by renovations of our destination resort health and wellness centers. Three Months Ended March 31 2023 2022 Average Ship Count 173 104 Period End Ship Count 179 170 Average Weekly Revenue Per Ship$ 77,076 $ 58,775
Average Revenue Per Shipboard Staff Per Day
48 47 Period End Resort Count 51 51 Average Weekly Revenue Per Resort$ 16,973 $ 13,992
Key Financial Definitions
Revenues. Revenues consist primarily of sales of services and sales of products to cruise ship passengers and destination resort guests. The following is a brief description of the components of our revenues:
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Service revenues. Service revenues consist primarily of sales of health and wellness services, including a full range of massage and body care treatments, hair care treatments, skin and facial treatments, nutritional/weight management consultations, teeth whitening, ayurvedic treatments, acupuncture, medi-spa, and fitness personal training services to cruise ship passengers and destination resort guests. We bill our services at rates which inherently include an immaterial charge for products used in the rendering of such services, if applicable.
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Product revenues. Product revenues consist primarily of sales of skincare, body care, hair care, orthotics, and nutritional supplement products, among others, 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 line partners (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, wages paid directly to destination resort employees, payments to destination resort partners, the allocable cost of products consumed in the rendering of services, 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 corresponding increases or decreases in service revenues. Cost of services has tended to remain consistent as a percentage of service revenues. Cost of products. Cost of products consists primarily of the cost of products sold through our various methods of distribution, an allocable portion of wages paid to shipboard employees and an allocable portion of payments to cruise line 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 corresponding increases or decreases in product revenues and includes impairment of the carrying value of inventories. Cost of products has tended to remain consistent as a percentage of product revenues. Administrative. Administrative expenses are comprised of expenses associated with corporate and administrative functions that support our business, including fees for professional services, insurance, headquarters rent and other general corporate expenses.
Salaries, benefits and payroll taxes. Salaries, benefits and payroll taxes are comprised of employee expenses associated with corporate and administrative functions that support our business, including fees for employee salaries, bonuses, stock-based compensation, payroll taxes, pension/401(k) and other employee costs.
Amortization of intangible assets. Amortization of intangible assets are comprised of the amortization of intangible assets with definite useful lives (e.g. retail concession agreements, destination resort agreements, licensing agreements) and amortization expenses associated with prior transactions. 19
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Other income (expense), net. Other income (expense) consists of interest income, interest expense and changes in the fair value of warrant liabilities.
Income tax expense (benefit). Income tax expense (benefit) includes current and deferred federal income tax expenses, as well as state and local income taxes.
Net income (loss). Net income (loss) consists of income (loss) from operations less other income (expense) and income tax expense (benefit).
Revenue Drivers and Business Trends
Our revenues and financial performance are impacted by a multitude of factors, including, but not limited to:
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The number of ships and destination resorts in which we operate health and wellness centers. Revenue is impacted by net new ship growth, ships out of service, unanticipated dry-docks, ships prevented from sailing due to outbreaks of illnesses, such as the recent pandemic, and the number of destination resort health and wellness centers operating in each period.
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The size and offerings of new health and wellness centers. We have focused on innovating and implementing higher value added and price point services such as medi-spa and advanced facial techniques, which require treatment rooms equipped with specific equipment and staff trained to perform these services. As our cruise line partners continue to invest in new ships with enhanced health and wellness centers that allow for more advanced treatment rooms and larger staff sizes, we are able to increase the availability of these services, driving an overall shift towards a more profitable service mix.
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Expansion of value-added services and products across modalities in existing health and wellness centers. We continue to expand our higher value added and price point offerings in existing health and wellness centers, including introducing premium medi-spa and advanced facial services, resulting in higher guest spending.
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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 and guest socioeconomic factors.
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The mix of cruise itineraries. Revenue generated per shipboard health and wellness center is influenced by cruise itinerary, including the number of sea days versus port days, which impacts center utilization, and the geographic sailing region, which may impact ship category and offerings of services and products to align with forecast 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 of health and wellness services. We directly market and promote to onboard passengers as a result of enhanced collaboration with select cruise line partners. We also utilize our proprietary health and wellness services pre-booking and pre-payment technology platforms integrated with certain of our cruise line partners' pre-cruise planning systems. These areas of increased collaboration with cruise line partners are resulting in higher revenue generation across our health and wellness centers.
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The impact of weather. Our health and wellness centers onboard cruise ships and in select destination resorts may be negatively affected by hurricanes, particularly during the August through October period, which may be increasing in frequency and intensity due to climate change.
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Our revenues and financial performance may be impacted by other risks and uncertainties, including, without limitation, those set forth under the section entitled "Risk Factors" in Part II, Item 1A of the Company's 2022 Form 10-K.
The effect of each of these factors on our revenues and financial performance varies from period to period.
Recent Accounting Pronouncements
Refer to Note 2 to the Condensed Consolidated Financial Statements in this report for a discussion of recent accounting pronouncements.
Results of Operations
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Table of Contents Three Months Three Months Ended % of Total Ended % of Total March 31, 2023 Revenue March 31, 2022 Revenue (dollars in thousands, except per share amounts) REVENUES: Service revenues$ 150,121 82 %$ 71,162 81 % Product revenues 32,334 18 % 16,501 19 % Total revenues 182,455 100 % 87,663 100 % COST OF REVENUES AND OPERATING EXPENSES: Cost of services 126,328 69 % 62,667 71 % Cost of products 28,265 15 % 14,652 17 % Administrative 3,570 2 % 3,833 4 % Salaries, benefits and payroll taxes 8,921 5 % 8,727 10 % Amortization of intangible assets 4,206 2 % 4,206 5 % Total cost of revenues and operating expenses 171,290 94 % 94,085 107 % Income (loss) from operations 11,165 6 % (6,422 ) -7 % OTHER (EXPENSE) INCOME Interest expense, net (4,610 ) -3 % (3,407 ) -4 % Change in fair value of warrant liabilities (21,900 ) -12 % 3,400 4 % Total other expense (26,510 ) -15 % (7 ) -0 % Loss before income tax expense (benefit) (15,345 ) -8 % (6,429 ) -7 % INCOME TAX EXPENSE (BENEFIT) 559 0 % (113 ) 0 % NET LOSS$ (15,904 ) -9 %$ (6,316 ) -7 % NET LOSS PER VOTING AND NON-VOTING SHARE Basic and diluted $ (0.17 ) $ (0.07 ) WEIGHTED-AVERAGE SHARES OUTSTANDING Basic and diluted 93,418 92,204
Comparison of Results for the Three Months Ended
Results of operations for the first quarter of 2023 continued to accelerate from 2022 as the Company has substantially returned to normalized operations since the advent of the COVID-19 pandemic.
Revenues. Revenues for the three months ended
The break-down of revenue growth between service and product revenues was as follows:
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Service revenues. Service revenues for the three months endedMarch 31, 2023 were$150.1 million , an increase of$79.0 million , or 111%, compared to$71.2 million for the three months endedMarch 31, 2022 .
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Product revenues. Product revenues for the three months ended
Cost of services. Cost of services for the three months endedMarch 31, 2023 were$126.3 million , an increase of$63.7 million , or 102%, compared to$62.7 million for the three months endedMarch 31, 2022 . The increase was primarily attributable to costs associated with increased service revenues of$150.1 million in the quarter from our operating health and wellness centers at sea and on land, compared with service revenues of$71.2 million in the first quarter of 2022. Cost of products. Cost of products for the three months endedMarch 31, 2023 were$28.3 million , an increase of$13.6 million , or 93%, compared to$14.7 million for the three months endedMarch 31, 2022 . The increase was primarily attributable to costs associated with increased product revenues of$32.3 million in the quarter from our operating health and wellness centers at sea and on land, compared to product revenues of$16.5 million in the first quarter of 2022. Administrative. Administrative expenses for the three months endedMarch 31, 2023 were$3.6 million , a decrease of$0.2 million , or 7%, compared to$3.8 million for the three months endedMarch 31, 2022 . The decrease was primarily attributable to a reduction of costs in the three months endedMarch 31, 2023 in connection to administrative costs related to recruitment, travel, housing and training of shipboard employees at ourLondon Wellness Academy and professional fees. 21
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Salaries, benefits and payroll taxes. Salaries, benefits and payroll taxes for the three months endedMarch 31, 2023 were$8.9 million , an increase of$0.2 million , or 2%, compared to$8.7 million for the three months endedMarch 31, 2022 . The increase was primarily attributable the measured increase in corporate head count to account for the return to normal operations.
Amortization of intangible assets. Amortization of intangible assets for the
three months ended
Other (expense) income. Other (expense) income includes interest expense and change in the fair value of the warrant liabilities. Interest expense for the three months endedMarch 31, 2023 was($4.6) million , an increase of$1.2 million , or 35%, compared to($3.4) million for the three months endedMarch 31, 2022 . The increase was primarily attributable to the interest rate increase partially offset by lower debt balances. The change in fair value of the outstanding warrants during the three months endedMarch 31, 2023 was a loss of($21.9) million compared to a gain of$3.4 million during the three months endedMarch 31, 2022 . The change in fair value of warrant liabilities is the result of changes in market prices deriving the value of the financial instruments. Income tax expense (benefit) Income tax expense (benefit) for the three months endedMarch 31, 2023 was$0.6 million , an increase of$0.7 million , or 595%, compared to an income tax benefit of($0.1) million for the three months endedMarch 31, 2022 . The increase was primarily driven by a change in valuation allowance, withholding taxes due in various jurisdictions and the decrease in availability of net operating losses. Net loss. Net loss for the three months endedMarch 31, 2023 was($15.9) million , a decrease of$9.6 million , or 152%, compared to a net loss of($6.3) million for the three months endedMarch 31, 2022 . The decrease was primarily attributable to the negative change in fair value of warrant liabilities as a result of the increased share price. The change in fair value of warrant liabilities was a loss of($21.9) million in the quarter, compared to a gain of$3.4 million in the first quarter of 2022. Excluding the change in fair value of warrant liabilities the improvement in the first quarter of 2023 was primarily a result of the$17.6 million change in income from operations derived primarily from the increase in the number of wellness centers onboard ships operating during the quarter.
Liquidity and Capital Resources
Overview
Prior to the COVID-19 pandemic, we funded our operations principally with cash flow from operations. Upon the onset of the COVID-19 pandemic inMarch 2020 , we took prudently aggressive actions to increase our financial flexibility by securing and reallocating capital resources, including: (i) eliminating all non-essential operating and capital expenditures, (ii) withdrawing the Company dividend program until further notice, (iii) deferring payment of a dividend declared onFebruary 26, 2020 until approved by the Board of Directors, (iv) completing the 2020 Private Placement onJune 12, 2020 ; (v) borrowing$7 million , net, on our First Lien Revolving Facility, leaving$13 million available and undrawn; and (vi) entering into an agreement to allow for the Company to operate its ATM Program, which permitted the Company to sell, from time to time, common shares up to an aggregate offering price of$50.0 million , pursuant to which, as ofJuly 31, 2022 , shares representing approximately$10 million remained available for sale under the Agreement, and which Agreement was terminated by the Company onAugust 1, 2022 . Since the substantial easing of COVID-19 pandemic restrictions, our principal uses for liquidity have been funding our return to service on 179 cruise ships and in 51 destination resorts, associated working capital investment, debt service and full repayment of our Second Lien Term Loan Facility. Our results continued to experience significant recovery during the three months endedMarch 31, 2023 when compared to the prior year period, building upon the positive net operating cash flows. Taking into account the actions described above and our current resources, we have concluded that we will have sufficient liquidity to satisfy our obligations over the next twelve months and comply with all debt covenants as required by our debt agreements. 22
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The following table shows summary cash flow information for the three months
ended
Three Months Three Months Ended Ended (in thousands) March 31, 2023 March 31, 2022 Net loss$ (15,904 ) $ (6,316 ) Depreciation and amortization 5,509
5,477
Amortization of deferred financing costs 324 257 Change in fair value of warrant liabilities 21,900 (3,400 ) Stock-based compensation 2,591
3,286
Provision for doubtful accounts 5 - Loss from write-offs of property and equipment - 10 Noncash lease expense 51 20 Deferred income taxes 227 - Change in working capital (12,511 ) 105 Net cash provided by (used in) operating activities 2,192 (561 ) Capital expenditures (1,319 ) (919 ) Net cash used in investing activities (1,319 ) (919 ) Proceeds from exercise of warrants 215 55 Repayment on term loan facilities (10,521 ) (212 ) Net cash used in financing activities (10,306 ) (157 ) Effect of exchange rate changes on cash 168 (246 ) Net decrease in cash and cash equivalents and restricted cash $ (9,265 ) $
(1,883 )
Comparison of Results for the Three Months Ended
Operating activities. Our net cash provided by (used in) operating activities for the three months endedMarch 31, 2023 and 2022 were$2.2 million and$(0.6) million , respectively. In the three months endedMarch 31, 2023 , net operating cash flows continue to accelerate from 2022, as the Company has substantially returned to normal operations. In the three months endedMarch 31, 2022 , the Company incurred a deficit in net cash provided by (used in) operating activities, as the Company had substantially reduced revenues from operations onboard cruise ships due to the COVID-19 pandemic, while still incurring operating expenses. Investing activities. Our net cash used in investing activities for the three months endedMarch 31, 2023 and 2022 were$1.3 million and$0.9 million , respectively. In the three months endedMarch 31, 2023 , the Company incurred more capital expenditures than in the three months endedMarch 31, 2022 , as the Company has substantially returned to normal operations since the advent of the COVID-19 pandemic. Financing activities. Our net cash used in financing activities for the three months endedMarch 31, 2023 and 2022 were$10.3 million and$0.2 million , respectively. For the three months endedMarch 31, 2023 , the Company repaid$0.5 million on the First Lien Term Loan Facility and$10.0 million on the Second Lien Term Loan Facility and received proceeds from the exercise of public warrants of$0.2 million . For the three months endedMarch 31, 2022 , the Company repaid$0.2 million on the First Lien Term Loan Facility and received proceeds from the exercise of public warrants of$0.1 million .
Seasonality
A significant portion of our revenues are generated onboard cruise ships and are subject to specific individual cruise itineraries as to time of year and geographic location, among other factors. As a result, we experience varying degrees of seasonality as the demand for cruises is stronger in the Northern Hemisphere during the summer months and during holidays. Accordingly, the third quarter and holiday periods generally result in the highest revenue yields for us. Further, cruises and destination resorts have been negatively affected by the frequency and intensity of hurricanes, particularly during the August through October period, which may be increasing in frequency and intensity due to climate change. 23
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Table of Contents Contractual Obligations
As of
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated unaudited financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated unaudited financial statements and the reported amount of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. At least quarterly, management reevaluates its judgments and estimates, which are based on historical experience, current trends and various other assumptions that are believed to be reasonable under the circumstances. Our critical accounting policies are included in our 2022 Form 10-K. We believe that there have been no significant changes during the three months endedMarch 31, 2023 to the critical accounting policies disclosed in our 2022 Form 10-K.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, income or expenses, results of operations, liquidity, capital expenditures or capital resources.
Inflation and Economic Conditions
We do not believe that inflation has had a material adverse effect on our revenues or results of operations. However, public demand for activities, including cruises, is influenced by general economic conditions, including inflation, global health epidemics/pandemics and customer preferences. Periods of economic softness could have a material adverse effect on the cruise industry and hospitality industry upon which we are dependent. Such a slowdown could adversely affect our results of operations and financial condition. The COVID-19 pandemic substantially negatively impacted our business, operations, results of operations and financial condition in 2022 and 2021. Recurrence of the more severe aspects of the recent adverse economic conditions, including a reescalation of the COVID-19 outbreak, increases in inflation rates and interest rates, as well as periods of fuel price increases, could have a material adverse effect on our results of operations and financial condition during the period of such recurrence. Weakness in theU.S. Dollar compared to the U.K. Pound Sterling and the Euro also could have a material adverse effect on our results of operations and financial condition.
Cautionary Statement Regarding Forward-Looking Statements
From time to time, including in this report and other disclosures, we may issue "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements reflect our current views about future events and are subject to known and unknown risks, uncertainties and other factors which may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We attempt, whenever possible, to identify these statements by using words like "will," "may," "could," "should," "would," "believe," "expect," "anticipate," "forecast," "future," "intend," "plan," "estimate" and similar expressions of future intent or the negative of such terms.
Such forward-looking statements include, but are not limited to, statements regarding:
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the impact of COVID-19 on the industries and the markets in which the Company operates and the Company's business, operations, and financial condition, including cash flows and liquidity;
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the demand for the Company's services together with the possibility that the Company may be adversely affected by other economic, business, and/or competitive factors or changes in the business environment in which the Company operates;
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changes in consumer preferences or the markets for the Company's services and products;
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changes in applicable laws or regulations;
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competition for the Company's services and the availability of competition for opportunities for expansion of the Company's business;
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difficulties of managing growth profitably;
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the loss of one or more members of the Company's management team;
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changes in the market for the products we offer for sale;
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other risks and uncertainties included from time to time in the Company's
reports (including all amendments to those reports) filed with the
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other risks and uncertainties indicated in our 2022 Form 10-K, including those set forth under the section entitled "Risk Factors"; and
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other statements preceded by, followed by or that include the words "estimate," "plan," "project," "forecast," "intend," "expect," "anticipate," "believe," "seek," "target" or similar expressions.
These forward-looking statements are based on information available as of the date of this report and 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. We do not undertake any 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.
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