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Section 1: 10-Q (QUARTERLY REPORT)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2018

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                 to

 

Commission file number 001-35898

 

LINDBLAD EXPEDITIONS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   27-4749725
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

96 Morton Street, 9th Floor, New York, New York, 10014

(Address of principal executive offices) (Zip Code)

 

(212) 261-9000

(Registrant’s telephone number, including area code)

 

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company
  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. ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of April 30, 2018, 45,796,330 shares of common stock, par value $0.0001 per share, were issued and outstanding.

 

 

 

 

 

 

LINDBLAD EXPEDITIONS HOLDINGS, INC.

Quarterly Report On Form 10-Q

For The Quarter Ended March 31, 2018

 

Table of Contents

 

    Page(s)
   
PART I. FINANCIAL INFORMATION  
   
ITEM 1. Financial Statements (Unaudited) 1
  Condensed Consolidated Balance Sheets as of March 31, 2018 (Unaudited) and December 31, 2017 1
 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017 (Unaudited)

2
 

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2018 (Unaudited)

3
 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (Unaudited)

4
  Notes to the Condensed Consolidated Financial Statements (Unaudited) 5
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 27
ITEM 4. Controls and Procedures 27
     
PART II. OTHER INFORMATION  
   
ITEM 1. Legal Proceedings 27
ITEM 1A. Risk Factors 27
ITEM 2. Unregistered Sale of Equity Securities and Use of Proceeds 27
ITEM 3. Defaults Upon Senior Securities 28
ITEM 4. Mine Safety Disclosures 28
ITEM 5. Other Information 29
ITEM 6. Exhibits  
    30
SIGNATURES

 

 

 

 

PART 1. FINANCIAL INFORMATION
   
Item 1. Financial Statements

 

LINDBLAD EXPEDITIONS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

 

   As of
March 31,
2018
   As of
December 31,
2017
 
ASSETS  (unaudited)     
Current Assets:        
Cash and cash equivalents  $97,284   $96,443 
Restricted cash and marketable securities   20,237    7,057 
Marine operating supplies   5,413    5,045 
Inventories   1,826    1,794 
Prepaid expenses and other current assets   22,661    21,351 
Total current assets   147,421    131,690 
           
Property and equipment, net   260,804    250,952 
Goodwill   22,105    22,105 
Intangibles, net   9,159    9,554 
Other long-term assets   9,310    10,047 
Total assets  $448,799   $424,348 
           
LIABILITIES          
Current Liabilities:          
Unearned passenger revenues  $111,259   $112,238 
Accounts payable and accrued expenses   24,702    30,422 
Long-term debt - current   1,500    1,750 
Total current liabilities   137,461    144,410 
           
Long-term debt, less current portion   188,481    164,186 
Deferred tax liabilties   2,791    2,444 
Other long-term liabilities   692    684 
Total liabilities   329,425    311,724 
           
COMMITMENTS AND CONTINGENCIES          
           
REDEEMABLE NONCONTROLLING INTEREST   6,423    6,302 
           
STOCKHOLDERS’ EQUITY          
           
Preferred stock, $0.0001 par value, 1,000,000 shares authorized; no shares issued and outstanding   -    - 
Common stock, $0.0001 par value, 200,000,000 shares authorized; 45,767,643 and 45,427,030 issued, 45,357,640 and 44,787,608 outstanding as of March 31, 2018 and December 31, 2017, respectively   5    5 
Additional paid-in capital   38,331    42,498 
Retained earnings   74,615    63,819 
Total stockholders’ equity   112,951    106,322 
Total liabilities, stockholders’ equity and redeemable noncontrolling interest  $448,799   $424,348 

  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 1 

 

 

LINDBLAD EXPEDITIONS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands, except share and per share data)
(unaudited)

 

   For the three months ended
March 31,
 
   2018   2017 
         
Tour revenues  $82,410   $63,128 
Cost of tours   35,871    32,603 
Gross profit   46,539    30,525 
           
Operating expenses:          
General and administrative   15,050    15,101 
Selling and marketing   12,073    10,296 
Depreciation and amortization   5,045    3,763 
Total operating expenses   32,168    29,160 
           
Operating income   14,371    1,365 
           
Other (expense) income:          
Interest expense, net   (2,734)   (2,315)
(Loss) gain on foreign currency   (451)   246 
Other income (expense)   8    (263)
Total other expense   (3,177)   (2,332)
           
Income (loss) before income taxes   11,194    (967)
Income tax expense (benefit)   277    (1,592)
           
Net income  $10,917   $625 
Net income attributable to noncontrolling interest   121    29 
           
Net income available to common stockholders  $10,796   $596 
           
Weighted average shares outstanding          
Basic   45,274,540    44,707,273 
Diluted   45,667,565    45,761,938 
           
Net income per share available to common stockholders          
Basic  $0.24   $0.01 
Diluted  $0.24   $0.01 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 2 

 

 
LINDBLAD EXPEDITIONS HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands, except share data)
(unaudited)

 

   Common Stock   Additional Paid-In   Retained   Total Stockholders’ 
   Shares   Amount   Capital   Earnings   Equity 
Balance as of December 31, 2017   45,427,030   $5   $42,498   $63,819   $106,322 
Stock-based compensation   -            -    866    -    866 
Issuance of stock for equity compensation plans, net   349,643    -    (4,179)   -    (4,179)
Repurchase of shares and warrants   (9,030)   -    (854)   -    (854)
Net income   -    -    -    10,796    10,796 
Balance as of March 31, 2018   45,767,643   $5   $38,331   $74,615   $112,951 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 3 

 

 

LINDBLAD EXPEDITIONS HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 

   For the three months ended
March 31,
 
   2018   2017 
Cash Flows From Operating Activities        
Net income  $10,917   $625 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   5,045    3,763 
Amortization of National Geographic fee   727    727 
Amortization of deferred financing costs and other, net   608    552 
Stock-based compensation   866    4,202 
Deferred income taxes   347    (2,073)
Loss (gain) on foreign currency   451    (246)
Changes in operating assets and liabilities          
Marine operating supplies and inventories   (400)   116 
Prepaid expenses and other current assets   (1,754)   (1,358)
Unearned passenger revenues   (939)   4,261 
Write-off of unamortized issuance costs related to debt refinancing   359    - 
Other long-term assets   10    29 
Other long-term liabilities   8    - 
Accounts payable and accrued expenses   (5,727)   (7,861)
Net cash provided by operating activities   10,518    2,737 
Cash Flows From Investing Activities          
Purchases of property and equipment   (14,502)   (22,844)
Transfer to restricted cash and marketable securities   (13,180)   (4,411)
Net cash used in investing activities   (27,682)   (27,255)
Cash Flows From Financing Activities          
Proceeds from long-term debt   200,000    - 
Repayments of long-term debt   (170,625)   (438)
Payment of deferred financing costs   (6,297)   - 
Repurchase under stock-based compensation plans and related tax impacts   (4,179)   (1,103)
Repurchase of warrants and common stock   (854)   (5,572)
Net cash provided by (used in) financing activities   18,045    (7,113)
Effect of exchange rate changes on cash   (40)   (3)
Net increase (decrease) in cash and cash equivalents   841    (31,634)
Cash and cash equivalents at beginning of period   96,443    135,416 
Cash and cash equivalents at end of period  $97,284   $103,782 
Supplemental disclosures of cash flow information:          
Cash paid during the period:          
Interest  $3,012   $2,601 
Income taxes  $45   $12 
Non-cash investing and financing activities:          
Additional paid-in capital exercise proceeds of option shares  $1,682   $168 
Additional paid-in capital exchange proceeds used for option shares  $(1,682)  $(168)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 4 

 

  

Lindblad Expeditions Holdings, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 1 – BUSINESS

 

Organization

 

Lindblad Expeditions Holdings, Inc. and its consolidated subsidiaries (the “Company” or “Lindblad”) currently operate a fleet of seven owned expedition ships and five seasonal charter vessels under the Lindblad brand.

 

Lindblad’s mission is to offer life-changing adventures on all seven continents and pioneering innovative ways to allow its guests to connect with exotic and remote places. The Company’s expedition ships are customized, nimble and intimately-scaled vessels that are able to venture where larger cruise ships cannot, thus allowing Lindblad to offer up-close experiences in the planet’s wild and remote places and capitals of culture. Many of these expeditions involve travel to remote places with limited infrastructure and ports (such as Antarctica and the Arctic) or places that are best accessed by a ship (such as the Galápagos, Alaska, Baja’s Sea of Cortez, Costa Rica and Panama), and foster active engagement by guests. Each expedition ship is designed to be comfortable and inviting, while being fully equipped with state-of-the-art tools for in-depth exploration. The Company has an alliance with the National Geographic Partners (“National Geographic”), which often provides lecturers and National Geographic experts, including photographers, writers, marine biologists, naturalists, field researchers and film crews.

 

Through our subsidiary, Natural Habitat, the Company offers primarily land-based trips around the globe. Natural Habitat’s expeditions include polar bear tours in Churchill, Canada, Alaskan grizzly bear adventures, small-group Galápagos tours and African safaris. In addition to its land offerings, Natural Habitat offers select itineraries on six small chartered vessels for parts of the year. Natural Habitat has partnered with World Wildlife Fund (“WWF”) to offer conservation travel, sustainable travel that directly protects nature.

 

The Company’s common stock and warrants are listed on the NASDAQ Capital Market under the symbols “LIND” and “LINDW,” respectively.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements and footnotes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding unaudited interim financial information. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial statements for the periods presented. Operating results for the periods presented are not necessarily indicative of the results of operations to be expected for the full year due to seasonality and other factors. Certain information and footnote disclosures normally included in the condensed consolidated financial statements in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC. All intercompany balances and transactions have been eliminated in these unaudited condensed consolidated financial statements. Accordingly, these unaudited condensed consolidated financial statements and footnotes should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto for the year ended December 31, 2017 contained in the Annual Report on Form 10-K filed with the SEC on March 2, 2018.

 

Principles of Consolidation

 

The condensed consolidated financial statements of the Company include Lindblad Expeditions Holdings, Inc. and its consolidated subsidiaries.

 

Reclassifications

 

We have reclassified certain prior period amounts to conform to the current period presentation, with no impact on consolidated net income or cash flows.

 

 5 

 

 

Use of Estimates

 

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets, liabilities, revenues and expenses. Actual results could differ from such estimates. Management estimates include determining the estimated lives of long-lived assets, determining the fair value of assets acquired and liabilities assumed in business combinations, the fair value of the Company’s common stock and related warrants, the valuation of securities underlying stock-based compensation, income tax expense, the valuation of deferred tax assets, the value of contingent consideration and assessing its litigation, other legal claims and contingencies. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period that they are determined to be necessary.

 

Revenue Recognition

 

Revenues are measured based on consideration specified in our contracts with guests and are recognized as the related performance obligations are satisfied.

 

The majority of our revenues are derived from guest ticket contracts which are reported as tour revenues in our condensed consolidated statements of operations. Our primary performance obligation under this contract is to provide an expedition and may include pre- and post-expedition excursions, hotel accommodations, land-based expeditions and air transportation to and from the ships. Upon satisfaction of these performance obligations, the Company recognizes revenue over the duration of each expedition.

 

Tour revenues also include revenues from the sale of goods and services onboard our ships, cancellation fees and trip insurance. Revenues from the sale of goods and services rendered onboard are recognized upon purchase. Guest cancellation fees are recognized as tour revenues at the time of the cancellation. The Company records a liability for estimated trip insurance claims based on the Company’s claims history. Proceeds received from trip insurance premiums in excess of this liability are recorded as revenue in the period in which they are received.

 

Customer Deposits and Contract Liabilities

 

The Company’s guests remit deposits in advance of tour embarkation. Guest deposits consist of guest ticket revenues as well as revenues from the sale of pre- and post-expedition excursions, hotel accommodations, land-based expeditions and air transportation to and from the ships. Guest deposits represent unearned revenues and are reported as unearned passenger revenues in the condensed consolidated balance sheet when received and are subsequently recognized as tour revenue during the duration of the expedition. Accounting Standards Codification, Revenue from Contracts with Customers (Topic 606) defines a “contract liability” as an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration from the customer. We do not consider guest deposits to be a contract liability until the guest no longer has the right, resulting from the passage of time, to cancel their reservation and receive a full refund. Unearned passenger revenues presented in our condensed consolidated balance sheets include contract liabilities of $45.6 million and $40.3 million as of March 31, 2018 and December 31, 2017, respectively. During the three months ended March 31, 2018, we recognized revenues related to our contract liabilities as of December 31, 2017 of $38.3 million.

 

Earnings per Common Share

 

Earnings per common share is computed by dividing net income available to common shareholders, by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the dilutive incremental common shares associated with restricted stock awards or issuable upon the exercise of stock options, using the treasury stock method.

 

For the three months ended March 31, 2018 and 2017, the Company calculated earnings per share as follows:

 

   For the three months ended
March 31,
 
(In thousands, except share and per share data)  2018   2017 
   (unaudited) 
Net income available to common stockholders  $10,796   $596 
Weighted average shares outstanding:          
Total weighted average shares outstanding, basic   45,274,540    44,707,273 
Dilutive potential common shares   393,025    1,054,665 
Total weighted average shares outstanding, diluted   45,667,565    45,761,938 
           
Net income per share available to Lindblad          
Basic  $0.24   $0.01 
Diluted  $0.24   $0.01 

 

The Company’s Board of Directors and stockholders approved a 2015 Long-Term Incentive Plan, which includes the authority to issue up to 2,500,000 shares of Lindblad common stock. As of March 31, 2018, options to purchase an aggregate of 220,000 shares of the Company’s common stock with a weighted average exercise price of $9.63 per share were outstanding.

 

 6 

 

 

As of March 31, 2018 and 2017, 10,088,074 and 10,673,015 warrants, respectively, expiring July 8, 2020 to purchase common stock at a price of $11.50 per share were outstanding. These warrants were anti-dilutive and were not included in the calculation of diluted weighted average shares outstanding.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments with an original maturity of three months or less, as well as deposits in financial institutions, to be cash and cash equivalents.

 

Concentration of Credit Risk

 

The Company maintains cash in several financial institutions in the U.S. and other countries which, at times, may exceed the federally insured limits. Accounts held in the U.S. are guaranteed by the Federal Deposit Insurance Corporation up to certain limits. As of March 31, 2018 and December 31, 2017, the Company’s cash held in financial institutions outside of the U.S. amounted to $6.7 million and $4.1 million, respectively.

 

Restricted Cash and Marketable Securities

 

Restricted cash and marketable securities consist of the following:

 

   As of
March 31,
2018
   As of
December 31,
2017
 
(In thousands)  (unaudited)     
Federal Maritime Commission escrow  $17,383   $4,186 
Credit card processor reserves   1,530    1,530 
Certificates of deposit and other restricted securities   1,324    1,341 
Total restricted cash and marketable securities  $20,237   $7,057 

 

The amounts held in restricted cash and marketable securities represent principally funds required to be held in certificates of deposit by certain vendors and regulatory agencies and are classified as restricted assets since such amounts cannot be used by the Company until the restrictions are removed by those vendors and regulatory agencies. Interest income is recognized when earned.

 

The Company has classified marketable securities, principally money market funds, as trading securities which are recorded at market value. Unrealized gains and losses are included in current operations. Gains and losses on the disposition of securities are recognized by the specific identification method in the period in which they occur.

 

In order to operate guest tour expedition vessels from U.S. ports, the Company is required to post a performance bond with the Federal Maritime Commission or escrow all unearned guest deposits plus an additional 10% in restricted accounts. To satisfy this requirement, the Company entered into an agreement with a financial institution to escrow all unearned guest revenues collected for sailings from U.S. ports.

 

At March 31, 2018 and December 31, 2017, a cash reserve of approximately $1.5 million is required for credit card deposits by third-party credit card processors.

 

Amounts in the escrow accounts include cash, certificates of deposit and marketable securities. Cost of these short-term investments approximates fair value.

 

Marine Operating Supplies and Inventories

 

Marine operating supplies consist primarily of fuel, provisions, spare parts, items required for maintenance and supplies used in the operation of marine expeditions. Marine operating supplies are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method.

 

Inventories consist primarily of gift shop merchandise and other items for resale and are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method.

 

 7 

 

 

Prepaid Expenses and Other Current Assets

 

The Company records prepaid expenses and other current assets at cost and expenses them in the period the services are provided or the goods are delivered. The Company’s prepaid expenses and other current assets consist of the following:

 

   As of
March 31,
2018
   As of
December 31,
2017
 
(In thousands)  (unaudited)     
Prepaid tour expenses  $9,938   $9,846 
Prepaid air expense   3,546    3,621 
Prepaid client insurance   2,560    2,525 
Prepaid marketing, commissions and other expenses   2,511    2,495 
Prepaid corporate insurance   2,457    1,033 
Prepaid port agent fees   840    1,022 
Prepaid income taxes   809    809 
Total prepaid expenses  $22,661   $21,351 

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization were computed using the straight line method over the estimated useful lives of the assets, as follows:

 

    Years
Vessels and vessel improvements   15-25
Furniture and equipment   5
Computer hardware and software   5
Leasehold improvements, including port facilities   Shorter of lease term or related asset life

 

Vessel improvement costs that add value to the Company’s vessels are capitalized and depreciated over the shorter of the improvements or the vessel’s estimated remaining useful life, while costs of repairs and maintenance, including minor improvement costs and drydock expenses, are charged to expense as incurred and included in cost of tours. Drydock costs primarily represent planned maintenance activities that are incurred when a vessel is taken out of service. For U.S. flagged ships, the statutory requirement is an annual docking and U.S. Coast Guard inspections, normally conducted in drydock. Internationally flagged ships have scheduled dockings approximately every 12 months, for a period of up to three to six weeks.

 

Goodwill

 

The authoritative guidance requires that goodwill be assessed annually for impairment. The Company completed the annual impairment test as of September 30, 2017 with no indication of goodwill impairment. Future impairment tests will be performed annually as of September 30, or more frequently if warranted. As of March 31, 2018 there was no indication of impairment.

 

Intangibles, net

 

Intangibles, net include tradenames, customer lists and operating rights. Tradenames are words, symbols, or other devices used in trade or business to indicate the source of products and to distinguish it from other products and are registered with government agencies and are protected legally by continuous use in commerce. Customer lists are established relationships with existing customers that resulted in repeat purchases and customer loyalty. Based on the Company’s analysis, amortization of the tradenames and customer lists were computed using the estimated useful lives of 15 and 5 years, respectively

 

The Company operates two vessels year-round in the Galápagos National Park in Ecuador: the National Geographic Endeavour II with 95 berths and the National Geographic Islander with 47 berths. In order to operate these vessels within the park, the Company is required to have in its possession cupos (licenses) sufficient to cover the total available berths on each vessel.

 

 8 

 

 

In June 2015, a new Ecuadorian Special Law for Protected Areas was approved and updated in November 2015. A Presidential Decree issued by President Correa of Ecuador in November 2015 established that cupos, which were in effect since July 2015, will have a validity of nine years. The Company’s operating rights are up for renewal in July 2024 and, based on the new law, the Company will begin the renewal process in 2020. The current “owners” of the cupos will have the opportunity to re-apply for them, but any other enterprise or individual will have the opportunity to bid for the cupos. All bidders must present proof that they fulfill the conditions to properly utilize the license (access to a vessel, experience in tourism, proven environmental behavior, marketing, etc.). While the Company believes that, based on the expected criteria to retain cupos and its past operating history in the Galápagos, there is a strong possibility that the Company will retain its cupos, from an accounting perspective, it will assume they retain no value after July 2024. Once the renewal process has begun and if it can be determined that the Company will be successful in its bid, then the Company will adjust its amortization prospectively. Operating rights are amortized over their remaining government mandated lives.

 

Upon the occurrence of a triggering event, the assessment of possible impairment of the Company’s intangibles will be based on the Company’s ability to recover the carrying value of its asset, which is determined by using the asset’s estimated undiscounted future cash flows. If these estimated undiscounted future cash flows are less than the carrying value of the asset, an impairment charge is recognized for the excess of the asset’s carrying value over its estimated fair value. A significant amount of judgment is required in estimating the future cash flows and fair values of its tradenames, customer lists and operating rights. As of March 31, 2018 and December 31, 2017, there was no triggering event and the Company did not record an impairment for intangible assets.

 

Long-Lived Assets

 

The Company reviews its long-lived assets, principally its vessels, for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Upon the occurrence of a triggering event, the assessment of possible impairment is based on the Company’s ability to recover the carrying value of its asset, which is determined by using the asset’s estimated undiscounted future cash flows. If these estimated undiscounted future cash flows are less than the carrying value of the asset, an impairment charge is recognized for the excess of the asset’s carrying value over its estimated fair value. A significant amount of judgment is required in estimating the future cash flows and fair values of its vessels. As of March 31, 2018 and December 31, 2017, there was no triggering event and the Company did not record an impairment of its long-lived assets.

 

Accounts Payable and Accrued Expenses

 

The Company records accounts payable and accrued expenses for the cost of such items when the service is provided or when the related product is delivered. The Company’s accounts payable and accrued expenses consist of the following:

 

   As of
March 31,
2018
   As of
December 31,
2017
 
(In thousands)  (unaudited)     
Accrued other expense  $7,045   $7,001 
Accounts payable   4,321    7,791 
New build liability   3,817    2,730 
Employee liability   2,744    2,644 
Royalty payable   1,605    1,673 
Income tax liabilities   1,368    1,490 
Bonus compensation liabilty   1,276    3,736 
Travel certificate liability   1,128    1,120 
Refunds and commissions payable   926    1,805 
Accrued travel insurance expense   472    432 
Total accounts payable and accrued expenses  $24,702   $30,422 

 

 9 

 

 

Fair Value Measurements and Disclosure

 

Fair value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:

 

Level 1 Quoted market prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at measurement date.
   
Level 2 Quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly. Fair value is determined through the use of models or other valuation methodologies.
   
Level 3 Significant unobservable inputs for assets or liabilities that cannot be corroborated by market data. Fair value is determined by the reporting entity’s own assumptions utilizing the best information available, and includes situations where there is little market activity for the investment.

 

The carrying amounts of cash and cash equivalents, accounts payable and accrued expenses, approximate fair value due to the short-term nature of these instruments.

 

The carrying value of long-term debt approximates fair value given that the terms of the agreement were comparable to the market as of March 31, 2018. As of March 31, 2018 and December 31, 2017, the Company had no other significant liabilities that were measured at fair value on a recurring basis.

 

The asset’s or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement.

 

Level 3 financial liabilities consist of obligations for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

 

Income Taxes

 

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The measurement of net deferred tax assets is reduced by the amount of any tax benefit that, based on available evidence, is not expected to be realized, and a corresponding valuation allowance is established. The determination of the required valuation allowance against net deferred tax assets was made without taking into account the deferred tax liabilities created from the book and tax differences on indefinite-lived assets.

 

The Company accounts for income taxes using the asset and liability method, under which it recognizes deferred income taxes for the tax consequences attributable to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, as well as for tax loss carryforwards and tax credit carryforwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recoverable or settled. The Company recognizes the effect on deferred taxes of a change in tax rates in income in the period that includes the enactment date. The Company provides a valuation allowance against deferred tax assets if, based upon the weight of available evidence, the Company does not believe it is “more-likely-than-not” that some or all of the deferred tax assets will be realized. The Company will continue to evaluate the deferred tax asset valuation allowance balances in all of our foreign and U.S. companies to determine the appropriate level of valuation allowances.

 

The Company is subject to income taxes in both the U.S. and the non-U.S. jurisdictions in which it operates. The Company regularly assesses the potential outcome of current and future examinations in each of the taxing jurisdictions when determining the adequacy of the provision for income taxes. The Company has only recorded financial statement benefits for tax positions which it believes reflect the “more-likely-than-not” criteria of FASB’s authoritative guidance on accounting for uncertainty in income taxes, and it has established income tax reserves in accordance with this guidance where necessary. Once a financial statement benefit for a tax position is recorded or a tax reserve is established, the Company adjusts it only when there is more information available or when an event occurs necessitating a change. While the Company believes that the amount of the recorded financial statement benefits and tax reserves reflect the more-likely-than-not criteria, it is possible that the ultimate outcome of current or future examinations may result in a reduction to the tax benefits previously recorded on its condensed consolidated financial statements or may exceed the current income tax reserves in amounts that could be material. As of March 31, 2018, and December 31, 2017, the Company had a liability for unrecognized tax benefits of $0.4 million, which was included in other long-term liabilities. The Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense. During the three months ended March 31, 2018 and 2017, interest and penalties related to uncertain tax positions included in income tax expense are not significant.

 

The Company is subject to tax audits in all jurisdictions for which it files tax returns. Tax audits by their very nature are often complex and can require several years to complete. Currently, there are no U.S. federal, state or foreign jurisdiction tax audits pending. The Company’s corporate U.S. federal and state tax returns for the current year and three prior years remain subject to examination by tax authorities and the Company’s foreign tax returns for the current year and four prior years remain subject to examination by tax authorities.

 

 10 

 

 

The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), codified as Accounting Standards Update (“ASU”) 2018-05, to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 is effective for reporting periods that include December 22, 2017. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company made reasonable estimates of the effects and recorded provisional amounts in its financial statements as of December 31, 2017, resulting in additional tax expense of $12.7 million in that period. As the Company collects and prepares the necessary data, and interprets the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, it may make adjustments to the provisional amounts. Those adjustments may materially impact the Company’s provision for income taxes and effective tax rate in the period in which the adjustments are made. To date, management has not made any adjustments to the provisional amounts for the remeasurement of deferred tax assets/liabilities and the deemed repatriation of certain foreign subsidiary earnings. The accounting for the tax effects of the Tax Act will be completed in 2018.

 

Stock-Based Compensation

 

The Company accounts for equity instruments issued to employees, non-employee directors or other service providers in accordance with accounting guidance that requires that awards are recorded at their fair value on the date of grant and are amortized over the service period of the award. The Company recognizes compensation costs on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the equity instrument issued.

 

Segment Reporting

 

We are primarily a specialty cruise operator with operations in two segments, Lindblad and Natural Habitat. We evaluate the performance of our business based largely on the results of our operating segments. The chief operating decision maker, or CODM, and management review operating results monthly, and base operating decisions on the total results at a consolidated level, as well as at a segment level. Our reports provided to the Board of Directors are at a consolidated level and also contain information regarding the separate results of both segments. Management performance and related compensation is primarily based on total results. While both segments have similar characteristics, the two operating and reporting segments cannot be aggregated because they fail to meet the requirements for aggregation.

 

Recent Accounting Pronouncements

 

In August 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-12, Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities. This guidance will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. Update No. 2017-12 is effective for years beginning after December 15, 2018. Early adoption is permitted. Management is currently assessing the impact this guidance will have on the financial position or results of operations.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance requires the recognition of lease right of use assets and lease liabilities by lessees for those leases previously classified as operating. This guidance was issued to increase transparency and comparability among organizations by disclosing key information about leasing arrangements and requiring the recognition of right of use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. ASU 2016-02 is effective for years beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the effect adoption of this guidance will have on its consolidated financial statements. The Company does not believe the adoption of this guidance will have a material impact on our cash flows or results of operations.

 

Accounting Pronouncements Recently Adopted

 

In 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is based on the principle that revenue is recognized upon the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. There have been multiple clarifying ASU’s issued subsequent to ASU 2014-09. We adopted the guidance related to revenue recognition beginning January 1, 2018, using the modified retrospective transition method applied to those contracts which were not completed as of the adoption date. Prior periods have not been restated. The adoption of this guidance was not material to our financial position and results of operations.

 

 11 

 

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendment was issued in response from stakeholders’ regarding the cost and complexity of the goodwill impairment test. To simplify the subsequent measurement of goodwill, the Board eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities). Now the entity compares the fair value of the reporting unit with its carrying amount. The Company adopted this guidance beginning January 1, 2018, which did not have a material impact on our financial position or results of operations.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The guidance was issued to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amendments in this Update provide a screen to determine when a set (inputs and processes that produce an output) is a business. The screen requires that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The Company adopted this guidance beginning January 1, 2018, which did not have a material impact on our financial position or results of operations.

 

NOTE 3 – LONG-TERM DEBT

 

   As of
March 31, 2018
   As of
December 31, 2017
 
   (unaudited)     
(In thousands)  Principal   Discount and Deferred Financing Costs, net   Balance   Principal   Discount and Deferred Financing Costs, net   Balance 
Note payable  $2,525   $-   $2,525   $2,525   $-   $2,525 
Credit Facility   200,000    (12,544)   187,456    170,625    (7,214)   163,411 
Total long-term debt   202,525    (12,544)   189,981    173,150    (7,214)   165,936 
Less current portion   (1,500)   -    (1,500)   (1,750)   -    (1,750)
Total long-term debt, non-current  $201,025   $(12,544)  $188,481   $171,400   $(7,214)  $164,186 

 

Credit Facility

 

On March 27, 2018, the Company entered into a Third Amended and Restated Credit Agreement (the “Amended Credit Agreement”) providing for a refinancing and amendment of the terms of the Company’s existing secured credit facility, dated as of March 7, 2016 (the “Superseded Agreement”).

 

The Amended Credit Agreement provides for a $200.0 million senior secured first lien term loan facility (the “Term Facility”), which represents an increase of $25.0 million from the senior secured first lien term loan facility under the Superseded Agreement. The Term Facility matures March 27, 2025. Consistent with the Superseded Agreement, the Amended Credit Agreement also provides for a $45.0 million senior secured incremental revolving credit facility (the “Revolving Facility”), which includes a $5.0 million letter of credit sub-facility. The Company’s obligations under the Amended Credit Agreement remain secured by substantially all of the assets of the Company.

 

The Company capitalized $4.2 million related to lender and third-party fees in connection with the Third Amended and Restated Credit Agreement. In addition, the entry into the Third Amended and Restated Credit Agreement was considered a debt modification with a partial extinguishment, as a result the Company incurred costs of $1.0 million during the three months ended March 31, 2018.

 

Borrowings under the Term Facility will bear interest at an adjusted Intercontinental Exchange (“ICE”) Benchmark administration LIBOR plus a spread of 3.50%, which steps down to 3.25% if the Company’s debt rating from Moody’s and S&P are both B1 (stable) or better and BB (negative) or better, respectively. The interest rate at March 31, 2018 is 5.95%. Borrowings under the Revolving Facility will bear interest at an adjusted ICE Benchmark administration LIBOR plus a spread of 3.00%, or, at the option of the Company, an alternative base rate plus a spread of 2.00%. The Company is also required to pay a 0.5% annual commitment fee on undrawn amounts under the Revolving Credit Facility, which matures on March 27, 2023.

 

The Restated Credit Agreement (i) requires the Company to satisfy certain financial covenants as set forth in the Amended Credit Agreement; (ii) limits the amount of indebtedness the Company may incur; (iii) limits the amount the Company may spend in connection with certain types of investments; (iv) requires the delivery of certain periodic financial statements and an operating budget and (v) requires the mortgaged vessels and related inventory to be maintained in good working condition. As of March 31, 2018, the Company was in compliance with the covenants.

 

Borrowings under the Revolving Credit Facility will be used for general corporate and working capital purposes and related fees and expenses. As of March 31, 2018, the Company had no borrowings under the Revolving Credit Facility.

 

For the three months ended March 31, 2018 and 2017, deferred financing costs charged to interest expense was $0.6 million.

 

 12 

 

 

Senior Secured Credit Agreement

 

On January 8, 2018, the Company and its indirect, wholly-owned subsidiary (the “Borrower”) entered into a senior secured credit agreement (the “Export Credit Agreement”) with Citibank, N.A., London Branch (“Citi”) and Eksportkreditt Norge AS (together with Citi, the “Lenders”). Pursuant to the Export Credit Agreement, the Lenders have agreed to make available to the Borrower, at the Borrower’s option and subject to certain conditions, a loan in an aggregate principal amount not to exceed $107.7 million for the purpose of providing financing for up to 80% of the purchase price of the Company’s new ice class vessel, the National Geographic Endurance, targeted to be completed in January 2020. Seventy percent of the loan will be guaranteed by Garantiinstituttet for Eksportkreditt, the official export credit agency of Norway. If drawn upon, the loan will be made at the time of delivery of the vessel.

 

At the Borrower’s election, the loan will bear interest either at a fixed interest rate effectively equal to 5.78% or a floating interest rate equal to three-month LIBOR plus a margin of 3.00% per annum. The loan will amortize quarterly based on a twelve-year profile, with 70% maturing over twelve years from drawdown, and 30% maturing over five years from drawdown. The loan will be secured by a first priority mortgage over the new vessel and the assignment of related insurances. The Export Credit Agreement also contains customary events of default and mandatory prepayment events for, among other things, non-payment, breach of covenants, default on certain other indebtedness, certain large judgments and a change of control of the Company or the Borrower. In addition to paying interest on any outstanding loans under the facility, the Borrower is required to pay customary coordination, arrangement, agency, collateral and commitment fees. Amounts drawn under the Export Credit Agreement may be voluntarily prepaid at any time subject to customary breakage costs. All obligations of the Borrower under the Export Credit Agreement are guaranteed by the Company.

 

Note Payable

 

On May 4, 2016, in connection with the Natural Habitat acquisition, Natural Habitat issued an unsecured promissory note to Benjamin L. Bressler, the founder of Natural Habitat, with an outstanding principal amount of $2.5 million due at maturity on December 31, 2020. The promissory note accrues interest at a rate of 1.44% annually, with interest payable every six months.

 

NOTE 4 – EMPLOYEE BENEFIT PLAN

 

The Company has a 401(k) profit sharing plan and trust for its employees. The Company matches 30% of employee contributions up to annual maximum of $2,100 as of March 31, 2018 and 2017. For the three months ended March 31, 2018 and 2017, the Company’s benefit plan contribution was $0.1 million. The benefit plan contribution is included in general and administrative expenses on the accompanying condensed consolidated statements of operations.

 

NOTE 5 – STOCKHOLDERS’ EQUITY

 

Capital Stock

 

The Company has 1,000,000 shares of preferred stock authorized, $0.0001 par value and 200,000,000 shares of common stock authorized, $0.0001 par value.

 

Stock and Warrant Repurchase Plan

 

On November 2, 2016, the Company’s Board of Directors approved a $15.0 million increase to the Company’s existing stock and warrant repurchase plan (“Repurchase Plan”), to $35.0 million. This Repurchase Plan, which was authorized in November 2015, authorizes the Company to purchase from time to time the Company’s outstanding common stock and warrants. Any shares and warrants purchased will be retired. The Repurchase Plan has no time deadline and will continue until otherwise modified or terminated at the sole discretion of the Company’s Board of Directors. The repurchases exclude shares repurchased to settle statutory employee tax withholding related to the exercise of stock options and vesting of stock awards. All repurchases were made using cash resources. During the three months ended March 31, 2018 the Company repurchased 9,030 shares of common stock for $0.1 million and 568,446 warrants for $0.8 million. The Company has cumulatively repurchased 864,806 shares of common stock for $8.1 million and 6,011,926 warrants for $14.7 million, since plan inception. The balance as of April 30, 2018 for the repurchase plan was $12.1 million.

 

2018 Long-Term Incentive Compensation

 

In March 2017, the Company’s compensation committee approved awards of restricted stock units (“RSUs”) and performance share units (“PSUs”) to key employees under the Company’s 2015 Long-Term Incentive Plan. The Company granted 132,741 RSUs on March 30, 2018 at a grant price of $10.27. The RSU’s will vest in equal installments on each of the first three anniversaries of the grant date, subject to the recipient’s continued employment or service with us or our subsidiaries on the applicable vesting date.

 

 13 

 

 

The PSUs are performance-vesting equity incentive awards that will be earned based on our performance against metrics relating to annual Adjusted EBITDA, annual revenue, and guest satisfaction. Awards will vest after a three-year performance period and may be earned at a level ranging from 0%-200% of the number of PSUs granted, depending on performance. On March 30, 2018, the Company awarded 88,851 of targeted PSUs with the number of shares determined based upon the closing price of our common stock on March 30, 2018 of $10.27.

 

Stock Options

 

During the three months ended March 31, 2018, 955,424 stock options were exercised at an exercise price of $1.76 per share in a cashless transaction.

 

NOTE 6 – COMMITMENTS AND CONTINGENCIES

 

Fleet Expansion

 

On December 2, 2015, the Company entered into two separate Vessel Construction Agreements, (collectively, the “Agreements”) with Ice Floe, LLC, a Washington limited liability company doing business as Nichols Brothers Boat Builders (the “Builder”). The Agreements provide for the Builder to construct two new 236-foot 100-passenger cruise vessels.

 

The first vessel, the National Geographic Quest, was delivered in July 2017. The Company amended the agreement for the second vessel, the National Geographic Venture, in October 2017. The current contract price is $57.3 million and the vessel is scheduled to be completed in the fourth quarter of 2018, subject to extension for certain events, such as change orders. As of March 31, 2018, the Company has paid Ice Floe, LLC $34.8 million related to the National Geographic Venture. The Company may terminate the applicable Agreement in the event the builder fails to deliver the vessel within 180 days of the applicable due date or the builder becomes insolvent or otherwise bankrupt. The Agreement also contains customary representations, warranties, covenants and indemnities.

 

In November 2017, the Company entered into an agreement with Ulstein Verft to construct a polar ice class vessel, the National Geographic Endurance, with a total purchase price of 1,066.0 million Norwegian Kroner (NOK). Subsequently, the Company exercised its right to make payments in United States Dollars, which resulted in a purchase price of $134.6 million, including hedging costs. The purchase price is subject to potential adjustments from contract specifications for variations in speed, deadweight, fuel consumption and delivery date, and is due in installments. The first twenty percent of the purchase price was paid shortly after execution of the Agreement with the remaining eighty percent due upon delivery and acceptance of the vessel. The vessel is targeted to be delivered in January 2020, with potential accelerated delivery to November 2019. The contract also includes options to build two additional ice class vessels.

 

Royalty Agreement – National Geographic

 

The Company is engaged in an alliance and license agreement with National Geographic, which allows the Company to use the National Geographic name and logo. In return for these rights, the Company is charged a royalty fee. The royalty fee is included within selling and marketing expense on the accompanying condensed consolidated statements of operations. The amount is calculated based upon a percentage of certain ticket revenues less travel agent commission, including the revenues received from cancellation fees and any revenues received from the sale of voyage extensions. A voyage extension occurs when a guest extends his or her trip with pre- or post-voyage hotel nights and is included within tour revenues on the accompanying condensed consolidated statements of operations. The royalty expense is recognized at the time of revenue recognition. See Note 2 – Summary of Significant Accounting Policies for a description of the Company’s revenue recognition policy. Royalty expense for the three months ended March 31, 2018 and 2017 totaled $1.6 million and $1.2 million, respectively.

 

The balances outstanding to National Geographic as of March 31, 2018 and December 31, 2017 are $1.6 million and $1.7 million, respectively, and are included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheets.

 

Royalty Agreement – World Wildlife Fund

 

Natural Habitat has a license agreement with World Wildlife Fund, which allows it to use the WWF name and logo. In return for these rights, Natural Habitat is charged a royalty fee and a fee based on annual gross sales. The fees are included within selling and marketing expense on the accompanying condensed consolidated statements of operations. The annual royalty payment and gross sales fees are paid on a quarterly basis. For the three months ended March 31, 2018 and 2017, these fees totaled $0.2 million.

 

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Charter Commitments

 

From time to time, the Company enters into agreements to charter vessels onto which it holds its tours and expeditions. Future minimum payments on its charter agreements as of March 31, 2018 are as follows:

 

For the years ended December 31,  Amount 
(In thousands)  (unaudited) 
2018 (nine months)  $6,027 
2019   8,451 
2020   130 
Total  $14,608 

 

NOTE 7 – SEGMENT INFORMATION

 

The Company evaluates the performance of its business segments based largely on tour revenues and operating income, and results of the segments without allocating other income and expenses, net, income taxes and interest expense, net. For the three months ended March 31, 2018 and 2017 operating results were:

 

   For the three months ended
March 31,
 
(In thousands)  2018   2017   Change   % 
Tour revenues:  (unaudited) 
Lindblad  $70,453   $53,202   $17,251    32%
Natural Habitat   11,957    9,926    2,031    20%
Total tour revenues  $82,410   $63,128   $19,282    31%
Operating income:                    
Lindblad  $13,439   $1,266   $12,173    NM 
Natural Habitat   932    99    833    NM 
Total operating income  $14,371   $1,365   $13,006    NM 

 

As of March 31, 2018 and December 31, 2017, total assets for the Lindblad segment and for the Natural Habitat segment were $395.2 million and $53.6 million, respectively, and $382.7 million and $49.6 million, respectively. As of March 31, 2018 and December 31, 2017, there were $4.6 million and $4.8 million, respectively, of intangibles, net related to the Lindblad segment. As of March 31, 2018 and December 31, 2017, there was $22.1 million in goodwill and $4.6 million and $4.8 million in intangibles, respectively, that were related to the Natural Habitat segment.

 

For the Lindblad segment, capital expenditures for the three months ended March 31, 2018 and 2017 were $14.4 million and $22.8 million, respectively. Depreciation and amortization expense for the three months ended March 31, 2018 and 2017 was $4.7 million and $3.4 million, respectively. For the three months ended March 31, 2018 and 2017, amortization expense related to operating rights was $0.2 million.

 

For the Natural Habitat segment for the three months ended March 31, 2018 and 2017, amortization of tradenames and customer lists was $0.2 million. For the three months ended March 31, 2018 and 2017 there was $0.4 million and $0.3 million in depreciation and amortization expense, respectively, and $0.1 million in capital expenditures.

 

There were $1.0 million and $0.2 million in intercompany tour revenues between the Lindblad and Natural Habitat segments eliminated in consolidation for the three months ended March 31, 2018 and 2017, respectively.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION

 

The following discussion and analysis addresses material changes in the financial condition and results of operations of the Company for the periods presented. This discussion and analysis should be read in conjunction with its unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q (“Form 10-Q”), as well as its audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2018.

 

Cautionary Note Regarding Forward-Looking Statements

 

Any statements in this Form 10-Q about our expectations, beliefs, plans, objectives, prospects, financial condition, assumptions or future events or performance are not historical facts and are “forward-looking statements” as that term is defined under the federal securities laws. These statements are often, but not always, made through the use of words or phrases such as “believe,” “anticipate,” “should,” “intend,” “plan,” “will,” “expects,” “estimates,” “projects,” “positioned,” “strategy,” “outlook” and similar words. You should read the statements that contain these types of words carefully. Such forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from what is expressed or implied in such forward-looking statements. There may be events in the future that we are not able to predict accurately or over which we have no control. Potential risks and uncertainties include, but are not limited to:

 

  general economic conditions;
     
  unscheduled disruptions in our business due to weather events, mechanical failures, or other events;
     
  changes adversely affecting the business in which we are engaged;
     
  management of our growth and our ability to execute on our planned growth;
     
  our business strategy and plans;
     
  compliance with laws and regulations,
     
  compliance with the financial and/or operating covenants in our Third Amended & Restated Credit Agreement (“Amended Credit Agreement”);
     
  adverse publicity regarding the cruise industry in general;
     
  loss of business due to competition;
     
  the result of future financing efforts;
     
  delays and costs overruns with respect to the construction and delivery of newly constructed vessels;
     
  the inability to meet revenue and Adjusted EBITDA projections; and
     
  those risks discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or uncertainties after the date hereof or to reflect the occurrence of unanticipated events.

 

Unless the context otherwise requires, in this Form 10-Q, “Company,” “Lindblad,” “we,” “us,” “our,” and “ours” refer to Lindblad Expeditions Holdings, Inc., and its subsidiaries.

 

Business Overview

 

Lindblad provides expedition cruising and adventure travel experiences that include itineraries that feature up-close encounters with wildlife and nature, history and culture and promote guest empowerment and interactivity. Our mission is offering life-changing adventures on all seven continents and pioneering innovative ways to allow our guests to connect with exotic and remote places. We operate a fleet of seven owned expedition ships. The Company has contracted for two additional vessels, the National Geographic Venture, a coastal vessel, expected to be completed in the fourth quarter of 2018, and the National Geographic Endurance, a polar ice class vessel targeted to be completed in January 2020, with potential accelerated delivery to November 2019. The polar ice class contract includes options to build two additional ice class vessels.

 

In addition, the Company operates five seasonal charter vessels under the Lindblad brand. We deploy chartered vessels for various seasonal offerings and continually seek to optimize our charter fleet to balance our inventory with demand and maximize yields. We use our charter inventory as a mechanism to both increase travel options for our existing and prospective guests and also to test demand for certain areas and seasons to understand the potential for longer term deployments and additional vessel needs.

 

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We have a longstanding relationship with the National Geographic Society, since 2004, based on a shared interest in exploration, research, technology and conservation. This relationship includes co-selling, co-marketing and branding arrangements with National Geographic Partners, LLC (“National Geographic”) whereby our owned vessels carry the National Geographic name and National Geographic sells our expeditions through their internal travel divisions. We collaborate with National Geographic on expedition planning to enhance the guest experience by having National Geographic experts, including photographers, writers, marine biologists, naturalists, field researchers and film crews, join our expeditions. Guests have the ability to interface with these experts through lectures, excursions, dining and other experiences throughout their expedition.

 

On March 27, 2018, the Company entered into a Third Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with Credit Suisse, as Administrative Agent and Collateral Agent, providing for a refinancing and amendment of the terms of the Company’s existing secured credit facility, dated as of March 7, 2016 (the “Superseded Agreement”).The Amended Credit Agreement provides for a $200.0 million senior secured first lien term loan facility (the “Term Facility”), which represents an increase of $25.0 million from the senior secured first lien term loan facility under the Superseded Agreement. Consistent with the Superseded Agreement, the Amended Credit Agreement also provides for a $45.0 million senior secured incremental revolving credit facility (the “Revolving Facility”), which includes a $5.0 million letter of credit sub-facility. See Note 3 – Long-Term Debt to the condensed consolidated financial statements for additional information regarding the Restated Credit Agreement.

 

In the fourth quarter of 2016, the National Geographic Orion experienced an issue with its main engine and as a result we cancelled four voyages during the first quarter of 2017 for necessary engine repairs. In addition, in the first quarter of 2017, the National Geographic Sea Lion cancelled two voyages to repair the air conditioning system. It is estimated that the impact of the cancellations was approximately $9.1 million in tour revenues and $6.5 million in Adjusted EBITDA for the three months ended March 31, 2017.

 

The discussion and analysis of our results of operations and financial condition are organized as follows:

 

  a description of certain line items and operational and financial metrics we utilize to assist us in managing our business;
     
  results and a comparable discussion of our consolidated and segment results of operations for the three months ended March 31, 2018 and 2017;
     
  a discussion of our liquidity and capital resources, including future capital and contractual commitments and potential funding sources; and
     
  a review of our critical accounting policies.

 

Financial Presentation

 

Description of Certain Line Items

 

Tour revenues

 

Tour revenues consist of the following:

 

  Guest ticket revenues recognized from the sale of guest tickets; and
     
  Other tour revenues from the sale of pre- or post-expedition excursions, hotel accommodations, and land-based expeditions; air transportation to and from the ships, goods and services rendered onboard that are not included in guest ticket prices, trip insurance, and cancellation fees.

 

Cost of tours

 

Cost of tours includes the following:

 

  Direct costs associated with revenues, including cost of pre- or post-expedition excursions, hotel accommodations, and land-based expeditions, air and other transportation expenses, and cost of goods and services rendered onboard;
     
  Payroll costs and related expenses for shipboard and expedition personnel;
     
  Food costs for guests and crew, including complimentary food and beverage amenities for guests;
     
  Fuel costs and related costs of delivery, storage and safe disposal of waste; and
     
  Other tour expenses, such as land costs, port costs, repairs and maintenance, equipment expense, drydock, ship insurance, and charter hire costs.

 

Selling and marketing

 

Selling and marketing expenses include commissions and a broad range of advertising and promotional expenses.

 

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General and administrative

 

General and administrative expenses include the cost of shoreside vessel support, reservations and other administrative functions, including salaries and related benefits, credit card commissions, professional fees and rent.

 

Operational and Financial Metrics

 

We use a variety of operational and financial metrics, including non-GAAP financial measures, such as Adjusted EBITDA, Net Yields, Occupancy and Net Cruise Costs, to enable us to analyze our performance and financial condition. We utilize these financial measures to manage our business on a day-to-day basis and believe that they are the most relevant measures of performance. Some of these measures are commonly used in the cruise and tourism industry to evaluate performance. We believe these non-GAAP measures provide expanded insight to assess revenue and cost performance, in addition to the standard GAAP-based financial measures. There are no specific rules or regulations for determining non-GAAP measures, and as such, they may not be comparable to measures used by other companies within the industry.

 

The presentation of non-GAAP financial information should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. You should read this discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and the related notes thereto also included within.

 

Adjusted EBITDA is net income (loss) excluding depreciation and amortization, net interest expense, other income (expense), income tax (expense) benefit, (gain) loss on foreign currency, (gain) loss on transfer of assets, reorganization costs, and other supplemental adjustments. Other supplemental adjustments include certain non-operating items such as stock-based compensation, executive severance costs, the National Geographic fee amortization, merger-related expenses, debt refinancing costs and acquisition-related expenses. The Company believes Adjusted EBITDA, when considered along with other performance measures, is a useful measure as it reflects certain operating drivers of the business, such as sales growth, operating costs, selling and administrative expense, and other operating income and expense. The Company believes Adjusted EBITDA helps provide a more complete understanding of the underlying operating results and trends and an enhanced overall understanding of the Company’s financial performance and prospects for the future. Adjusted EBITDA is not intended to be a measure of liquidity or cash flows from operations or a measure comparable to net income as it does not take into account certain requirements, such as unearned passenger revenues, capital expenditures and related depreciation, principal and interest payments, and tax payments. The Company’s use of Adjusted EBITDA may not be comparable to other companies within the industry.

 

The following metrics apply to our Lindblad segment:

 

Adjusted Net Cruise Cost represents Net Cruise Cost adjusted for Non-GAAP other supplemental adjustments which include certain non-operating items such as stock-based compensation, the National Geographic fee amortization, merger-related expenses, and acquisition-related expenses.

 

Available Guest Nights is a measurement of capacity and represents double occupancy per cabin (except single occupancy for a single capacity cabin) multiplied by the number of cruise days for the period. We also record the number of guest nights available on our limited land programs in this definition.

 

Gross Cruise Cost represents the sum of cost of tours plus merger-related expenses, selling and marketing expenses, and general and administrative expenses.

 

Gross Yield represents tour revenues less insurance proceeds divided by Available Guest Nights.

 

Guest Nights Sold represents the number of guests carried for the period multiplied by the number of nights sailed within the period.

 

Maximum Guests is a measure of capacity and represents the maximum number of guests in a period and is based on double occupancy per cabin (except single occupancy for a single capacity cabin).

 

Net Cruise Cost represents Gross Cruise Cost excluding commissions and certain other direct costs of guest ticket revenues and other tour revenues.

 

Net Cruise Cost Excluding Fuel represents Net Cruise Cost excluding fuel costs.

 

Net Revenue represents tour revenues less insurance proceeds, commissions and direct costs of other tour revenues.

 

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Net Yield represents Net Revenue divided by Available Guest Nights.

 

Number of Guests represents the number of guests that travel with us in a period.

 

Occupancy is calculated by dividing Guest Nights Sold by Available Guest Nights.

 

Voyages represent the number of ship expeditions completed during the period.

 

Foreign Currency Translation

 

The U.S. dollar is the functional currency in our foreign operations and re-measurement adjustments and gains or losses resulting from foreign currency transactions are recorded as foreign exchange gains or losses in the condensed consolidated statements of operations.

 

Seasonality

 

Lindblad tour revenues from the sale of guest tickets are mildly seasonal, historically larger in the first and third quarters. The seasonality of our operating results increases due to our vessels being taken out of service for scheduled maintenance or drydocking, which is typically during non-peak demand periods, in the second and fourth quarters. Our drydock schedules are subject to cost and timing differences from year to year due to the availability of shipyards for certain work, drydock locations based on ship itineraries, operating conditions experienced especially in the polar regions, and the applicable regulations of class societies in the maritime industry, which require more extensive reviews periodically. Drydocking impacts operating results by reducing tour revenues and increasing cost of tours. Natural Habitat is a seasonal business, with higher tour revenue recorded in the fourth quarter than other quarters related to polar bear tour revenues.

 

Results of Operations - Consolidated

 

   For the three months ended
March 31,
 
(In thousands, except per share data)  2018   2017   Change   % 
Tour revenues  $82,410   $63,128   $19,282    31%
Cost of tours   35,871    32,603    3,268    10%
Gross profit   46,539    30,525    16,014    52%
General and administrative   15,050    15,101    (51)   (0%)
Selling and marketing   12,073    10,296    1,777    17%
Depreciation and amortization   5,045    3,763    1,282    34%
Operating income  $14,371   $1,365   $13,006    NM 
Net income  $10,917   $625   $10,292    NM 
Earnings per share available to common stockholders                    
Basic  $0.24   $0.01   $0.23    NM 
Diluted   0.24    0.01    0.23    NM 

 

Comparison of Three Months Ended March 31, 2018 to Three Months Ended March 31, 2017 - Consolidated

 

Tour Revenues

 

Tour revenues for the three months ended March 31, 2018 increased $19.3 million, or 31%, to $82.4 million compared to $63.1 million for the three months ended March 31, 2017. The Lindblad segment increased tour revenues by $17.3 million driven by higher guest ticket revenue, primarily from an increase in available guest nights due to the addition of the National Geographic Quest to our fleet in the third quarter of 2017, as well as from the impact of cancelled voyages in the first quarter of 2017. At the Natural Habitat segment tour revenues increased $2.0 million over the prior year period primarily due to additional departures and an increase in pricing. Excluding the estimated $9.1 million impact from the voyage cancellations in the first quarter of 2017, tour revenues would have increased $10.1 million, or 14%, for the three months ended March 31, 2018.

 

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Cost of Tours

 

Total cost of tours for the three months ended March 31, 2018 increased $3.3 million, or 10%, to $35.9 million compared to $32.6 million for the three months ended March 31, 2017. The increase was primarily due to a $2.3 million increase at the Lindblad segment mainly from costs related to the National Geographic Quest and the impact of cancelled voyages in the first quarter of 2017, partially offset by a decrease in charter expense due to a planned reduction in chartered voyages. At the Natural Habitat segment, cost of tours increased $1.0 million due to additional departures.

 

General and Administrative

 

General and administrative expenses for the three months ended March 31, 2018 and 2017 were $15.1 million. At the Lindblad segment, general and administrative expenses decreased $0.4 million over the prior year period as a result of $3.3 million in lower stock compensation expense, mainly due to higher costs in the first quarter a year ago from the 2016 CEO Allocation Grant and option grants fully expensed on December 31, 2017, partially offset by debt refinancing and higher personnel costs. At the Natural Habitat segment, general and administrative expenses increased $0.4 million primarily due to an increase in personnel costs and credit card commissions. 

 

Selling and Marketing

 

Selling and marketing expenses for the three months ended March 31, 2018 increased $1.8 million, or 17%, to $12.1 million compared to $10.3 for the three months ended March 31, 2017 primarily due to a $1.9 million increase at the Lindblad segment due to increased commission and royalty expense associated with the higher tour revenues. At the Natural Habitat segment, selling and marketing expenses decreased $0.2 million primarily driven by a decrease in promotional offers.

 

Depreciation and Amortization

 

Depreciation and amortization expenses for the three months ended March 31, 2018 increased $1.3 million, or 34%, to $5.0 million, compared to $3.7 million for the three months ended March 31, 2017 primarily due to a $1.2 million increase at the Lindblad segment mainly due to the addition of the National Geographic Quest to the fleet in July 2017.

 

Other Expense

 

Other expenses for the three months ended March 31, 2018 increased $0.9 million to $3.2 million from $2.3 million for the three months ended March 31, 2017, primarily due to the following:

 

 

In 2018, we recorded a $0.5 million loss in foreign currency translation compared to a gain of $0.3 million in 2017 due to the weakening of the U.S. dollar in relation to the Canadian dollar and the Euro.

     
  Interest expense, net, increased $0.4 million to $2.7 million in 2018 from $2.3 million in 2017 due to higher interest rates.
     
 

In 2017, we incurred $0.2 million of costs related to the retirement of the National Geographic Endeavour. No such costs were incurred in 2018.

 

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Results of Operations – Segments

 

Selected information for our segments is below. The presentation of non-GAAP financial information should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

 

   For the three months ended
March 31,
 
(In thousands)  2018   2017   Change   % 
Tour revenues:                
Lindblad  $70,453   $53,202   $17,251    32%
Natural Habitat   11,957    9,926    2,031    20%
Total tour revenues   82,410    63,128    19,282    31%
Impact of voyage cancellations   -    9,140    (9,140)   NA 
Total tour revenues excluding voyage cancellations  $82,410   $72,268   $10,142    14%
Operating income:                    
Lindblad  $13,439   $1,266   $12,173    NM 
Natural Habitat   932    99    833    NM 
Total operating income   14,371    1,365    13,006    NM 
Impact of voyage cancellations   -    6,464    (6,464)   NA 
Total operating income excluding voyage cancellations  $14,371   $7,829   $6,542    84%
Adjusted EBITDA:                    
Lindblad  $20,889   $9,842   $11,047    112%
Natural Habitat   1,293    422    871    NM 
Total adjusted EBITDA   22,182    10,264    11,918    116%
Impact of voyage cancellations   -    6,464    (6,464)   NA 
Total adjusted EBITDA excluding voyage cancellations  $22,182   $16,728   $5,454    33%

 

Results of Operations – Lindblad Segment

 

The following table sets forth our Available Guest Nights, Guest Nights Sold, Occupancy, Maximum Guests, Number of Guests and Voyages for the three months ended March 31, 2018 and 2017:

 

   For the three months ended March 31, 
   2018   2017 
Available Guest Nights   53,917    42,722 
Guest Nights Sold   48,935    37,064 
Occupancy   90.8%   86.8%
Maximum Guests   6,899    5,268 
Number of Guests   6,177    4,601 
Voyages   95    81 

 

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The following table shows the calculations of Gross Yield and Net Yield for the three months ended March 31, 2018 and 2017. Gross Yield is calculated by dividing Tour Revenues by Available Guest Nights and Net Yield is calculated by dividing Net Revenue by Available Guest Nights:

 

Calculation of Gross Yield and Net Yield

 

Lindblad Segment

 

  For the three months ended
March 31,
 
(In thousands, except for Available Guest Nights, Gross and Net Yield)  2018   2017 
Guest ticket revenues  $62,681   $45,045 
Other tour revenues   7,772    8,157 
Tour Revenues   70,453    53,202 
Less: Orion Insurance Proceeds   -    (1,900)
Adjusted Tour Revenues   70,453    51,302 
Less: Commissions   (5,554)   (4,102)
Less: Other tour expenses   (4,118)   (4,118)
Net Revenue  $60,781   $43,082 
Available Guest Nights   53,917    42,722 
Gross Yield  $1,307   $1,201 
Net Yield   1,127    1,008 

 

The following table shows the calculations of Gross Cruise Cost per Available Guest Night and Net Cruise Costs per Available Guest Night for the three months ended March 31, 2018 and 2017:

 

(In thousands, except for Available Guest Nights,  For the three months ended March 31, 
Gross and Net Cruise Cost per Avail. Guest Night)  2018   2017 
Cost of tours  $28,680   $26,372 
Plus: Selling and marketing   11,262    9,312 
Plus: General and administrative   12,388    12,812 
Gross Cruise Cost   52,330    48,496 
Less: Commission expense   (5,554)   (4,102)
Less: Other tour expenses   (4,118)   (4,118)
Net Cruise Cost   42,658    40,276 
Less: Fuel expense   (2,110)   (1,668)
Net Cruise Cost Excluding Fuel   40,548    38,608 
Non-GAAP Adjustments:          
Debt refinancing costs   (993)   - 
Stock-based compensation   (866)   (4,202)
National Geographic fee amortization   (727)   (727)
Reorganization costs   (180)   (207)
Adjusted Net Cruise Cost Excluding Fuel  $37,782   $33,472 
Adjusted Net Cruise Cost  $39,892   $35,140 
Available Guest Nights   53,917    42,722 
Gross Cruise Cost per Available Guest Night  $971   $1,135 
Net Cruise Cost per Available Guest Night   791    943 
Net Cruise Cost Excl. Fuel per Available Guest Night   752    904 
Adj. Net Cruise Cost Excl. Fuel per Avail. Guest Night   701    783 
Adjusted Net Cruise Cost per Available Guest Night   740    823 

 

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Comparison of Three Months Ended March 31, 2018 to Three Months Ended March 31, 2017

 

Tour Revenues

 

Tour revenues for the three months ended March 31, 2018 increased $17.3 million, or 32%, to $70.5 million compared to $53.2 million for the three months ended March 31, 2017. The increase was driven by higher guest ticket revenue primarily from an increase in available guest nights due to the addition of the National Geographic Quest to our fleet in the third quarter of 2017, as well as from the impact of cancelled voyages in the first quarter of 2017. In addition, Net Yield for the three months ended March 31, 2018 increased to $1,127 compared to $1,008 for the three months ended March 31, 2017, primarily driven by price increases and changes in itineraries. Occupancy rates increased for the three months ended March 31, 2018 to 91% compared to 87% for the three months ended March 31, 2017 reflecting higher demand across the fleet. Excluding the estimated $9.1 million impact from the voyage cancellations in the first quarter of 2017, tour revenues would have increased $8.1 million, or 13%, for the three months ended March 31, 2018.

 

Operating Income

 

Operating income increased $12.2 million to $13.4 million for the three months ended March 31, 2018 compared to $1.3 million for the three months ended March 31, 2017. The increase was primarily driven by additional tour revenue. In addition, stock compensation expense decreased due to higher costs in the prior year’s quarter from the 2016 CEO Allocation Grant and option grants fully expensed on December 31, 2017. This was partially offset by higher operating costs due to the addition of the National Geographic Quest to our fleet in the third quarter of 2017, as well as the impact of cancelled voyages in the first quarter of 2017.

 

Results of Operations – Natural Habitat Segment

 

Comparison of Years Ended March 31, 2018 to March 31, 2017

 

Tour Revenues

 

Tour revenues for the three months ended March 31, 2018 increased $2.0 million, or 20%, to $11.9 million compared to $9.9 million for the three months ended March 31, 2017. The increase was primarily due to additional departures, as well as price increases.

 

Operating Income

 

Operating income for the three months ended March 31, 2018 increased $0.8 million to $0.9 million compared to $0.1 million for the three months ended March 31, 2017. The increase was primarily due to the revenue growth, partially offset by higher operating costs.

 

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Adjusted EBITDA – Consolidated

 

The following table outlines the reconciliation to net income and calculation of consolidated Adjusted EBITDA for the three months ended March 31, 2018 and 2017. The presentation of non-GAAP financial information should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP

 

   For the three months ended
March 31,
 
(In thousands)  2018   2017 
Net income  $10,917   $625 
Interest expense, net   2,734    2,315 
Income tax expense (benefit)   277    (1,592)
Depreciation and amortization   5,045    3,763 
Loss (gain) on foreign currency   451    (246)
Other (income) expense, net   (8)   263 
Debt refinancing costs   993    - 
Stock-based compensation   866    4,202 
National Geographic fee amortization   727    727 
Reorganization costs   180    207 
Adjusted EBITDA   22,182    10,264 
Impact of voyage cancellations   -    6,464 
Adjusted EBITDA excluding impact of voyage cancellations  $22,182   $16,728 

 

The following tables outline the reconciliation for each segment from operating income to Adjusted EBITDA for the three months ended March 31, 2018 and 2017.

 

Reconciliation of Operating Income to Adjusted EBITDA

 

Lindblad Segment

 

   For the three months ended
March 31,
 
(In thousands)  2018   2017 
Operating income  $13,439   $1,266 
Depreciation and amortization   4,684    3,440 
Debt refinancing costs   993    - 
Stock-based compensation   866    4,202 
National Geographic fee amortization   727    727 
Reorganization costs   180    207 
Adjusted EBITDA   20,889    9,842 
Impact of voyage cancellations   -    6,464 
Adjusted EBITDA excluding impact of voyage cancellations  $20,889   $16,306 

 

Reconciliation of Operating Income to Adjusted EBITDA

 

Natural Habitat Segment

 

   For the three months ended 
   March 31, 
(In thousands)  2018   2017 
Operating income  $932   $99 
Depreciation and amortization   361    323 
Adjusted EBITDA  $1,293   $422 

 

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Liquidity and Capital Resources

 

Sources and Uses of Cash for the Three Months Ended March 31, 2018 and 2017

 

Net cash provided by operating activities was $10.5 million in 2018 compared to $2.7 million in 2017. The $7.8 million increase was primarily due to the improved operating results.

 

Net cash used in investing activities was $27.7 million in 2018 compared to $27.3 million in 2017. The $0.4 million increase was primarily related to higher deposits into our Federal Maritime Commission escrow for travel on the Company’s U.S. flagged vessels offset by a decrease in purchases of property and equipment.

 

Net cash provided by financing activities was $18.0 million in 2018 compared to Net cash used in financing activities of $7.1 million in 2017. The $25.1 million increase was primarily related to the $200.0 million in proceeds from refinancing the credit facility, partially offset by the $170.6 million repayment of the previous senior debt and payment of $6.3 million in deferred financing costs.

 

Funding Needs and Sources

 

We have historically relied on a combination of cash flows provided by operations and the incurrence of additional debt and/or the refinancing of existing debt to fund obligations. Similar to others in the industry, we have historically operated with a meaningful working capital deficit. This historical deficit is mainly attributable to the fact that, under our business model, a vast majority of guest ticket receipts are collected in advance of the applicable expedition date. These advance passenger receipts remain a current liability until the expedition date and the cash generated from these advance receipts is used interchangeably with cash on hand from other cash from operations. The cash received as advanced receipts can be used to fund operating expenses for the applicable future expeditions or otherwise, pay down credit facilities, invest in long-term investments or any other use of cash. As a result of the proceeds from the Restated Credit Facility, we had working capital of $10.0 million and a working capital deficit of $12.7 million as of March 31, 2018 and December 31, 2017, respectively. As of March 31, 2018, we had $97.3 million in cash and cash equivalents, excluding restricted cash.

 

On November 2, 2016, the Company’s Board of Directors approved a $15.0 million increase to the Company’s existing stock and warrant repurchase plan (“Repurchase Plan”), to $35.0 million. This Repurchase Plan, which was authorized in November 2015, authorizes the Company to purchase from time to time the Company’s outstanding common stock and warrants. Any shares and warrants purchased will be retired. The Repurchase Plan has no time deadline and will continue until otherwise modified or terminated at the sole discretion of the Company’s Board of Directors. The repurchases exclude shares repurchased to settle statutory employee tax withholding related to the vesting of stock awards. All repurchases were made using cash resources. During the three months ended March 31, 2018 the Company repurchased 9,030 shares of common stock for $0.1 million and 568,446 warrants for $0.8 million. The Company has cumulatively repurchased 864,806 shares of common stock for $8.1 million and 6,011,926 warrants for $14.7 million, since plan inception. The balance as of April 30, 2018 for the repurchase plan was $12.1 million.

 

In December 2015, we executed definitive agreements for the construction of two new coastal vessels. The first vessel, the National Geographic Quest, was delivered in the third quarter of 2017. The second vessel, the National Geographic Venture, has a contract price of $57.3 million and is scheduled to be completed in the fourth quarter of 2018, subject to extension for certain events, such as change orders. As of March 31, 2018, the Company has paid Ice Floe, LLC $34.8 million related to the National Geographic Venture. The Company may terminate the applicable Agreement in the event the builder fails to deliver the vessel within one hundred eighty days of the applicable due date or the builder becomes insolvent or otherwise bankrupt.

 

In November 2017, the Company executed a contract to build a polar ice class vessel, the National Geographic Endurance, targeted to be competed in January 2020, with potential accelerated delivery to November 2019, with a total purchase price of 1,066.0 million Norwegian Kroner (NOK). Subsequently, the Company exercised its right to make payments in United States Dollars, which resulted in a purchase price of $134.6 million, including hedging costs. The first twenty percent of the purchase price was paid shortly after execution of the Agreement with the remaining eighty percent due upon delivery and acceptance of the vessel. The contract includes options to build two additional ice class vessels. The remaining purchase price of the ship will be funded through a combination of cash available on our balance sheet, our Export Credit Agreement, our revolving credit facility and excess cash flows generated by our existing operations.

 

As of March 31, 2018, we had approximately $202.5 million in long-term debt obligations, including the current portion of long-term debt. We believe that our cash on hand, our new revolving credit facility, our Export Credit Agreement and expected future operating cash inflows will be sufficient to fund operations, debt service requirements, capital expenditures for our newbuilds and other assets, acquisitions, and our Repurchase Plan. However, there can be no assurance that cash flows from operations will be available in the future to fund future obligations.

 

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Debt Facilities

 

Revolving Credit Facility

 

On March 27, 2018, the Company entered into a Third Amended and Restated Credit Agreement (the “Amended Credit Agreement”), providing for a refinancing and amendment of the terms of the Company’s existing secured credit facility, dated as of March 7, 2016 (the “Superseded Agreement”).

 

The Amended Credit Agreement provides for a $200.0 million senior secured first lien term loan facility (the “Term Facility”), which represents an increase of $25.0 million from the senior secured first lien term loan facility under the Superseded Agreement. The Term Facility matures March 27, 2025. Consistent with the Superseded Agreement, the Amended Credit Agreement also provides for a $45.0 million senior secured incremental revolving credit facility (the “Revolving Facility”), which includes a $5.0 million letter of credit sub-facility. The Company’s obligations under the Amended Credit Agreement remain secured by substantially all of the assets of the Company.

 

Borrowings under the Term Facility will bear interest at an adjusted Intercontinental Exchange (“ICE”) Benchmark administration LIBOR plus a spread of 3.50%, which steps down to 3.25% if the Company’s debt rating from Moody’s and S&P are both B1 (stable) or better and BB (negative) or better, respectively. Borrowings under the Revolving Facility will bear interest at an adjusted ICE Benchmark administration LIBOR plus a spread of 3.00%, or, at the option of the Company, an alternative base rate plus a spread of 2.00%. The Company is also required to pay a 0.5% annual commitment fee on undrawn amounts under the Revolving Credit Facility, which matures on March 27, 2023.

 

The Amended Credit Agreement contains financial covenants that, among other things, (i) require us to maintain a total net leverage ratio (defined as on any date of determination, the ratio of total debt on such date, less up to $50.0 million of the unrestricted cash and cash equivalents to Adjusted EBITDA (as defined in the Amended Credit Agreement) for the trailing 12-month period) of 5.25 to 1.00 initially, with 0.25 equal reductions every two years thereafter until March 31, 2022 when the total net leverage ratio shall be 4.75 to 1.00 thereafter; (ii) limit the amount of indebtedness we may incur generally and specifically for intercompany debt, debt incurred to finance acquisitions and improvements, for capital and synthetic lease obligations, for standby letters of credit, and in connection with refinancing; (iii) limit the amount we may spend in connection with certain types of investments; and (iv) require the delivery of certain periodic financial statements and an operating budget.

 

The following table shows the contractual obligation of the Amended Credit agreement for the next five years and thereafter as of March 31, 2018:

 

   Payments due by period 
(In thousands)  Total   Current   1-2 years   3-5 years   Thereafter 
Long-term debt obligations  $200,000   $1,500   $4,000   $6,000   $188,500 
Interest on long-term debt   81,879    12,174    23,770    34,733    11,202 
   $281,879   $13,674   $27,770   $40,733  $199,702 

 

Senior Secured Credit Agreement

 

On January 8, 2018, the Company and its indirect, wholly-owned subsidiary (the “Borrower”) entered into a senior secured credit agreement (the “Export Credit Agreement”) with Citibank, N.A., London Branch (“Citi”) and Eksportkreditt Norge AS (together with Citi, the “Lenders”). Pursuant to the Export Credit Agreement, the Lenders have agreed to make available to the Borrower, at the Borrower’s option and subject to certain conditions, a loan in an aggregate principal amount not to exceed $107.7 million for the purpose of providing financing for up to 80% of the purchase price of the Company’s new polar ice class vessel, the National Geographic Endurance, targeted to be completed in January 2020. Seventy percent of the loan will be guaranteed by Garantiinstituttet for Eksportkreditt, the official export credit agency of Norway. If drawn upon, the loan will be made at the time of delivery of the vessel.

 

Critical Accounting Policies

 

For a detailed discussion of the Critical Accounting Policies, please see the Company’s Annual Report for the year ended December 31, 2017 on Form 10-K filed on March 2, 2018 with the Securities and Exchange Commission.

 

Off-Balance Sheet Arrangements

 

On January 8, 2018, the Company entered into an Export Credit Agreement as described above.
 

 26 

 

 

Item  3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been no material changes in our exposure to market risk from the information set forth in the “Quantitative and Qualitative Disclosures About Market Risk” sections contained in the Company’s Annual Report for the year ended December 31, 2017 on Form 10-K.

  

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the quarter ended March 31, 2018, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and principal financial and accounting officer have concluded that during the period covered by this report, our disclosure controls and procedures were effective.

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Part 2. OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

 

The Company is involved in various claims, legal actions and regulatory proceedings arising from time to time in the ordinary course of business. We have protection and indemnity insurance that would be expected to cover any damages.

 

ITEM 1A. RISK FACTORS

 

We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. The risks and uncertainties that we believe are most important for you to consider are discussed under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed on March 2, 2018.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Recent Sales by the Company of Unregistered Securities

 

There were no unregistered sales of equity securities during the quarter ended March 31, 2018.

 

Repurchases of Securities

 

On November 2, 2016, the Company’s Board of Directors approved a $15.0 million increase to the Company’s existing stock and warrant repurchase plan (“Repurchase Plan”), to $35.0 million. This Repurchase Plan, which was authorized in November 2015, authorizes the Company to purchase from time to time the Company’s outstanding common stock and warrants. Any shares and warrants purchased will be retired. The Repurchase Plan has no time deadline and will continue until otherwise modified or terminated at the sole discretion of the Company’s Board of Directors.

 

 27 

 

 

The following table represents information with respect to purchases by us of our warrants and common stock during the months presented.

 

Period  Total number of warrants purchased   Average price paid per warrant   Dollar value of warrants purchased as part of publicly announced plans or
programs
    Maximum dollar value of warrants and shares that may be purchased under the plans or programs 
Beginning Balance                $12,979,046 
January 1-31, 2018   191,550   $1.35   $260,508    12,718,538 
February 1-28, 2018   371,896    1.35    505,779    12,212,759 
March 1-31, 2018   5,000    1.35    6,800    12,205,959 
Total   568,446       $773,087      

 

Period  Total
number of shares
 purchased
   Average 
price paid per share
   Dollar value of shares purchased as part of publicly announced plans or programs   Balance from above 
January 1-31, 2018   -    -    -   $12,205,959 
February 1-28, 2018   9,030   $8.98   $81,173    12,124,786 
March 1-31, 2018   -    -    -    12,124,786 
Total   9,030        $81,173      

 

Item 3. DEfaults upon senior securities

 

Not applicable.

 

Item 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

Item 5. Other information

 

Not applicable

 

 28 

 

 

Item 6. exhibits

 

Number   Description   Included   Form   Filing Date
                 
10.1   Shipbuilding Contract between Ulstein Verft AS and Lindblad Maritime Enterprises, Ltd. ††   Herewith        
10.2   Senior Secured Credit Agreement dated January 8, 2018 among the Company and LEX Endurance Ltd. with Citibank, N.A. and Eksportkreditt Norge AS.   Herewith        
10.3   Third Amended and Restated Credit Agreement, dated as of March 27, 2018, among Lindblad Expeditions, LLC and Lindblad Maritime Enterprises, Ltd. as borrowers, the Company, the lenders party thereto, and Credit Suisse AG, as Administrative Agent and Collateral Agent, and Credit Suisse Securities (USA) LLC, JPMorgan Chase Bank, N.A. and Citibank, N.A. as Joint Bookrunners, Joint Lead Arrangers and Syndication Agents. ††   Herewith        
31.1   Certification of Chief Executive Officer of Lindblad Expeditions Holdings, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.   Herewith        
31.2   Certification of Chief Financial Officer of Lindblad Expeditions Holdings, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.   Herewith        
32.1   Certification of Chief Executive Officer of Lindblad Expeditions Holdings, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   Herewith        
32.2   Certification of Chief Financial Officer of Lindblad Expeditions Holdings, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   Herewith        
101.INS    XBRL Instance Document   Herewith        
101.SCH   Taxonomy extension schema document   Herewith        
101.CAL   Taxonomy extension calculation link base document   Herewith        
101.LAB   Taxonomy extension label link base document   Herewith        
101.PRE   Taxonomy extension presentation link base document   Herewith        
101.DEF   XBRL Taxonomy Extension Definition Link base   Herewith        

 

†† Certain portions of the exhibit have been omitted pursuant to a request for confidential treatment. An unredacted copy of the exhibit has been filed separately with the United States Securities and Exchange Commission pursuant to a request for confidential treatment.

 

 29 

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 3, 2018.

 

  LINDBLAD EXPEDITIONS HOLDINGS, INC.
  (Registrant)
     
  By /s/ Sven-Olof Lindblad
    Sven-Olof Lindblad
    Chief Executive Officer and President

 

 

 30

 

(Back To Top)

Section 2: EX-10.1 (SHIPBUILDING CONTRACT BETWEEN ULSTEIN VERFT AS AND LINDBLAD MARITIME ENTERPRISES, LTD.)

Exhibit 10.1

 

[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

 

 

 

 

 

SHIPBUILDING CONTRACT

 

BETWEEN

 

ULSTEIN VERFT AS

(AS “BUILDER”)

 

AND

 

LINDBLAD MARITIME ENTERPRISES, LTD (AS “BUYER”)

 

FOR

 

ONE ULSTEIN® CX104 Exploration Cruise Vessel

 

BUILDER’S HULL NO: 312

 

 

 

 

 

 

 PAGE 1 

 

 

CONDITIONS OF CONTRACT   3
PREAMBLE       3
Article I   Definitions   3
ARTICLE II   THE VESSEL, DESCRIPTION AND CLASS   7
ARTICLE III   PRICE AND PAYMENT TERMS   10
ARTICLE IV   ADJUSTMENT OF CONTRACT PRICE – CANCELLATION BY THE BUYER   13
ARTICLE V   APPROVAL OF PLANS AND DRAWINGS AND INSPECTION DURING CONSTRUCTION   18
ARTICLE VI   MODIFICATIONS AND CHANGES   22
ARTICLE VII   TEST AND TRIALS   23
ARTICLE VIII   DELIVERY DATE AND DELIVERY   25
ARTICLE IX   DELAYS AND EXTENSION OF TIME FOR DELIVERY (PERMISSIBLE DELAY, FORCE MAJEURE)   27
ARTICLE X   WARRANTY OF QUALITY   29
ARTICLE XI   OWNERSHIP, RISK AND INSURANCE   33
ARTICLE XII   DEFAULT PROVISIONS   35
ARTICLE XIII   ASSIGNMENT   36
ARTICLE XIV   TAXES AND DUTIES   36
ARTICLE XV   PATENTS, TRADEMARKS, COPYRIGHTS   37
ARTICLE XVI   BUYER’S SUPPLIES   38
ARTICLE XVII   NOTICES   39
ARTICLE XVIII   ENTIRE CONTRACT & INTERPRETATION   40
ARTICLE XIX   GOVERNING LAW, DISPUTE AND ARBITRATION   41
ARTICLE XX   INTENTIONALLY OMITTED   42
ARTICLE XXI   ADDITIONAL TERMS   42

 

 PAGE 2 

 

 

CONDITIONS OF CONTRACT

 

PREAMBLE  

 

THIS CONTRACT is made this 1st day of November, 2017 by and between:

 

Ulstein Verft AS (business org. no. 912 447 561), a company organised and existing under the laws of Norway, having its principal office at Osneset, N-6065 Ulsteinvik, Norway, (hereinafter called the “Builder”) and

 

Lindblad Maritime Enterprises, Ltd (business org. no. CT-185923), a company organised and existing under the laws of the Cayman Islands, having an office at 99 Morton Street, New York, New York (hereinafter called the “Buyer”).

 

WHEREBY

 

In consideration of the mutual covenants herein contained, the Builder agrees to design, build, launch, equip, complete, sell and deliver to the Buyer at the Builder´s shipyard the “Vessel” as hereinafter described; and the Buyer agrees to purchase the “Vessel”, take delivery and pay for it;

 

all in accordance with the terms hereinafter set forth.

 

 PAGE 3 

 

 

Article I Definitions

 

In this CONTRACT the following words shall have the meaning set out herein below:

 

“Affiliate(s)” means in relation to any party; any company, corporation or other legal entity, which directly or indirectly: (a) is controlled by such party; or (b) controls such party; or (c) is under common control with such party. For the purposes of this definition a company is directly controlled by another company if such other company holds shares, quotas or voting rights, carrying in the aggregate fifty per cent (50%) or more of the votes exercisable at shareholder meetings

 

“Banking Days” days where banks are open for business in:
Norway and the United States

 

“Builder” the company referred to as “Builder” in the preamble, inclusive of its servants and employees

 

“Buyer” the company referred to as “Buyer” in the preamble, inclusive of its servants and employees

 

“Buyer´s Supplies” any item, equipment, stores or services ordered directly by the Buyer from the manufacturer or supplier, which shall not be supplied and/or paid for by the Builder in accordance with the terms of the Contract

 

“Classification Society” or “Class” the Classification Society referred to in Article II, clause 3

 

“Conditions of Contract” means the Preamble and Articles I to Articles XXI of this Contract

 

“Contract” the Conditions of Contract, the Specifications and Drawings attached as Appendix I-IX, and any amendments thereto (if in writing and signed by Builder and Buyer)

 

“Contract Deadweight” the weight set out in Article 2, clause 2

 

“Contract Delivery Date” the date set out in Article VIII, clause 1

 

“Contract Price” the Original Contract Price as set out in Article III, clause 1, as may be adjusted in accordance with the terms of the Contract

 

“Date of Contract” the date specified in the preamble to this Contract, regardless of whether the Contract actually is effective on this date or whether the Contract is signed subject to conditions to be fulfilled

 

 PAGE 4 

 

 

“Deadweight” difference between (i) displacement of the Vessel at its design draft draught at even keel and (ii) Lightweight

 

“Defect” any deficiency or non-conformity in the design, construction, material and/or workmanship of the Vessel (excluding always any Buyer’s Supplies) for which the Builder and/or the Builder’s Subcontractors are liable.

 

“Delivery and Acceptance” the delivery of the Vessel from the Builder to the Buyer and acceptance thereof by the Buyer in accordance with Article VIII, clause 2

 

“Delivery Date” Contract Delivery Date as set out in Article VIII, clause 1, as may be adjusted for Net Delay and/or otherwise in accordance with the provisions of the Contract

 

“Drawings” the plans and drawings listed in Appendix I hereto

 

“Financial Liability” the total amount paid, payable, credited or to be credited by or on behalf of the Builder to the Buyer directly, or for the benefit of the Buyer, including but not limited to the specified liquidated damages in Article IV and any other monetary or financial liability the Builder may have to the Buyer, whether such liability is known or unknown to the parties at the date of the Contract, excluding the refund of moneys advanced to the Builder by the Buyer in instalments of the Contract Price and any interest on those instalments that the Builder becomes obligated to pay to the Buyer

 

“Flag State” the State referred to in Article II, clause 5

 

“Force Majeure” any one or more of the events set out in Article IX, clause 1

 

“Force Majeure Delay” a delay caused by Force Majeure, which according to Article IX constitutes Permissible Delay

 

“Gross Negligence” a negligent act or negligent failure to act, which act or omission would reasonably be perceived as entailing an extreme degree of risk of injury to a person or physical loss of or damage to property (considering the probability and magnitude of the potential injury, loss or damage), coupled with indifference to such extreme risk

 

“Guarantee Period” a period of 12 months from the earlier of i) the Delivery and Acceptance of the Vessel, or ii) the date falling five (5) days after the Builder rightfully has tendered notice that the Vessel is ready for delivery in accordance with Article VII, clause 4 and Article VIII, clause 2, or iii) such other period as may be mutually agreed between the Buyer and the Builder

 

 PAGE 5 

 

 

“Intellectual Property Rights” all copyright, trade mark, patent or similar rights

 

“Lightweight” the weight of the Vessel, fully completed and equipped, ready for normal operations, with zero (0) metric tonnes of Buyer’s Supplies and without consumables, crew, and bunkers, as determined by customary inclining experiment

 

“Maker’s List” an agreed list of potential Subcontractors approved for equipment, machinery or services (as identified with respect to each such supplier) included in the Specifications

 

“Net Delay” the actual delay in the construction of the Vessel determined as set forth in Article IX, clause 4

 

“Original Contract Price” the price stipulated in Article III, clause 1

 

“Permissible Delay” all delays, inclusive of Force Majeure Delay, causing delay in delivery of the Vessel which according to the terms of the Contract permit postponement of the Delivery Date

 

“Regulatory Bodies” the relevant authorities imposing rules and regulations with which the construction and delivery of the Vessel must comply, as specified in this Contract, including the authorities of the Flag State together with other authorities set out in the Specifications

 

“Representative” a person or persons authorised by the Buyer as set forth in Article V, clause 2

 

“Specifications” the specifications included in Appendix I hereto

 

“Subcontractor” any person (not being a servant or employee of the Builder) or company, with whom the Builder has entered into, or will enter into a contract for the design, construction, manufacture or supply of any item, equipment, work or service for the Vessel

 

“Vessel” the vessel described in Article II.

 

“Working Day” a day when work is normally performed in the country of the Builder’s yard as referred to in Article II, clause 1

 

 PAGE 6 

 

 

[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

 

ARTICLE II THE VESSEL, DESCRIPTION AND CLASS

 

1. Description

 

The Vessel shall be built at the Builder’s yard in Ulsteinvik, and shall have the Builder’s Hull No 312, and be designed, constructed, equipped, completed and delivered by the Builder in accordance with the provisions of this Contract.

 

In the event of inconsistency between the Conditions of Contract and the Specifications and/or the Drawings, the Conditions of Contract shall prevail. In the event of inconsistency between the Specifications and the Drawings, the Specifications shall prevail. In case of inconsistency between any of the Drawings, the later in date shall prevail.

 

The Vessel shall be designed and built in accordance with first class shipbuilding practice in Western Europe for new vessels of similar type and characteristics as the Vessel.

 

2. Main Dimensions and Characteristics

 

Main dimensions

Overall length: approx. [*]
Loadline length approx. [*]
Breadth moulded: approx. [*]
Depth moulded to uppermost deck: approx [*]
Draught max: approx [*]
Design draft, moulded: approx [*]

 

Deadweight:

The Vessel’s Contract Deadweight shall be [*] (of [*]) on [*] draft moulded and a density of sea water of [*]. The Contract Deadweight shall include fuel, provisions, stores, freshwater, crew and passengers in addition to spare parts in excess of the requirements of Class.

 

Propulsion machinery:

Type: [*] Max. continuous power [*]

 

Speed:

The mean speed of the vessel in trials with propulsion motor output of [*]

kW (85% of the output of the propulsion motors) shall be at least [*] in two opposite direction double runs corrected to the following conditions:

- design draught of [*]

- even keel or small trim

- clean bottom

- calm weather (wind speed 0 m/s and sea not exceeding State 2)

- deep water

- no current

- sea water temperature +15 ◦C

- fin stabilizers housed

- bow thrusters to have grids

- propulsion motor control in normal sea operation control mode

- ship steering by autopilot

 

 PAGE 7 

 

 

[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

 

The speed determination to be based on the Builder’s trial trip measured results. The ambient seawater temperature is to be corrected to 15 °C / density 1.025 and the opposite speed runs are to be averaged according to the latest ITTC guidelines. Wave and wind corrections are to be based on normal well known and accepted methods. Explanatory notes to the standards for ship manouverability – MSC Circ. 1053.

 

Fuel consumption:

The brake specific fuel consumption for constant speed [*] for each of the two (2) [*] engines at [*], as measured by the test cell power measurement system with a [*] accuracy tolerance as further set out in Appendix VII, shall not exceed [*]grams per kW hour. The fuel consumption test procedure calculations as measured for an E2 duty cycle shall be performed following testing in the [*] test cell as further set out in Appendix VII.

 

The brake specific fuel consumption for constant speed [*] for each of the two (2) [*] engines at [*], as measured by the test cell power measurement system with a [*] accuracy tolerance as further set out in Appendix VII, shall not exceed [*]grams per kW hour. The fuel consumption test procedure calculations as measured for an E2 duty cycle shall be performed following testing in the [*] test cell, as further set out in Appendix VII.

 

On basis of the figures above as well as figures from [*], the estimated fuel consumption of the Vessel is indicated in Addendum IX.

 

Passenger and crew cabins

The Vessel shall be designed for the accommodation of 126 passengers, 112 crew (including expedition crew, lecturers, helicopter crew and pilots) and 22 extra guests (guests of crew with space for guests), as per the Specifications.

 

General:

The further details of the above main particulars, as well as definitions and methods of measurement and calculation shall be as described in the Specification.

 

3. Classification, Rules and Regulations

 

The Vessel, including its machinery, equipment and outfittings shall be designed and constructed in accordance with the rules and regulations of DNV•GL (the Classification Society) in force or published on or before the Date of Contract, and which are mandatory for the Vessel, with the Class notations described in the Specifications, chapter G.

 

 PAGE 8 

 

 

The Vessel shall further comply with the applicable rules, regulations and requirements of the Regulatory Bodies of Bahamas (the Flag State) in force on or before the date of keel-laying of the Vessel as set out in the Specification, chapter G and which are mandatory for the Vessel.

 

The Vessel to be constructed under special survey of the Classification Society, and Builder to arrange for a surveyor of the Classification Society to be assigned to Builder’s yard for supervision of the construction. The Classification Society’s decision as to compliance or non-compliance with the classification rules and regulations shall be final and binding upon both parties.

 

All fees and charges in respect of compliance with Class and the rules, regulation and requirements of the Class or Regulatory Bodies referred to above shall be for the account of the Builder.

 

4. Subcontracting

 

The Builder may, at its sole discretion and responsibility, subcontract any portion of the construction or outfit of the Vessel to Subcontractors identified in the Maker’s List or otherwise agreed in writing between Buyer and Builder, subject to compliance with any requirement on the Specifications. The Builder shall remain fully liable for the due performance by Subcontractors as if done by the Builder at the Builder’s yard.

 

Except as otherwise stated in the Specifications and/or the “Maker’s List”, or otherwise agreed in writing, the Builder may, without interference from the Buyer, freely choose its Subcontractors, but the Builder shall in ample time notify the Buyer in writing before placing major orders for equipment or services with Subcontractors, and shall give reasonable consideration to Buyer’s request.

 

5. Certificates and Registration

 

The Builder shall provide, deliver and pay for all certificates specified in this Contract, including the Specifications, as further set out in the Contract, together with all documents reasonably required by the Buyer or necessary for the registration of the Vessel in the Commonwealth of the Bahamas (Flag State). The Vessel shall be registered by the Buyer at its own cost and expense after the Delivery and Acceptance. The Buyer may choose another flag during the construction, provided the Buyer bears all costs of any such change of flag, including costs related to changes in markings of the Vessel and compliance with other requirements by the Regulatory Bodies of such new flag state.

 

 PAGE 9 

 

 

[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

 

ARTICLE III PRICE AND PAYMENT TERMS

 

1. Original Contract Price

 

The Original Contract Price is NOK One Billion and Sixty-six Millions (1,066,000,000).

 

The Contract Price of the Vessel includes an aggregate lump sum for the interior designer (architect) of [*] as further described in Appendix IV. In the event the actual price of the interior design exceeds the sum set out above, the Contract Price shall be adjusted based on the Builder’s actual cost of the interior design.

 

Further, the Contract Price of the Vessel includes an aggregate lump sum for the interior solution (accommodation) and certain other items as further described in Appendix V, of [*]. In the event the actual price of the interior solution (which for the avoidance of doubt shall include [*] exceeds the sum set out in Appendix V, [*].

 

2. Currency

 

All payments under the Contract shall be made in Norwegian Kroner (NOK), or in the event that an Exchange Rate Agreement in the form attached as Appendix VIII to this Contract, is entered into latest within 15:00 CET on Wednesday, 8 November 2017, an equivalent amount in USD based on the relevant exchange rate set out therein; provided that the Builder shall enter into such an Agreement if timely requested by the Buyer.

 

3. Terms and Method of Payment

 

The Original Contract Price shall, subject to notices being given under this Article III, clause 5, be paid in instalments as follows:

 

(a) 1st Instalment:

The sum of NOK Two Hundred and Thirteen Million Two Hundred Thousand (213,200,000) (20% of the Contract Price) shall be paid as per Article III, clause 5.

 

(b) Instalment on Delivery and Acceptance:

The sum of NOK Eight Hundred and Fifty-two Million Eight Hundred Thousand (852,800,000) (80% of the Contract Price)plus any increase or minus any decrease due to adjustments of the Contract Price hereunder, shall, subject to the other provisions of the Contract, be paid upon Delivery and Acceptance of the Vessel, but in no circumstances later than [*] after the Builder has validly tendered notice that the Vessel is ready for delivery in accordance with Article VII, clause 4 (unless Buyer has validly rejected the Vessel and Article VII, clause 4(d) has not become effective).

 

4. All instalments (net of any bank or transfer charges) shall be remitted to DNB ASA, Builder’s account no .

 

 PAGE 10 

 

 

[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

 

5. The instalment due under 3(a) shall be due [*] after Buyer’s receipt of the refund guarantee pursuant to clause 6 (a). The instalment under 3 (b) shall under no circumstances fall due until [*] from Buyer’s receipt of written notice from the Builder, accompanied by an invoice for the amount payable. Notice of the instalment payable on Delivery and Acceptance shall include notice of adjustments, if any.

 

6. The following security shall be provided:

 

(a) latest within [*] of signing of the Contract, the Builder shall provide the Buyer with a refund guarantee from DNB Bank ASA on terms set out in Appendix II, securing the repayment obligation of the Builder of the instalment under 3(a) if the Contract is lawfully cancelled by the Buyer. Failure by the Builder to issue a bank guarantee or other security satisfactory to the Buyer at the latest within [*] shall entitle the Buyer to cancel this Contract.

 

(b) Upon signing of the Contract, the Buyer shall provide to the Builder a corporate guarantee from Lindblad Expeditions Holdings, Inc. on terms set out in Appendix I, securing the payment by the Buyer of the instalment on Delivery and Acceptance. Failure by the Buyer to issue a corporate guarantee as set out herein shall entitle the Builder to cancel this Contract and claim compensation for its losses.

 

(c) latest within [*], the Buyer shall provide to the Builder a confirmation letter issued by the Buyer’s bank, in form and substance satisfactory to the Builder, confirming the Buyer’s committed long term financing of the Vessel, i.e. that the loan facility extended to the Buyer will be extended (has been agreed and committed) to cover the Instalment on Delivery and Acceptance, and stating that the loan facility shall not be available for any purpose other than the construction of the Vessel (hereafter the “Confirmation Letter”). In the event the Confirmation Letter is not received by the Builder at the latest within [*], the Buyer shall be obliged to make a pre-payment of additional [*] latest within [*] after Buyer’s receipt of a refund guarantee from DNB ASA and of equivalent tenor to that to be provided by the Builder pursuant to clause 6 (a) that secures the repayment obligation of the Builder in respect of such additional pre-payment if the Contract is lawfully cancelled by Buyer, whereafter the Instalment on Delivery and Acceptance shall be reduced accordingly. Failure by the Buyer to duly pay such additional [*] within such [*] shall entitle the Builder to cancel this Contract and claim compensation for its losses in an amount not to exceed [*].

 

(d) Upon the Builder’s due receipt of the pre-payment as set out in clause 6 (c), the Buyer shall have a new deadline for presenting to the Builder the Confirmation Letter latest within [*]. In the event the Confirmation Letter is still not received by the Builder at the latest within [*], the Buyer shall be obliged to make another pre-payment of additional [*] latest within [*] after Buyer’s receipt of a refund guarantee from DNB ASA and of equivalent tenor to that to be provided by the Builder pursuant to clause 6 (a) that secures the repayment obligation of the Builder in respect of such additional pre-payment if the Contract is lawfully cancelled by Buyer, whereafter the Instalment on Delivery and Acceptance shall be reduced accordingly. Failure by the Buyer to duly pay such additional [*] within such [*] shall entitle the Builder to cancel the Contract and claim compensation for its losses in an amount not to exceed [*].

 

 PAGE 11 

 

 

[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

 

(e) Upon the Builder’s due receipt of the pre-payment as set out in clause 6 (d), the Buyer shall have a new deadline for presenting to the Builder the Confirmation Letter latest within [*]. In the event the Confirmation Letter is still not received by the Builder at the latest within [*], the Buyer shall be obliged to make another pre-payment of additional [*] latest within [*] after Buyer’s receipt of a refund guarantee from DNB ASA and of equivalent tenor to that to be provided by the Builder pursuant to clause 6 (a) that secures the repayment obligation of the Builder in respect of such additional pre-payment if the Contract is lawfully cancelled by Buyer, whereafter the Instalment on Delivery and Acceptance shall be reduced accordingly. Failure by the Buyer to duly pay such additional [*] within such [*] shall entitle the Builder to cancel the Contract and claim compensation for its losses in an amount not to exceed [*].

 

7. Subject to the exceptions set forth in this clause 7, the Builder may retain the Vessel until full payment has been made in accordance with the agreed payment terms.

 

(a) If the Builder is unable to present a final account at delivery, the Buyer may require the Vessel to be delivered in return for a bank guarantee or other security, satisfactory to the Builder, for the reasonably estimated balance owed to the Builder. Costs of such guarantee shall be for Builder’s account.

 

(b) In the event of any dispute concerning the payment on delivery of the Vessel, including the question of the Buyer’s right to offset any claim it may have, the Buyer may by paying the entire amount demanded by the Builder require the Builder to provide a bank guarantee or other security satisfactory to the Buyer for the disputed amount. The Builder cannot in such case refuse to deliver the Vessel. If the Builder does not wish to issue security for the disputed part of the claim, the Buyer is entitled to take delivery of the Vessel against payment of the undisputed amount and provide a bank guarantee or other security satisfactory to the Builder for the disputed part of the claim. Security which has been issued by a party pursuant to this sub - clause terminates automatically unless the other party has initiated proceedings pursuant to Article XIX below within 3 months from date of issue of the security. The Tribunal shall decide who bears the cost of security between the parties.

 

(c) If on or before Delivery and Acceptance of the Vessel the Builder is declared bankrupt or insolvent, proposes or enters into a formal composition arrangement or fails to pay its accounts as they come due, the Buyer may demand that the Builder shall provide satisfactory security for the performance by the Builder of its guarantee obligations, limited to [*] of the Original Contract Price, or failing such guarantee, the Buyer is entitled to deposit the equivalent amount in an escrow account in the joint name of the Builder and the Buyer and to deduct this amount from the instalment to be paid on Delivery and Acceptance.

 

8. Any breach by Buyer of its obligation to pay any part of the Contract Price when due shall entitle the Builder to [*].

 

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[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

 

ARTICLE IV ADJUSTMENT OF CONTRACT PRICE – CANCELLATION BY THE BUYER

 

The Contract Price shall be subject to adjustments, as hereinafter set forth, in any of the events set out in this Article IV (it being understood by both parties that any reduction of Contract Price is by way of liquidated damages and not by way of penalty). The liquidated damages payable by the Builder hereunder represent the sole and exclusive financial compensation payable to the Buyer in respect of the breaches of the Contract to which they relate and the Builder shall not in any way be responsible or liable to remedy or rectify such breaches or for any other loss or consequences by way of damages or otherwise as a consequence of any of the matters hereinafter set forth in this Article IV.

 

The Buyer’s rights to liquidated damages, by way of a reduction in the Contract Price, for each of the circumstances set forth in this Article, are cumulative. If more than one circumstance applies, there shall be separate reductions for each, subject always to the limit set out below.

 

Notwithstanding anything to the contrary in this Article, or elsewhere in the Contract, the Builder’s maximum total Financial Liability to the Buyer arising out of or in connection with this Contract, shall [*]. This limit shall apply however that liability arises, including without limitation, a liability arising by breach of contract, arising by tort (including, without limitation, negligence of any type), arising by breach of statutory duty, or arising by direct consequence of a contractual obligation or right, including the credit of liquidated damages pursuant to this Article IV. The limitation of liability set out in this paragraph shall not apply to the Builder’s obligation to rectify Defects pursuant to Section VII.4(d)(i) and (iii) and Article X of this Contract.

 

1. Delivery

 

(a) If the delivery of the Vessel is delayed beyond the Delivery Date, the Contract Price shall be reduced by deducting therefrom as follows:

 

  1st - 10th day [*]
  11th - 20th day [*]
  21st - 180th day [*]

 

[*].

 

(b) If the delay in delivery of the Vessel should continue for a period in excess of 180 days after Delivery Date, the Buyer may at its option cancel the Contract.

 

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[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

 

Provided the Buyer has not sent notice of cancellation as provided for in Article XII hereof within [*] of delay having elapsed after the Delivery Date, the Builder may thereafter demand in writing that the Buyer shall make an election either to cancel the Contract, or to consent to the acceptance of the delivery at a specific future date reasonably estimated by the Builder to be the date when the Vessel will be ready for delivery; in which case the Buyer shall, within fifteen (15) days after such demand is received by Buyer, notify the Builder of its choice it being understood that, if the Buyer elects not to cancel and the Vessel is not delivered by such future date, the Buyer shall have the right to cancel the Contract. Should the Buyer fail to give such notification within the said fifteen (15) days, the Buyer shall be deemed to have accepted the new date for delivery as proposed by the Builder. Buyer’s acceptance (or deemed acceptance) of a later delivery date pursuant to this paragraph or paragraph (c) following shall be without prejudice to Buyer’s rights to liquidated damages.

 

(c) If the total accumulated delay of non-Permissible Delay and of Force Majeure Delay, but excluding other Permissible Delay, amounts to [*] or more, then in such event the Buyer may cancel the Contract. The Builder may, at any time after expiry of the said [*] demand in writing that the Buyer shall make an election either to cancel the Contract or to consent to the acceptance of the delivery at a specific future date reasonably estimated by the Builder to be the date when the Vessel will be ready for delivery, in which case the Buyer shall, within fifteen (15) days after such demand is received by Buyer, notify the Builder of its choice; it being understood that, if the Buyer elects not to cancel and the Vessel is not delivered by such future date, the Buyer shall have the right to cancel the Contract. Should the Buyer fail to give such notification within the said 15 days, the Buyer shall be deemed to have accepted the new date for delivery as proposed by the Builder.

 

2. Speed

 

(a) If the speed as stipulated in Article II, clause 2 (as adjusted pursuant to Article II, clause 3 and/or Article VI as the case may be) is not achieved at the sea trial pursuant to Article VII and the specifications and this is not due to incorrect or inadequate information or measures given by the Buyer to the Builder in connection with the inclusion of the Buyer’s Supplies, the Contract Price shall be reduced as follows:

 

  (i) [*].

 

  (ii) [*].

 

  (iii) [*].

 

[*].

 

(b) If the deficiency in speed is more than [*], the Buyer may cancel the Contract, provided always that the reduction is not due to incorrect or inadequate information or measures given by the Buyer to the Builder in connection with the calculation of the Speed following the inclusion of the Buyer’s Supplies.

 

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[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

 

(c) If the actual speed of the Vessel is greater than the speed stipulated in Article II clause 2 (as adjusted pursuant to Article II clause 3 and/or Article VI as the case may be) the Buyer shall pay to the Builder premiums as follows:

 

  (i) [*].

 

  (ii) [*].

 

  (iii) [*].

 

  [*]  

 

3. Fuel Consumption

 

The Builder shall have no liability for the fuel consumption except for such guarantees and undertakings as given by the main engine supplier and attached as Appendix VII, which shall be assigned to the Buyer

 

If the actual fuel consumption of one or more of the engine(s) at [*],[*], as measured on test bed by the test cell power measurement system with a [*], as per Appendix VII, exceeds the figure(s) stipulated in Article II clause 2 (as further set out in Appendix VII), the Original Contract Price shall be reduced as described in Appendix VII.

 

If the fuel consumption of one or more of the Vessel’s main engines exceeds the fuel consumption stipulated in Article II clause 2 as further described in Appendix VII, by [*] or more, the Buyer may, at its option, either: (i) in lieu of a reduction of the Contract Price as set out in Appendix VII, reject such engine(s) as exceeds the respective limit set out herein and receive new [*] engine(s) in compliance with the fuel consumption stipulated in Article II clause 2; or (ii) accept the relevant engine(s) as exceeds the respective limit set out herein at a reduction in the Original Contract Price corresponding to the maximum amount referred to in Appendix VII for the relevant engine(s) (being [*]. If the Buyer rejects one or more of the engine(s) pursuant to (i) above, any delay in the delivery of the Vessel resulting directly from the need to replace the Vessel’s main engine(s) shall be treated as a Permissible Delay in accordance with Article IX hereof.

 

4. Deadweight

 

If the Contract Deadweight stipulated in Article II, is not attained and this is not due to incorrect or inadequate information or measures given by the Buyer to the Builder in connection with the calculation of the Contract Deadweight following the inclusion of the Buyer’s Supplies, and the reduction exceeds [*], the Contract Price shall be reduced as follows:

 

  (i) for each metric ton of reduction in deadweight in excess of the said [*];
     
  (ii) for each metric ton of reduction in deadweight in excess of the said [*].

 

[*].

 

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[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

 

If the reduction in actual deadweight is more than [*], the Buyer may cancel the Contract, provided always that the reduction is not due to incorrect or inadequate information or measures given by the Buyer to the Builder in connection with the calculation of the Contract Deadweight following the inclusion of the Buyer’s Supplies.

 

[*]

 

  (i) for each metric ton of increase in deadweight in excess [*];

 

  (ii) for each metric ton of increase in deadweight in excess [*].

 

[*]

 

5. Noise and Vibrations

 

(a) Noise:

If, at the time of Delivery and Acceptance of the Vessel, the noise level(s) of the Vessel in such areas and conditions as defined in the Specifications, chapter G.2, does not meet the requirements for the respective Class notations COMF-V(1) and COMF-V(3) (as applicable) as specified for the relevant areas of the Vessel as defined in the Specifications, chapter G.2 and as further described in Class guideline DNV GL – CG-0493, the Builder shall be allowed a period of up to [*] after Delivery and Acceptance (or such longer period as may be agreed to by the parties in writing) to correct and/or remedy such non-conformities; provided that (unless and to the extent it may be agreed in writing between the parties to defer corrective or remedial action to the Vessel’s next drydock or other another agreed time/place) the Builder shall act promptly and use reasonable commercial efforts to correct and/or remedy such non-conformities.

 

If, after such period of [*] as set out in the paragraph above, the noise level(s) of the Vessel in such areas and condition as defined in the Specifications, chapter G.2, still does not meet the requirements for the respective Class notations COMF-V(1) and COMF-V(3) (as applicable) as specified for the relevant areas of the Vessel as defined in the Specifications, chapter G.2 and as further described in Class guideline DNV GL – CG-0493, and providing that this is not due to incorrect or inadequate information or measurements given by the Buyer to the Builder in connection with the calculation of the relevant noise levels following the inclusion of the Buyer’s Supplies, the Contract Price shall be reduced as follows:

 

  (i) for the [*] noise in excess of the Class notation requirements as set out in (a) above: [*];

 

  (ii) for each [*] in excess of the Class notation requirements as set out in (a) above: [*].

 

  [*].  

 

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[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

 

(b) Vibration:

If, at the time of Delivery and Acceptance of the Vessel, the vibration level(s) of the Vessel in such areas and condition as defined in the Specifications, chapter G.2 as further described in Class guideline DNV GL – CG-0493, does not meet the requirements for the respective Class notations COMF-V(I) and COMF-V(3) (as applicable) as specified for the relevant areas of the Vessel as defined in the Specifications, chapter G.2, the Builder shall be allowed a period of up to [*] after Delivery and Acceptance (or such longer period as may be agreed to by the Parties in writing) to correct and/or remedy such non-conformities; provided that (unless and to the extent it may be agreed in writing between the Parties to defer corrective or remedial action to the Vessel’s next drydock or other another agreed time/place) the Builder shall act promptly and use reasonable commercial efforts to correct and/or remedy such non-conformities.

 

If, after such period of [*] as set out in the paragraph above, the vibration level(s) of the Vessel in such areas and conditions as defined in the Specifications, chapter G.2, still does not meet the requirements for the respective Class notations COMF-V(1) and COMF-V(3) (as applicable) as specified for the relevant areas of the Vessel as defined in the Specifications, chapter G.2 and as further described in Class guideline DNV GL – CG-0493, and providing that this is not due to incorrect or inadequate information or measurements given by the Buyer to the Builder in connection with the calculation of the relevant vibration level(s) following the inclusion of the Buyer’s Supplies, the Contract Price shall be reduced as follows:

 

  (i) for the first [*] in excess of the Class notation requirements as set out in (b) above: [*];

 

  (ii) for each [*] up to and including [*] of vibration in excess of the Class notation requirements as set out in (b) above: [*].

 

  [*].  

 

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[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

 

6. Passenger and Crew Capacity

 

(a) The Vessel’s passenger, staff and crew accommodations shall be as stated in the Specifications (including the number and type of different cabins and suites). No deviation shall be permitted without Buyer’s express written approval. In the event of any deficiency in the accommodations not so approved by Buyer and this is not due to incorrect or inadequate information or measures given by the Buyer to the Builder in connection with the calculation of the Passenger and Crew Capacity following the inclusion of the Buyer’s Supplies, the Contract Price shall be reduced as follows:

 

  (i) For each reduction in passenger accommodation, the reduction shall be [*].

 

  (ii) For each reduction in staff or crew accommodation, the reduction shall be [*].

 

[*].

 

(b) If the deficiency in the Vessel’s passenger, staff and crew accommodation is more than [*], the Buyer may cancel the Contract.

 

ARTICLE V APPROVAL OF PLANS AND DRAWINGS AND INSPECTION DURING CONSTRUCTION

 

1. Approval of Plans and Drawings

 

As soon as practical after the Date of Contract the Builder shall put forward a proposed detailed building schedule, including a schedule for testing. The Buyer shall make its comment on the schedule as soon as practical and at the latest within seven (7) days. The schedules shall be issued by the Builder in writing not later than thirty (30) days after the Date of Contract.

 

(a) In accordance with the construction schedule of the Vessel and provisions in the Specifications, the Builder shall submit to the Buyer the plans and drawings for its approval in pdf format for ease of transmission and sharing. Plans and drawings will be distributed through Synergi Project Exchange WEB-portal. The Buyer and its designated Representative(s) will receive a notification by e-mail for all plans and drawings distributed to the said WEB-portal. The Buyer shall within ten (10) Working Days after receipt of e-mail notification, set approval status or upload its comments (if any) for the relevant plans and drawings to the Synergi Project Exchange WEB-portal. Such comments shall be as complete as possible.

 

(b) If Buyer’s uploaded comments on the plans and drawings are unclear or unspecified, the Builder may, by e-mail notice to the Buyer, request a clarification, and failure by the Buyer or its Representative to respond to this request within three (3) Working Days of receipt of such notice shall entitle the Builder to place its own reasonable interpretation on such comments or amendments when implementing the same.

 

 PAGE 18 

 

 

(c) If the Builder and the Buyer fail to agree whether such comments are of such a nature or extent as to constitute modification or change under Article VI hereof, the Builder shall nevertheless proceed with the construction based on the Buyer’s comments if so requested in writing by the Buyer. If it is established by mutual agreement or by arbitration as per Article XIX, that the Buyer’s uploaded comments, constitute a modification or change under Article VI, the Builder shall be entitled to an appropriate adjustment of the Contract Price, Delivery Date and/or the characteristics of the Vessel and Article VI, clause 1, first paragraph shall apply.

 

(d) In the event that the Buyer fails to set approval status or upload its comments (if any) for the relevant plans and drawings to the Synergi Project Exchange WEB-portal within the time limit specified in (a) above, the Builder shall through Synergi Project Exchange WEB-portal or by e-mail to the Buyer request approval status or comments (if any) within three (3) days, failing which the Builder shall have the right to consider such plans and drawings as approved by the Buyer.

 

(e) The Buyer’s approval or non-approval of drawings shall not affect any of the Builder’s obligations hereunder, including the Builder’s obligation to deliver the Vessel fully approved by the Regulatory Bodies, or the Builder’s responsibility under Article X hereof.

 

2. Appointment of Buyer’s Representative

 

The Buyer shall send to and maintain at the Builder’s yard, at the Buyer’s own cost and expense, one or more representatives at least one of which shall be duly authorised in writing by the Buyer (herein called the “Representative”) to act on behalf of the Buyer in connection with approval of the plans and drawings, attendance to the tests and inspections relating to the Vessel, its machinery, equipment and outfitting, and any other matters for which he is specifically authorised by the Buyer. Any other limitation in the authorisation shall be specified in writing, and such authorisation shall be valid and binding upon the Buyer until withdrawn in writing by notice from the Buyer to the Builder.

 

The Buyer shall use commercially reasonable efforts to have the Representative present at all times required for necessary approvals to facilitate the construction of the Vessel in an effective manner.

 

3. Inspection by Representative

 

Builder shall provide unimpeded access for the inspection of the Vessel, its machinery, equipment and outfittings (and to anywhere in the Builder’s yard where there is work on or storage of items connected with construction of the Vessel) by the Classification Society, Regulatory Bodies and the Representative and/or his assistants throughout the entire period of construction.

 

The Representative and his assistants shall, during the construction of the Vessel, have the right to attend all tests, trials and inspections undertaken in respect of the Vessel, its machinery, equipment and outfittings. The Builder shall give reasonable notice in advance of any such tests and inspections to the Representative to enable him or any of his assistants to attend. Failure of the Representative or his assistant(s) to be present at such tests and inspections after due notice to him as above provided shall be deemed to be a waiver of his right to be present.

 

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The Builder shall provide the Representative and/or his assistants with a similar right of inspection and supervision in respect of the work performed by the Subcontractor(s) of the construction of the hull of the Vessel, and the Builder shall make reasonable efforts to cause its other Subcontractors to provide the Representative and/or his assistants with a similar right of inspection and supervision in respect of the work performed by such Subcontractors.

 

In the event that Buyer or the Representative on behalf of the Buyer discovers any design, construction or material or workmanship which in its or his opinion does not conform to the requirements of the Contract (including the requirements for subcontracting), Buyer, the Representative or his assistants shall as soon as possible advise the Builder of such non-conformity. Unless the Builder agrees to rectify the matter, a notice thereof (which may be included in minutes of meeting or similar) shall be given to the Builder.

 

Neither any Inspection nor attendance of any test nor any failure to timely notify Builder of any defect or non-conformity shall relieve the Builder’s obligation under the Contract or operate as a waiver of any objection to any design, construction, material or workmanship considered (or later determined to be) non-conforming or not of the standard required for due performance of this Contract.

 

4. Facilities

 

The Builder at its own expense shall furnish the Representative and his assistant(s) with adequate office space, and such other reasonable facilities according to the Builder’s practice at, or in the immediate vicinity of, the shipyard as may be necessary or reasonably requested by Buyer to enable them to effectively carry out their duties.

 

5. Division of Liability

 

The Representative and his assistant(s) shall at all times be deemed to be the employees of the Buyer and not of the Builder.

 

The Builder, the Builder’s employees, Affiliates and Subcontractors shall be under no liability whatsoever to the Buyer, the Representative or his assistant(s), or the Buyer’s employees, Affiliates and/or subcontractors, and the Buyer shall keep the Builder, the Builder’s employees, Affiliates and Subcontractors harmless, for personal injuries, including death, suffered during the time when he/she or they are on the Vessel, or within the premises of either the Builder or its Subcontractors or are otherwise engaged in or about the construction of the Vessel, unless, however, such personal injuries, including death, were caused by Gross Negligence of the Builder, or any of the Builder’s employees, Affiliates or Subcontractors. Nor shall the Builder, the Builder’s employees, Affiliates and/or Subcontractors be under any liability whatsoever to the Buyer, the Representative or his assistant(s), or the Buyer’s employees, Affiliates and/or subcontractors for damage to, or loss or destruction of property of the Buyer or of the Representative or his assistant(s), or the Buyer’s employees, Affiliates and/or subcontractors unless such damage, loss or destruction is caused by Gross Negligence of the Builder, or any of the Builder’s employees, Affiliates or Subcontractors.

 

 PAGE 20 

 

 

The Buyer, the Representative and his assistant(s), and the Buyer’s employees, Affiliates and subcontractors shall be under no liability whatsoever to the Builder, the Builder’s employees, Affiliates and/or Subcontractors, and the Builder shall keep the Buyer, the Representative or his assistant(s), and the Buyer’s employees, Affiliates and subcontractors harmless, for personal injuries, including death, unless such personal injuries including death were caused by Gross Negligence of the Buyer, the Representative or his assistant(s), or the Buyer’s employees, Affiliates and subcontractors. Nor shall the Buyer, the Buyer’s employees, Affiliates and/or subcontractors be under any liability whatsoever to the Builder, the Builder’s employees, Affiliates or Subcontractors for damage to, or loss or destruction of property of the Builder, the Builder’s employees, Affiliates and/or Subcontractors unless such damage, loss or destruction were caused by Gross Negligence of the Buyer, the Representative or his assistant(s), or the Buyer’s employees, Affiliates or subcontractors.

 

6. Responsibility of Buyer

 

The Buyer shall undertake and assure that the Representative and his assistant(s) shall carry out their duties hereunder in accordance with normal shipbuilding practice and in such a way as to avoid any unnecessary increase in building cost, delay in the construction of the Vessel, and/or any disturbance to the construction schedule of the Builder.

 

The Builder has the right to request the Buyer to replace the Representative or any of his assistant(s) who is deemed by the Builder to be unsuitable and unsatisfactory for the proper progress of the Vessel’s construction. The Buyer shall investigate the situation by sending its representative(s) to the Shipyard if necessary, and if the Buyer considers that such Builder’s request is justified, the Buyer shall effect such replacement as soon as convenient.

 

7. Progress Reporting

 

The Builder shall provide monthly progress reporting to the Buyer, which inter alia shall include reporting on progress, planned production schedule, disclosure and exploration of any slippage in previously reported schedule, list of agreed/disputed changes, list of agreed/disputed force majeure delays, etc.

 

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ARTICLE VI MODIFICATIONS AND CHANGES

 

1. Modification of Specifications

 

The work to be performed by the Builder under the Contract can be modified or changed by written request from S.V.P,        , unless another person is duly appointed in writing by the Buyer, provided that such modifications or changes will not adversely affect the Builder’s other commitments, and provided further that the parties shall first agree to possible adjustment in Contract Price, the Delivery Date and such other terms and conditions occasioned by or resulting from such modification or change. Such agreement shall be effected either by way of exchange of letters duly signed by authorised representatives of the parties, or by signed change order form, or by minutes of meeting or similar signed by authorised representatives of the parties, which shall constitute the necessary amendments to the Contract. Any proposed increase or decrease in the Contract Price shall be calculated in accordance with unit prices (inclusive of administration costs) or budget prices if such prices are available, otherwise as per the Builder’s customary price for such work. Notwithstanding the foregoing (but subject always to the Builder’s right to refuse modifications or changes which adversely affect the Builder’s other commitments), if Builder and Buyer do not agree on the nature or extent of any such adjustments, Buyer may by written instruction require Builder to proceed with the requested modification(s) or change(s) with the consequences of implementing such modification(s) and/or change(s) to be determined pursuant to Article XIX.

 

Any reasonable time and costs incurred by the Builder in preparation of offer(s) to the Buyer following a request for modification or change as set out above, which is not effected by way of signed change order forms or similar, shall be compensated by the Buyer.

 

The Builder is entitled to make minor modifications or changes to the Specifications if found necessary or desirable due to the availability of materials and equipment, the introduction of improvement methods or otherwise, provided that the Builder shall first obtain the Buyer’s approval, which shall not be unreasonably withheld or delayed.

 

2. Change in Rules and Regulations

 

If, after the Date of Contract, there are any changes in the rules, regulations and requirements (or their application) of Class or Regulatory Bodies, the following shall apply:

 

(a) Upon receipt of notice of such changes either party shall promptly notify the other party thereof.

 

(b) If such change will be compulsory for the Vessel at the Contract Delivery Date, the Builder shall, unless the Buyer at its sole discretion seeks and obtains a waiver from the Classification Society or Regulatory Authorities (as appropriate), incorporate such alteration and/or change into the construction of the Vessel. The parties shall endeavour to agree on such adjustments to the Contract Price, Contract Delivery Date, changes in the Vessel’s characteristics or other changes in the Contract as set out in clause 1 above. If the parties fail to agree on the changes, the Builder shall proceed with the required changes and the matter shall be decided in accordance with Article XIX;

 

(c) If such change is not or will not be compulsory for the Vessel, but the Buyer nevertheless desires to incorporate such change, this shall be considered a change or modification, as provided for in clause 1 of this Article VI.

 

3. Substitution of Materials

 

If any of the materials, machinery or equipment required by the Specifications or the Maker’s List or otherwise pursuant to this Contract cannot be procured in time or are in short supply, the Builder may, in order to maintain the Delivery Date and subject to the Buyer’s approval, which shall not unreasonably be withheld and which shall be provided without undue delay, supply other materials, machinery or equipment of equal quality capable of meeting the requirements of the Classification Society or Regulatory Bodies if not negatively affecting performance or functionality or the appearance of any public space. No extra charges shall be made to the Buyer and, except that any savings shall be credited to the Buyer, the Contract shall remain unaltered.

 

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ARTICLE VII TEST AND TRIALS

 

1. Notice

 

The Builder shall before delivery, by not less than fifteen (15) days written notice to the Buyer, notify the time and place for the sea trial for the Vessel. The Buyer shall have its Representative on board the Vessel to witness the sea trial. Failure by the Representative to attend at the sea trial without any valid reason despite a notice to the Buyer as aforesaid, shall be deemed to be a waiver by the Buyer of its right to be present. Buyer may also have others, including prospective crew, aboard for the sea trial, which in total shall not exceed twelve (12) persons.

 

The Builder may after due notice conduct the sea trial without the Representative of the Buyer being present, provided a representative of the Classification Society is present, and in such case the Buyer shall be obligated to accept the results of the sea trial on the basis of a certificate of the Builder confirmed by the Classification Society stating the results of the sea trial.

 

2. Weather Conditions

 

The sea trial shall be carried out under weather conditions set out in the Specifications. Any delay in delivery caused by delay of the sea trial due to unfavourable weather conditions shall be considered Permissible Delay, provided that in the event of a delay so occasioned the sea trial shall be held on the first favourable day thereafter when conditions permit.

 

3. How conducted

 

The sea trial shall be carried out in the presence of representatives from the Classification Society and/or Regulatory Bodies, and shall be conducted in the manner described in the Specifications, and shall be sufficient in scope and duration to enable all parties to verify and establish that all elements are functioning in accordance with the Contract.

 

All expenses in connection with the sea trial shall be for the account of the Builder, including without limitation all necessary crew.

 

4. Method of Acceptance or Rejection

 

(a) Upon completion of the sea trial and when the trial results are available, Builder shall promptly provide the results of the tests to Buyer in writing. If the Builder considers the results thereof demonstrates that the Vessel conforms with the Contract, the Builder shall promptly give the Buyer a written notice of completion stating when the Vessel is ready for delivery. This notice shall state where and when the vessel shall be available for delivery, which shall be at least fifteen (15) days after the notice is given (unless Buyer consents in writing to a shorter period). The Buyer shall within two (2) days after receipt of this notice (and the test results) notify the Builder in writing of its acceptance or rejection of the Vessel.

 

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[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

 

(b) If the results of the sea trial demonstrate that the Vessel or any part or equipment thereof does not conform to the requirements of the Contract the Builder shall take all necessary steps to rectify such non-conformity. If necessary the Builder shall for its own account carry out further sea trial in accordance with this Article VII to ascertain that the Vessel complies with the terms of the Contract. Upon demonstration by the Builder that the deficiencies have been corrected, Builder shall give a notice thereof, with the results of such re-test in writing and of the readiness of the Vessel for delivery, to the Buyer, who shall then within two (2) days after receipt of such notice together with the new test results notify the Builder of its acceptance or rejection of the Vessel.

 

(c) If the Buyer for any reason rejects the Vessel, the Buyer shall state in which respects the Vessel does not confirm to the requirements of the Contract with sufficient specificity to allow the Builder to consider whether there is a non-conformity or not.

 

(d) If the non-conformity with the requirements of the Contract is of such a nature as to not materially interfere with the Vessel’s ability to operate in the luxury polar expedition cruise service, and the Builder is unable to rectify the matter within a reasonable time, the Builder may nevertheless require the Buyer to take delivery of the Vessel, provided that the Builder first:

 

  (i) undertakes writing to remedy the deficiency or fulfil the requirement for its own cost and expense and as soon as possible,

 

  (ii) agrees in writing to indemnify the Buyer for any direct and documented loss incurred as a consequence thereof, including loss of time, and

 

  (iii) provides a work guarantee or other security reasonably acceptable to Buyer in an amount sufficient to cover the expected cost (if accomplished by a third party in its own facility) of such deficiency.

 

Whereupon the Buyer shall accept delivery of the Vessel.

 

(e) The Builder’s liability in respect of (d) (ii) above shall be [*].

 

(f) If the Builder disputes the rejection by the Buyer, the case shall be submitted for final decision by arbitration in accordance with Article XIX hereof.

 

  (g) Failure in responding to the notice given by Builder under (a) or (b) above shall be deemed as unconditional acceptance of the Vessel by the Buyer.

 

5. Effect of Acceptance

 

Acceptance of the Vessel as provided above, shall be final and binding and shall preclude the Buyer from refusing formal delivery on basis of any alleged deficiency in any part or parts of the Vessel which were tested during the sea trial, provided all other procedural requirements for delivery have been met.

 

6. Disposition of Stores of consumable nature

 

Any fuel oil, unused lubricating oil, grease, fresh water or other consumable stores furnished by the Builder for the sea trial, remaining on board the Vessel at the time of Delivery and Acceptance shall be purchased by the Buyer from the Builder at the original net purchase price thereof (Builder to provide supporting invoices and documentation/monitoring or certificate (if applicable) as to quantities to Buyer establishing the total amount due). Payment thereof shall be effected by the Buyer together with payment of the final instalment of the Contract Price.

 

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ARTICLE VIII DELIVERY DATE AND DELIVERY

 

1. Time and Place

 

Subject to the provisions of the following paragraphs, the Vessel shall be delivered at the Builder’s yard (see Article II) or in the vicinity thereof free and clear of all liens, claims, mortgages and other encumbrances, on 21st January, 2020 (the Contract Delivery Date), except that in the event of delays in the construction of the Vessel or any performance required under the Contract due to causes which under the terms of the Contract permit postponement of the Delivery Date (Permissible Delay), the Delivery Date shall be postponed as provided by Article IX, clause 4.

 

The delivery range for the Vessel is not earlier than 18th November 2019 and not later than 21st January 2020 (the “Delivery Range”) but for all purposes in relation to this Contract the contractual Delivery Date by which the Vessel shall be delivered shall be the date stated in this Article VIII Clause 1, first paragraph. Where the Builder considers that it may be able to deliver the Vessel prior to the last date within the Delivery Range then the provisions of this clause shall apply. By no later than 10th January 2019 the Builder shall make an assessment of whether it may be possible for the Vessel to be delivered within the Delivery Range. If in its sole assessment the Builder concludes that it is possible for the Vessel to be delivered prior to the last date within the Delivery Range then it shall give written notice to the Buyer of the date by which the Vessel can be delivered (the “Revised Delivery Date”). At the same time the Builder shall notify the Buyer of any additional price which