# LINDBLAD EXPEDITIONS HOLDINGS, INC. (LIND) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from LINDBLAD EXPEDITIONS HOLDINGS, INC.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1512499/000143774923006086/lindb20221231b_10k.htm
Accession: 0001437749-23-006086
Filing date: 2023-03-10
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/LIND/
All MD&A years: /company/LIND/mda/
Previous year: /company/LIND/mda/fy2021/ (FY 2021)
Next year: /company/LIND/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of the Results of Operations and Financial Condition

The information contained in this section should be read in conjunction with our consolidated financial statements and related notes and the information contained elsewhere in this Form 10-K under the headings “Risk Factors” and “Business.”

Overview

We provide expedition cruising and land-based adventure travel fostering a spirit of exploration and discovery, using itineraries featuring up-close encounters with wildlife and nature, history and culture, and promote guest empowerment, human connections and interactivity. Our mission is to offer life-changing adventures around the world and pioneer innovative ways to allow our guests to connect with exotic and remote places.

We currently operate a fleet of ten owned expedition ships and operate five seasonal charter vessels under the Lindblad Expeditions, LLC. (“Lindblad”) brand. Each expedition ship is fully equipped with state-of-the-art tools for in-depth exploration and the majority of our expeditions involve travel to remote places, such as voyages to Alaska, the Arctic, Antarctic, the Galápagos Islands, Baja’s Sea of Cortez, the South Pacific, Costa Rica and Panama. We have a longstanding relationship with the National Geographic Society (“National Geographic”) dating back to 2004, which is based on a shared interest in exploration, research, technology and conservation. This relationship includes a co-selling, co-marketing and branding arrangement whereby our owned vessels carry the National Geographic name, and National Geographic sells our expeditions through its internal travel division. We collaborate with National Geographic on voyage 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 interact with these experts through lectures, excursions, dining and other experiences throughout their voyage.

We operate land-based adventure travel experiences around the globe, with unique itineraries designed to offer intimate encounters with nature and the planet's remarkable destinations including the animals and people who live there.

Natural Habitat, Inc. (“Natural Habitat”) provides eco-conscious expeditions and nature-focused, small-group experiences that include polar bear tours in Churchill, Canada, Alaskan grizzly bear adventures, small-group Galápagos Islands tours and African safaris. Natural Habitat has partnered with World Wildlife Fund (“WWF”) to offer conservation travel, which is sustainable travel that contributes to the protection of nature and wildlife. 

DuVine Cycling + Adventure Company (“DuVine”) provides intimate cycling adventures and travel experiences, led by expert guides, with a focus on connecting with local character and culture, including high-quality local cuisine and accommodations. International cycling tours include the exotic Costa Rican rainforests, the rocky coasts of Ireland and the vineyards of Spain, while cycling adventures in the United States include cycling beneath the California redwoods, pedaling through Vermont farmland and wine tastings in the world-class vineyards of Napa and Sonoma.

Off the Beaten Path, LLC (“Off the Beaten Path”) provides small group travel, led by local, experienced guides, with distinct focus on wildlife, hiking national parks and culture. Off the Beaten Path offerings include insider national park experiences in the Rocky Mountains, Desert Southwest, and Alaska, as well as unique trips across Europe, Africa, Australia, Central and South America and the South Pacific.

Classic Journeys, LLC (“Classic Journeys”) offers highly curated active small-group and private custom journeys centered around cinematic walks led by expert local guides in over 50 countries around the world. These walking tours are highlighted by luxury boutique accommodations, and handcrafted itineraries that immerse guests into the history and culture of the places they are exploring and the people who live there. 

Ramp of Operations

We resumed operations in June 2021 and since then have continually ramped our operations, providing immersive expeditions across all of our owned vessels and land businesses.  Travel restrictions related to COVID-19 have diminished dramatically, and we will continue to resume operations in additional geographies throughout 2023. Where travel restrictions remain, which primarily includes a limited number of itineraries impacted by the Russia-Ukraine conflict and the political unrest in Peru, we are adjusting itineraries where possible, and working with guests to reschedule travel plans and refund payments or issue future travel certificates, as applicable. Previously, due to the spread of the COVID-19 virus and the effects of travel restrictions around the world, we had suspended or rescheduled the majority of our expeditions departing between March 16, 2020 through May 31, 2021.

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2022 Highlights

During 2022, we continually ramped our operations and have provided immersive expeditions to our guests, on all ten of our owned and operated vessels, to Alaska, Antarctica, the Arctic, Baja California’s Sea of Cortez, British Columbia, Canada's Northwest Passage, French Polynesia, the Galápagos Islands, Greenland, Iceland, Norway, the Pacific Northwest, South America and elsewhere. During third quarter 2022, we launched the National Geographic Islander II, for expeditions in the Galápagos Islands, replacing the National Geographic Islander. We also operated three of our charter vessels during the year, sailing expeditions on the Amazon, in Egypt, the Adriatic and the Mediterranean seas.

2022 was the first full year of operations of our 2021 acquisitions, Off the Beaten Path, DuVine and Classic Journeys under our Land Experiences segment, introducing many new travelers to the Lindblad Company and adding significant revenue growth. Our Land Experiences segment provided over 2,000 adventures and trips to more than 16,000 guests during 2022, with itineraries that included our new Alaska bear camp, visiting the polar bears in Churchill, Canada, traveling through the U.S. parks in the Rocky Mountains, Italy, France, Portugal, Iceland and South America.

During May and October 2022, we amended our senior secured credit agreements to, among other things, extend the waiver of the net leverage ratio covenant through December 31, 2022, and to use an annualized EBITDA calculation in our net leverage ratio covenant for the periods from March 31, 2023 through September 30, 2023.

During February 2022, we issued $360.0 million of 6.75% senior secured notes due 2027 and entered into a new $45.0 million revolving credit facility, which remains undrawn and matures February 2027. We used the proceeds from the notes to prepay in full all outstanding borrowings under our prior term loan, including the Main Street Expanded Loan Facility, and revolving credit facility, and paid all related premiums, terminating in full our existing credit agreement and the commitments thereunder.

During February 2022, our cupos necessary for tours in the Galápagos Islands were contractually renewed for a 20-year period.

Bookings Trends

We have substantial advanced reservations for future travel despite some continued impact from the COVID-19 virus, including, but not limited to, elevated cancellations, as well as some impact related to itinerary changes due to the Russia-Ukraine conflict. Bookings for 2023 are 47% ahead of the bookings for the full year 2019 at the same point in 2019.

Financial Presentation

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

[[GREPCENT_TABLE]]
[["","\u25cf","a description of certain line items and operational and financial metrics we utilize to assist us in managing our business;"],["","\u25cf","a comparable discussion of our consolidated and segment results of operations for the years ended December 31, 2022, 2021 and 2020;"],["","\u25cf","a discussion of our liquidity and capital resources, including future capital and contractual commitments and potential funding sources; and"],["","\u25cf","a review of our critical accounting policies."]]
[[/GREPCENT_TABLE]]

Description of Certain Line Items

Tour revenues

Tour revenues consist of the following:

[[GREPCENT_TABLE]]
[["","\u25cf","guest ticket revenues recognized from the sale of guest tickets; and"],["","\u25cf","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."]]
[[/GREPCENT_TABLE]]

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Cost of tours

Cost of tours includes the following:

[[GREPCENT_TABLE]]
[["","\u25cf","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;"],["","\u25cf","payroll costs and related expenses for shipboard and expedition personnel;"],["","\u25cf","food costs for guests and crew, including complimentary food and beverage amenities for guests;"],["","\u25cf","fuel costs and related costs of delivery, storage and safe disposal of waste; and"],["","\u25cf","other tour expenses, such as land costs, port costs, repairs and maintenance, equipment expense, drydock, ship insurance and charter hire costs."]]
[[/GREPCENT_TABLE]]

Selling and marketing

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

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 Cost, to enable us to analyze the performance and financial condition of our ship operations. 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, our non-GAAP financial measures 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 results of operations and financial condition together with the consolidated financial statements and the related notes thereto also included in Item 8 of this Annual Report on Form 10-K.

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, debt refinancing costs, acquisition-related expenses and other non-recurring charges. We believe 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. We believe Adjusted EBITDA helps provide a more complete understanding of the underlying operating results and trends and an enhanced overall understanding of our 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. Our 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 and acquisition-related expenses.

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Available Guest Nights is a measurement of capacity available for sale 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 selling and marketing expenses, and general and administrative expenses.

Gross Yield per Available Guest Night represents tour revenues 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 Yield represents tour revenues less commissions and direct costs of other tour revenues.

Net Yield per Available Guest Night represents Net Yield 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 consolidated statements of operations.

Seasonality

Traditionally, our Lindblad brand tour revenues are mildly seasonal, historically larger in the first and third quarters. The seasonality of our operating results fluctuates due to our vessels being taken out of service for scheduled maintenance or drydocking, which is typically during nonpeak 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. Our Natural Habitat, DuVine, Off the Beaten Path and Classic Journeys brands are seasonal businesses, with the majority of Natural Habitat’s tour revenue recorded in the third and fourth quarters from its summer season departures and polar bear tours, the majority of Off the Beaten Path and DuVine's revenues are recorded during the second and third quarters from their spring and summer season departures, while Classic Journeys’ revenue is somewhat less seasonal with the majority of revenues recorded during their second, third and fourth quarters.

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Results of Operations – Consolidated

Our reported consolidated results of operations for the years ended December 31, 2022, 2021 and 2020 are shown in the following table:

[[GREPCENT_TABLE]]
[["","","For the years ended December 31,"],["(In thousands)","","2022","","","2021","","","Change","","","%","","","2020","","","Change","","","%"],["Tour revenues","","$","421,500","","","$","147,107","","","$","274,393","","","","187","%","","$","82,356","","","$","64,751","","","","79","%"],["Cost of tours","","","283,217","","","","124,484","","","","158,733","","","","128","%","","","72,931","","","","51,553","","","","71","%"],["General and administrative","","","96,291","","","","65,445","","","","30,846","","","","47","%","","","45,508","","","","19,937","","","","44","%"],["Selling and marketing","","","60,996","","","","28,484","","","","32,512","","","","114","%","","","20,231","","","","8,253","","","","41","%"],["Depreciation and amortization","","","44,042","","","","39,525","","","","4,517","","","","11","%","","","32,084","","","","7,441","","","","23","%"],["Operating loss","","$","(63,046",")","","$","(110,831",")","","$","47,785","","","","43","%","","$","(88,398",")","","$","(22,433",")","","","(25","%)"],["Net loss","","$","(108,160",")","","$","(119,168",")","","$","11,008","","","","9","%","","$","(100,140",")","","$","(19,028",")","","","(19","%)"],["Undistributed loss per share available to stockholders:"],["Basic","","$","(2.23",")","","$","(2.41",")","","$","0.17","","","","","","","$","(2.01",")","","$","(0.40",")"],["Diluted","","$","(2.23",")","","$","(2.41",")","","$","0.17","","","","","","","$","(2.01",")","","$","(0.40",")"]]
[[/GREPCENT_TABLE]]

Comparison of Years Ended December 31, 2022 and 2021 - Consolidated

Tour Revenues

Tour revenues for the year ended December 31, 2022 increased $274.4 million, or 187%, to $421.5 million compared to $147.1 million for the year ended December 31, 2021. At the Lindblad segment, tour revenues increased by $195.6 million and Land Experiences segment increased $78.8 million primarily due to the ramp of operations during 2022 and higher pricing. The Land Experiences segment also included a full year of results of Off the Beaten Path, DuVine and Classic Journeys, which were acquired during 2021. 

Cost of Tours

Total cost of tours for the year ended December 31, 2022 increased $158.7 million, or 128%, to $283.2 million compared to $124.5 million for the year ended December 31, 2021. The Lindblad segment cost of tours increased $115.6 million and the Land Experiences segment increased $43.1 million primarily related to the ramp of operations during 2022. The Land Experiences segment also included the full year results of Off the Beaten Path, DuVine and Classic Journeys, which were acquired during 2021.

General and Administrative Expenses

General and administrative expenses for the year ended December 31, 2022 increased $30.8 million, or 47%, to $96.3 million compared to $65.4 million for the year ended December 31, 2021. At the Lindblad segment, general and administrative expenses increased $18.5 million from the prior year primarily due to increased personnel costs related to the ramp of operations and higher credit card commissions due to strong booking environment. At the Land Experiences segment, general and administrative expenses increased $12.3 million primarily due to an increase in personnel costs due to operating additional trips and tours, higher credit card commissions due to a strong booking environment and the full year impact of the acquisitions of Off the Beaten Path, DuVine and Classic Journeys, which were acquired during 2021.

Selling and Marketing Expenses 

Selling and marketing expenses increased $32.5 million, or 114%, to $61.0 million for the year ended December 31, 2022 compared to $28.5 million for the year ended December 31, 2021. At the Lindblad segment, selling and marketing expenses increased $24.0 million, primarily due to increased commission expense and marketing spend related to the ramp of operations. At the Land Experiences segment, selling and marketing expenses increased $8.5 million, primarily due to increased marketing spend and higher commissions associated with the ramp in operations and from the full year impact of the acquisitions of Off the Beaten Path, DuVine and Classic Journeys, which were acquired during 2021.

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Depreciation and Amortization Expenses

Depreciation and amortization expenses increased $4.5 million, or 11%, to $44.0 million for the year ended December 31, 2022 compared to $39.5 million for the year ended December 31, 2021, primarily due to depreciation for the National Geographic Resolution added to the fleet in September 2021, depreciation of assets placed into service to support our digital initiatives, and the amortization of acquired intangibles.

Other Expense 

Other expenses were $39.0 million for the year ended December 31, 2022, compared to other expenses of $10.4 million for the year ended December 31, 2021. The $28.7 million increase was primarily due to:

[[GREPCENT_TABLE]]
[["","\u25cf","a $12.9 million increase in interest expense, net to $37.5 million in 2022, primarily due to additional drawdowns throughout 2021 under our export credit agreements related to the delivery of the National Geographic Resolution, as well as increased principal of our corporate debt as a result of the debt refinancing in February 2022 and higher rates across our debt facilities; and"],["","\u25cf","a $15.8 million increase in other expense primarily due to the write-off of $9.0 million of deferred financing costs and $1.9 million of fees and other expenses related to the repayment of our prior credit agreement, including the term facility, Main Street Loan and revolving credit facility, during 2022, and recognition of $11.6 million in income related to expenses covered under the grant for the Coronavirus Economic Relief for Transportation Services (\u201cCERTS\u201d) Act recognized in 2022 compared to $15.4 million recognized in 2021."]]
[[/GREPCENT_TABLE]]

Comparison of Years Ended December 31, 2021 and 2020 - Consolidated

Tour Revenues

Tour revenues for the year ended December 31, 2021 increased $64.8 million, or 79%, to $147.1 million compared to $82.4 million for the year ended December 31, 2020. At the Lindblad segment, tour revenues increased by $13.2 million, primarily due to the ramp up of operations beginning June 2021 following the cancellation, disruption and rescheduling of expeditions due to COVID-19 since March 2020. At the Land Experiences segment, tour revenues increased $51.5 million over the prior year period, primarily related to the ramp up of operations during 2021 and from the inclusion of the results of Off the Beaten Path, DuVine and Classic Journeys, which were acquired during 2021. 

Cost of Tours

Total cost of tours for the year ended December 31, 2021 increased $51.6 million, or 71%, to $124.5 million compared to $72.9 million for the year ended December 31, 2020. At the Lindblad segment, cost of tours increased $22.7 million, primarily related to the ramp up of expeditions beginning June 2021 following the cancellation, disruption and rescheduling of expeditions due to COVID-19 since March 2020 and from the addition to our fleet of the National Geographic Endurance in March 2020 and the National Geographic Resolution in September 2021. At Land Experiences segment, cost of tours increased $28.9 million, primarily due to the ramp up of operations during 2021 and from the inclusion of the results of Off the Beaten Path, DuVine and Classic Journeys, which were acquired during 2021.

General and Administrative Expenses

General and administrative expenses for the year ended December 31, 2021 increased $19.9 million, or 44%, to $65.4 million compared to $45.5 million for the year ended December 31, 2020. At the Lindblad segment, general and administrative expenses increased $11.8 million from the prior year primarily due to increased personnel costs and credit card commissions related to restarting operations during 2021, and higher stock-based compensation expense as compared to the 2020. At the Land Experiences segment, general and administrative expenses increased $8.1 million primarily due to an increase in personnel costs and credit card commissions related to the ramp up of operations during 2021 and the impact of the acquisitions of Off the Beaten Path, DuVine and Classic Journeys, which were acquired during 2021.

Selling and Marketing Expenses 

Selling and marketing expenses increased $8.3 million, or 41%, to $28.5 million for the year ended December 31, 2021 compared to $20.2 million for the year ended December 31, 2020. At the Lindblad segment, selling and marketing expenses increased $4.1 million, primarily due to increased marketing spend related to the restart of operations. At the Land Experiences segment, selling and marketing expenses increased $4.2 million, primarily due to increased marketing spend associated with the ramp up in operations and from the impact of the acquisitions of Off the Beaten Path, DuVine and Classic Journeys, which were acquired during 2021.

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Depreciation and Amortization Expenses

Depreciation and amortization expenses increased $7.4 million, or 23%, to $39.5 million for the year ended December 31, 2021 compared to $32.1 million for the year ended December 31, 2020, primarily due to the addition of the National Geographic Resolution to the fleet in September 2021 and a full year of deprecation on the National Geographic Endurance, which was added to the fleet in March 2020.

Other Expense 

Other expenses were $10.4 million for the year ended December 31, 2021, compared to other expenses of $21.5 million for the year ended December 31, 2020. The $11.2 million decrease was primarily due to the following: 

[[GREPCENT_TABLE]]
[["","\u25cf","$15.4 million in other income related to expenses covered under the CERTS grant received during 2021;"],["","\u25cf","a $7.9 million increase in interest expense, net to $24.6 million during 2021, primarily due to increased borrowings related to our new vessel builds and higher rates under our debt facilities; and"],["","\u25cf","a $1.3 million loss in foreign currency translation, due primarily to the maturity of foreign currency hedges related to the installment payment for the National Geographic Resolution in 2021 compared to a $4.8 million loss primarily due to maturity of a foreign currency hedges for the ship in 2020."]]
[[/GREPCENT_TABLE]]

Results of Operations – Segments

Selected results for our segments for the years ended December 31, 2022, 2021 and 2020 are 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.

[[GREPCENT_TABLE]]
[["","","For the years ended December 31,"],["(In thousands)","","2022","","","2021","","","Change","","","%","","","2020","","","Change","","","%"],["Tour revenues:"],["Lindblad","","$","278,449","","","$","82,842","","","$","195,607","","","","236","%","","$","69,620","","","$","13,222","","","","19","%"],["Land Experiences","","","143,051","","","","64,265","","","","78,786","","","","123","%","","$","12,736","","","","51,529","","","","405","%"],["Total tour revenues","","$","421,500","","","$","147,107","","","$","274,393","","","","187","%","","$","82,356","","","$","64,751","","","","79","%"],["Operating (loss) income:"],["Lindblad","","$","(77,871",")","","$","(111,477",")","","$","33,606","","","","30","%","","$","(78,573",")","","$","(32,904",")","","","(42","%)"],["Land Experiences","","","14,825","","","","646","","","","14,179","","","","NM","","","$","(9,825",")","","","10,471","","","","NM"],["Total operating loss","","$","(63,046",")","","$","(110,831",")","","$","47,785","","","","43","%","","$","(88,398",")","","$","(22,433",")","","","(25","%)"],["Adjusted EBITDA:"],["Lindblad","","$","(29,154",")","","$","(67,242",")","","$","38,088","","","","57","%","","$","(44,398",")","","$","(22,844",")","","","(51","%)"],["Land Experiences","","","17,628","","","","3,199","","","","14,429","","","","NM","","","$","(7,774",")","","","10,973","","","","NM"],["Total adjusted EBITDA","","$","(11,526",")","","$","(64,043",")","","$","52,517","","","","82","%","","$","(52,172",")","","$","(11,871",")","","","(23","%)"]]
[[/GREPCENT_TABLE]]

Results of Operations – Lindblad Segment

Comparison of Years Ended December 31, 2022 and 2021

Tour Revenues

Tour revenues for the year ended December 31, 2022 increased $195.6 million, or 236%, to $278.4 million compared to $82.8 million for the year ended December 31, 2021. The increase was primarily driven by the continued ramp in expeditions and higher pricing compared with 2021.

Operating Income

Operating loss improved $33.6 million to a loss of $77.9 million for the year ended December 31, 2022 compared to a loss of $111.5 million for the year ended December 31, 2021. The improvement was driven primarily by the increase in tour revenues, partially offset by higher cost of tours and personnel costs due to the ramp in operations, increased commissions related to the revenue and bookings growth, higher marketing costs to drive future growth and increased depreciation mainly from the delivery of the National Geographic Resolution. 

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Comparison of Years Ended December 31, 2021 and 2020

Tour Revenues

Tour revenues for the year ended December 31, 2021 increased $13.2 million, or 19%, to $82.8 million compared to $69.6 million for the year ended December 31, 2020. The increase was primarily driven by the ramp of operations beginning in June 2021 following the cancellation, disruption and rescheduling of expeditions due to COVID-19 since March 2020.

Operating Income

Operating loss increased $32.9 million to a loss of $111.5 million for the year ended December 31, 2021 compared to a loss of $78.6 million for the year ended December 31, 2020. The increase was primarily driven by higher costs associated with the resumption of expeditions during June 2021, costs related to adding the National Geographic Resolution to the fleet during 2021 and a full year of expenses associated with operating the National Geographic Endurance, which was added to the fleet in 2020. 

Results of Operations – Land Experiences Segment

Comparison of Years Ended December 31, 2022 to December 31, 2021

Tour Revenues

Tour revenues for the year ended December 31, 2022 increased $78.8 million, or 123%, to $143.1 million compared to $64.3 million in 2021, primarily as a result of operating additional trips during 2022, higher pricing and the inclusion of the full year results for Off the Beaten Path, DuVine and Classic Journeys, which were acquired in 2021.

Operating Income

Operating income increased $14.2 million to $14.8 million for the year ended December 31, 2022 compared to operating income of $0.6 million in 2021. The increase in operating income was primarily a result of operating additional trips during 2022 and the inclusion of the full year results for Off the Beaten Path, DuVine and Classic Journeys, which were acquired in 2021.

Comparison of Years Ended December 31, 2021 to December 31, 2020

Tour Revenues

Tour revenues for the year ended December 31, 2021 increased $51.5 million, or 405%, to $64.3 million compared to $12.7 million in 2020, primarily due to the ramp up of operations during 2021 and the inclusion of the results of Off the Beaten Path, DuVine and Classic Journeys, which were acquired during 2021.

Operating Income

Operating income increased $10.5 million to $0.6 million for the year ended December 31, 2021 compared to a loss of $9.8 million in 2020. The increase was primarily a result of higher revenues from the ramp up of operations during 2021 and the inclusion of the results of Off the Beaten Path, DuVine and Classic Journeys, which were acquired during 2021.

Adjusted EBITDA – Consolidated

The following table outlines the reconciliation of net loss to consolidated Adjusted EBITDA. 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.

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Reconciliation of Net Income to Adjusted EBITDA

[[GREPCENT_TABLE]]
[["Consolidated","","For the years ended December 31,"],["(In thousands)","","2022","","","2021","","","2020"],["Net loss","","$","(108,160",")","","$","(119,168",")","","$","(100,140",")"],["Interest expense, net","","","37,495","","","","24,578","","","","16,692"],["Income tax expense (benefit)","","","6,076","","","","(2,019",")","","","(9,805",")"],["Depreciation and amortization","","","44,042","","","","39,525","","","","32,084"],["Loss on foreign currency","","","1,236","","","","1,265","","","","4,772"],["Other expense (income)","","","307","","","","(15,487",")","","","83"],["Stock-based compensation","","","6,992","","","","5,563","","","","2,388"],["National Geographic fee amortization","","","-","","","","-","","","","727"],["Other","","","486","","","","1,700","","","","1,027"],["Adjusted EBITDA","","$","(11,526",")","","$","(64,043",")","","$","(52,172",")"]]
[[/GREPCENT_TABLE]]

The following tables outline the reconciliation for each segment from operating income (loss) to Adjusted EBITDA:

Reconciliation of Operating Income to Adjusted EBITDA

[[GREPCENT_TABLE]]
[["Lindblad Segment","","For the years ended December 31,"],["(In thousands)","","2022","","","2021","","","2020"],["Operating loss","","$","(77,871",")","","$","(111,477",")","","$","(78,573",")"],["Depreciation and amortization","","","41,275","","","","37,516","","","","30,033"],["Stock-based compensation","","","6,992","","","","5,429","","","","2,388"],["National Geographic fee amortization","","","-","","","","-","","","","727"],["Other","","","450","","","","1,290","","","","1,027"],["Adjusted EBITDA","","$","(29,154",")","","$","(67,242",")","","$","(44,398",")"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Land Experiences Segment","","For the years ended December 31,"],["(In thousands)","","2022","","","2021","","","2020"],["Operating income (loss)","","$","14,825","","","$","646","","","$","(9,825",")"],["Depreciation and amortization","","","2,767","","","","2,009","","","","2,051"],["Stock-based compensation","","","-","","","","134","","","","-"],["Other","","","36","","","","410","","","","-"],["Adjusted EBITDA","","$","17,628","","","$","3,199","","","$","(7,774",")"]]
[[/GREPCENT_TABLE]]

Guest Metrics — Lindblad Segment

The following tables set forth our Guest Metrics for the Lindblad segment. Please refer to our Description of Certain Line Items above for the specific definition by line item and segment. 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.

[[GREPCENT_TABLE]]
[["","","For the years ended December 31,"],["","","2022","","","2021","","","2020"],["Available Guest Nights","","","236,784","","","","75,389","","","","51,624"],["Guest Nights Sold","","","177,521","","","","60,997","","","","46,050"],["Occupancy","","","75","%","","","81","%","","","91","%"],["Maximum Guests","","","29,095","","","","10,596","","","","6,514"],["Number of Guests","","","22,347","","","","8,436","","","","5,564"],["Voyages","","","393","","","","143","","","","85"]]
[[/GREPCENT_TABLE]]

46

[[GREPCENT_TABLE]]
[["Calculation of Gross and Net Yield per Available Guest Night","","For the years ended December 31,"],["(In thousands, except for Available Guest Nights, Gross and Net Yield per Available Guest Night)","","2022","","","2021","","","2020"],["Guest ticket revenues","","$","240,592","","","$","76,158","","","$","60,351"],["Other tour revenue","","","37,857","","","","6,684","","","","9,269"],["Tour Revenues","","","278,449","","","","82,842","","","","69,620"],["Less: Commissions","","","(19,149",")","","","(6,474",")","","","(8,146",")"],["Less: Other tour expenses","","","(27,780",")","","","(10,076",")","","","(7,373",")"],["Net Yield","","$","231,520","","","$","66,292","","","$","54,101"],["Available Guest Nights","","","236,784","","","","75,389","","","","51,624"],["Gross Yield per Available Guest Night","","$","1,176","","","$","1,099","","","$","1,349"],["Net Yield per Available Guest Night","","","978","","","","879","","","","1,048"]]
[[/GREPCENT_TABLE]]

The following table reconciles operating income to our Net Yield Guest Metric for the Lindblad Segment. 

[[GREPCENT_TABLE]]
[["","","For the years ended December 31,"],["(In thousands)","","2022","","","2021","","","2020"],["Operating loss","","$","(77,871",")","","$","(111,477",")","","$","(78,573",")"],["Cost of tours","","","201,255","","","","85,588","","","","62,905"],["General and administrative","","","67,564","","","","49,028","","","","37,177"],["Selling and marketing","","","46,226","","","","22,187","","","","18,078"],["Depreciation and amortization","","","41,275","","","","37,516","","","","30,033"],["Less: Commissions","","","(19,149",")","","","(6,474",")","","","(8,146",")"],["Less: Other tour expenses","","","(27,780",")","","","(10,076",")","","","(7,373",")"],["Net Yield","","$","231,520","","","$","66,292","","","$","54,101"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Calculation of Gross and Net Cruise Cost","","For the years ended December 31,"],["(In thousands, except for Available Guest Nights, Gross and Net Cruise Cost per Avail. Guest Night)","","2022","","","2021","","","2020"],["Cost of tours","","$","201,255","","","$","85,588","","","$","62,905"],["Plus: Selling and marketing","","","46,226","","","","22,187","","","","18,078"],["Plus: General and administrative","","","67,564","","","","49,028","","","","37,177"],["Gross Cruise Cost","","","315,045","","","","156,803","","","","118,160"],["Less: Commissions","","","(19,149",")","","","(6,474",")","","","(8,146",")"],["Less: Other tour expenses","","","(27,780",")","","","(10,076",")","","","(7,373",")"],["Net Cruise Cost","","","268,116","","","","140,253","","","","102,641"],["Less: Fuel Expense","","","(31,135",")","","","(8,027",")","","","(4,694",")"],["Net Cruise Cost Excluding Fuel","","","236,981","","","","132,226","","","","97,947"],["Non-GAAP Adjustments:"],["Stock-based compensation","","","(6,992",")","","","(5,429",")","","","(2,388",")"],["National Geographic fee amortization","","","-","","","","-","","","","(727",")"],["Other","","","(450",")","","","(1,700",")","","","(1,027",")"],["Adjusted Net Cruise Cost Excluding Fuel","","$","229,539","","","$","125,097","","","$","93,805"],["Adjusted Net Cruise Cost","","$","260,674","","","$","133,124","","","$","98,499"],["Available Guest Nights","","","236,784","","","","75,389","","","","51,624"],["Gross Cruise Cost per Available Guest Night","","$","1,331","","","$","2,080","","","$","2,289"],["Net Cruise Cost per Available Guest Night","","","1,132","","","","1,860","","","","1,988"],["Net Cruise Cost Excluding Fuel per Available Guest Night","","","1,001","","","","1,754","","","","1,897"],["Adjusted Net Cruise Cost Excluding Fuel per Available Guest Night","","","969","","","","1,659","","","","1,817"],["Adjusted Net Cruise Cost per Available Guest Night","","","1,101","","","","1,766","","","","1,908"]]
[[/GREPCENT_TABLE]]

47

Liquidity and Capital Resources

The COVID-19 pandemic has had a material negative impact on our operations and financial results, and while we have substantially resumed operations, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of any lingering travel disruptions stemming from the COVID-19 pandemic on our financial condition, results of operations, cash flows, plans and growth for the foreseeable future. While travel restrictions related to COVID-19 have diminished dramatically, where travel restrictions remain, which primarily includes a limited number of itineraries impacted by the Russia/Ukraine conflict and the political unrest in Peru.

As of December 31, 2022, we had approximately $565.8 million in long-term debt obligations, including the current portion of long-term debt. We believe that our cash on hand and expected future operating cash inflows will be sufficient to fund operations, debt service requirements and necessary capital expenditures, assuming that our operations continue to proceed as we currently expect without a substantial interruption similar to the cessation of operations as a result of the COVID-19 pandemic.

Sources and Uses of Cash

Net cash used in operating activities was $2.2 million in 2022 compared to $32.5 million provided by operations in 2021. The $34.7 million decrease was primarily due to higher costs as we further ramped operations during 2022. Net cash provided by operating activities was $32.5 million in 2021 compared to $92.3 million used in operations in 2020. The $124.7 million increase was primarily due to cash received from guests for current and future expeditions and receipt of the CERTS grant, partially offset by additional costs as we resumed operations during 2021. 

Net cash used in investing activities was $49.6 million in 2022 compared to $114.7 million in 2021. 2022 primarily included routine vessel maintenance across the fleet, renovations to the National Geographic Islander II for its third quarter 2022 launch, investment in digital initiatives and an investment in securities, partially offset by the $3.6 million principal loan repayment by Ulstein Verft. 2021 primarily included costs associated with building the National Geographic Resolution and the acquisitions of Off the Beaten Path, DuVine and Classic Journeys. Net cash used in investing activities was $114.7 million in 2021 compared to $155.5 in 2020. The $40.8 million decrease was mainly due to a $58.8 million decrease in purchases of property and equipment in 2021 versus 2020, which included the delivery of the National Geographic Endurance, partially offset by $18.0 million in net cash used for the acquisitions of Off the Beaten Path, DuVine and Classic Journeys.

Net cash used in financing activities was $4.9 million in 2022 compared to $50.4 million provided by financing activities in 2021. 2022 primarily included principal payments on the senior secured credit agreements and the issuance of new senior secured notes which were used to repay the prior credit agreement, including the term facility, the Main Street Loan and the revolving facility. 2021 mainly included the drawdown of $61.7 million under a senior secured credit agreement for the remaining payments on the National Geographic Resolution. Cash provided by financing activities was $50.4 million in 2021 compared to $343.0 million in 2020. The $292.6 million decrease in cash provided by financing activities was primarily due to 2020 financing activities including borrowing $107.7 million for the final contracted payment of the National Geographic Endurance, $85.0 million of borrowing through the Main Street Expanded Loan Facility program, a $45.0 million drawdown of our revolving credit facility, $30.6 million borrowed for a contracted installment payment on the National Geographic Resolution and $85.0 million generated from the issuance of Preferred Stock partially offset by borrowing $61.7 million during 2021 for contracted payments on the National Geographic Resolution.

Contractual Obligations

[[GREPCENT_TABLE]]
[["","","Payments due by period"],["(In thousands)","","Total","","","Current","","","2-3 years","","","4-5 years","","","Thereafter"],["Operating Activities:"],["Operating lease obligations","","$","5,011","","","$","1,663","","","$","2,738","","","$","610","","","$","-"],["Charter commitments","","","21,746","","","","14,660","","","","7,086","","","","-","","","","-"],["Financing Activities:"],["Long-term debt obligations","","","565,793","","","","23,337","","","","63,870","","","","411,464","","","","67,122"],["Interest on long-term debt obligations","","","173,811","","","","40,738","","","","74,507","","","","42,541","","","","16,025"],["Total","","$","766,361","","","$","80,398","","","$","148,201","","","$","454,615","","","$","83,147"]]
[[/GREPCENT_TABLE]]

48

Funding Sources and Needs

Debt Facilities 

6.75% Senior Secured Notes due 2027

On February 4, 2022, we issued $360.0 million aggregate principal amount of 6.75% senior secured notes (the “Notes”). We used the proceeds from the Notes to prepay in full all outstanding borrowings under our former term loan, including the Main Street Expanded Loan Facility, and former revolving credit facility, and paid all related premiums, terminating in full our credit agreement and the commitments thereunder. Interest on the Notes is payable semiannually in arrears on February 15 and August 15 of each year. The Notes mature February 15, 2027, subject to earlier repurchase or redemption.

Revolving Credit Facility

On February 4, 2022, we entered into a revolving credit facility, which includes an aggregate principal amount of $45.0 million maturing February 2027, including a letter of credit sub-facility in an aggregate principal amount of up to $5.0 million (the “Revolving Credit Agreement”). Borrowings under the facility will bear interest at a rate per annum equal to, at our option, an adjusted Secured Overnight Financing Rate plus a spread or a base rate plus a spread. The Revolving Credit Agreement contains customary events of default provisions, affirmative and negative covenants as well as financial covenants.

Senior Secured Credit Agreements

On January 8, 2018, we entered into a senior secured credit agreement (the “First Export Credit Agreement”) with Citibank, N.A., London Branch (“Citi”) and Eksportkreditt Norge AS, (together with Garantiinstituttet, now known as Eksfin, Export Finance Norway), (together with Citi, the “Lenders”). Pursuant to the First Export Credit Agreement, in March 2020 we borrowed $107.7 million for the purpose of providing financing for up to 80% of the purchase price of our new polar ice-class vessel, the National Geographic Endurance. 70% of the loan is guaranteed by Eksfin, the official export credit agency of Norway. The loan amortizes quarterly based on a twelve-year profile, with 70% maturing over twelve years from drawdown, and 30% maturing over five years from drawdown. In June 2020, we amended our First Export Credit Agreement to defer approximately $9.0 million in aggregate scheduled amortization payments originally due in June 2020 through March 2021 and to suspend the total net leverage ratio covenant from June 2020 through June 2021. In June 2021, we further amended our First Export Credit Agreement to, among other things, extend the deferral of scheduled amortization payments through December 2021 in the aggregate amount of $15.7 million, extend the waiver of its total net leverage ratio covenants through March 31, 2022, increase the interest rate spread by 50 basis points and annualize EBITDA used in its covenant calculation through December 31, 2022. During May and October 2022, we amended the covenants of our Senior Secured Credit Agreements to extend the waiver of the total net leverage ratio through December 31, 2022 and to use an annualized EBITDA calculation in the net leverage ratio covenant for the periods from March 31, 2023 through September 30, 2023. Certain other covenants continue to be more restrictive during the extended covenant waiver period. The First Export Credit Agreement, as amended, bears interest at a floating interest rate equal to three-month LIBOR plus a margin of 3.50% per annum, for an aggregated rate of 8.23% over the borrowing period covering December 31, 2022.

On April 8, 2019, we entered into a senior secured credit agreement (the “Second Export Credit Agreement”) with the Lenders. Pursuant to the Second Export Credit Agreement, the Lenders made available to us, at our option and subject to certain conditions, a loan in an aggregate principal amount of $122.8 million for the purpose of providing pre- and post- delivery financing for up to 80% of the purchase price of our new expedition ice-class cruise vessel, the National Geographic Resolution. Additionally, 70% percent of the loan is guaranteed by Eksfin. In September 2021 the National Geographic Resolution was delivered, and we have borrowed the $122.8 million under the agreement including drawing approximately $30.5 million in 2019, $30.6 million in 2020 and $61.7 million in 2021. The loan amortizes quarterly based on a twelve-year profile, with 70% maturing over twelve years from final drawdown, and 30% maturing over five years from final drawdown. In June 2020, we amended our Second Export Credit Agreement to suspend the total net leverage ratio covenant from June 2020 through June 2021. In June 2021, we further amended our Second Export Credit Agreement to, among other things, extend the waiver of the total net leverage ratio covenants through March 31, 2022, increase the interest rate spread by 50 basis points and annualize EBITDA used in the covenant calculation through December 31, 2022. During May and October 2022, we amended the covenants of our Senior Secured Credit Agreements to extend the waiver of the total net leverage ratio through December 31, 2022 and to use an annualized EBITDA calculation in the net leverage ratio covenant for the periods from March 31, 2023 through September 30, 2023. Certain other covenants continue to be more restrictive during the extended covenant waiver period. The Second Export Credit Agreement, as amended, bears a variable interest rate equal to three-month LIBOR plus a margin of 3.50% per annum, or 8.25% over the borrowing period covering December 31, 2022.

The First Export Credit Agreement and Second Export Credit Agreement, as amended, contain financial covenants that, among other things, 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 Export Credit Agreement, for the trailing 12-month period of 4.75 to 1.00. The net leverage ratio covenants of our export credit agreements have been waived through December 2022. As of December 31, 2022, we were in compliance with the covenants currently in effect. 

49

Other

Our Off the Beaten Path subsidiary has a loan maturing June 2023 for the purchase of guest transportation vehicles. The loan’s original principal was $0.3 million, is collateralized by the vehicles and bears interest of 4.77%.

Off the Beaten Path also has an $0.8 million loan under a Main Street Expanded Loan Facility, originated on December 11, 2020. For the first 12 months, interest is not payable and accrued to the principal balance, thereafter, monthly interest payments are required. 15% of the outstanding balance is due on both December 2023 and December 2024, with the remaining balance due December 2025. The loan bears a variable interest rate equal to one-month LIBOR plus a spread of 3.00%, or 7.39% as of December 31, 2022. This loan may be voluntarily prepaid at any time and from time to time, without premium or penalty, other than customary “breakage costs” and fees for LIBOR-based loans.

Our DuVine subsidiary has a EUR 0.1 million State Assistance Loan related to the financial consequences of the COVID-19 pandemic, for the purpose of employment preservation. This loan matures August 2025, with monthly payments, and bears interest rate of 0.53%.

Equity

Preferred Stock

On August 31, 2020, we issued and sold 85,000 shares of Series A Redeemable Convertible Preferred Stock, par value of $0.0001, (“Preferred Stock”) for $1,000 per share for gross proceeds of $85.0 million. The Preferred Stock has senior and preferential ranking to our common stock. As of December 31, 2022, 62,000 shares of Preferred Stock were outstanding. The Preferred Stock is entitled to cumulative dividends of 6.00% per annum, and for the first two years, the dividends were required to be paid-in-kind. After the second anniversary of the issuance date, the dividends may be paid-in-kind or be paid in cash at our option. The Preferred Stock is convertible at any time, at the holder’s election, into a number of shares of our common stock equal to the quotient obtained by dividing the then-current accrued value by the conversion price of $9.50. At any time after the third anniversary of the issuance, we may, at our option, convert all, but not less than all, of the Preferred Stock into common stock if the closing price of shares of common stock is at least 150% of the conversion price for 20 out of 30 consecutive trading days. The number of shares of common stock received in such conversion shall be equal to the quotient obtained by dividing the then-current accrued value by the conversion price. At the six-year anniversary of the closing date, each investor has the right to request that we repurchase their Preferred Stock and any Preferred Stock not requested to be repurchased shall be converted into our common shares equal to the quotient obtained by dividing the then-current accrued value by the conversion price. During the years ended December 31, 2022 and 2021, 18,000 and 5,000 shares, respectively, of Preferred Stock and related accumulated dividends were converted by the holders into 2,109,561 and 566,364 shares of our common stock, respectively. As of December 31, 2022, the outstanding Preferred Stock and related accumulated dividends could be converted, at the option of the holder, into approximately 7.5 million shares of our common stock.

Funding Needs

We generally rely on a combination of cash flows provided by operations and the incurrence of additional debt to fund obligations. 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, make long-term investments or any other use of cash. We traditionally run a working capital deficit due primarily to a large balance of unearned passenger revenues and as of December 31, 2022 and 2021, we had working capital deficit of $156.4 million and $79.1 million, respectively. As of December 31, 2022 and 2021, we had cash and cash equivalents, excluding restricted cash, of $87.2 million and $150.8 million, respectively.

Our Board of Directors approved a stock and warrant repurchase plan (“Repurchase Plan”) in November 2015 and increased the repurchase plan to $35.0 million in November 2016. The Repurchase Plan authorizes us to purchase from time to time our outstanding common stock. Any shares purchased will be retired. The Repurchase Plan has no time deadline and will continue until otherwise modified or terminated at the sole discretion of our Board of Directors at any time. These repurchases exclude shares repurchased to settle statutory employee tax withholding related to the exercise of stock options and vesting of stock awards. The Repurchase Plan was suspended through February 4, 2023, due to restrictions related to the now-terminated Main Street Expanded Loan Facility program that remain in place for one-year upon repayment. We have cumulatively repurchased 875,218 shares of common stock for $8.3 million and 6,011,926 warrants for $14.7 million, since plan inception. All repurchases were made using cash resources. The balance for the Repurchase Plan was $12.0 million as of December 31, 2022. 

50

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in the consolidated financial statements and accompanying footnotes. Out of our significant accounting policies, which are described in Note 2—Summary of Significant Accounting Policies of our consolidated financial statements included elsewhere in this Form 10-K, certain accounting policies are deemed “critical,” as they require management’s highest degree of judgment, estimates and assumptions. While management believes its judgments, estimates and assumptions are reasonable, they are based on information presently available and actual results may differ significantly from those estimates under different assumptions and conditions.

Ship Accounting

Ships, including ship improvements and ships under construction, are our most significant assets, comprising over 80% of our non-current assets at December 31, 2022. We make several critical accounting estimates with respect to our ship accounting. Given the very large and complex nature of our ships, our accounting estimates related to ships and determinations of ship improvement costs to be capitalized require considerable judgment and are inherently uncertain.

We have to estimate the useful life of each of our ships as well as their residual values. We account for ship improvement costs by capitalizing those costs we believe add value to our ships and have a useful life greater than one year and depreciate those improvements over its estimated remaining useful life. The costs of repairs and maintenance, including minor improvement costs and drydock expenses, are charged to expense as incurred.

If materially different conditions existed, or if we materially changed our assumptions of ship useful lives and residual values, our depreciation expense, loss on retirement of ship components and net book value of our ships would be materially different. In addition, if we change our assumptions in making our determinations as to whether improvements to a ship add value, the amounts we expense each year as repair and maintenance expense could increase, which would be partially offset by a decrease in depreciation expense, resulting from a reduction in capitalized costs. We believe we have made reasonable estimates for ship accounting purposes.

Stock-Based Compensation

We account for stock-based compensation issued to employees, non-employee directors or other service providers in accordance with Accounting Standards Codification 718, Compensation - Stock Compensation, that requires awards to be recorded at their fair value on the date of grant and amortized over the service period of the award. Stock-based compensation costs are recognized on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the equity instrument issued.

Income Taxes

To measure deferred tax assets and liabilities, we provide a valuation allowance against deferred tax assets if, based upon the weight of available evidence, we do not believe it is “more-likely-than-not” that some or all of the deferred tax assets will be realized. We 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. While we believe 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 our consolidated financial statements or may exceed the current income tax reserves in amounts that could be material.

Valuation of Long-Lived Assets

We review our long-lived assets, principally our vessels and operating rights, 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 our ability to recover the carrying value of our 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, if any, 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 our vessels and operating rights.

Future Application of Accounting Standards

Refer to Item 8 of this Annual Report Note 2—Summary of Significant Accounting Policies for further information on Recent Accounting Pronouncements, if applicable. 

51