OneSpaWorld Holdings Limited — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. OneSpaWorld operates health, wellness, fitness and beauty services and sells related products mainly on cruise ships and at destination resorts. The filing was signed November 12, 2020. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2020 | Prior comparable period | Nine months 2020 |
|---|---|---|---|
| Revenue | $1.8 million | $144.9 million | $117.1 million |
| Operating income (loss) | $(19.4) million | $8.3 million | $(239.9) million |
| Net income (loss) | $(22.4) million | $3.7 million | $(252.5) million |
| Basic and diluted EPS | $(0.26) | $0.04 basic; $0.03 diluted | $(3.57) |
| Cash from (used in) operations | Not separately provided in the filing text | Not separately provided in the filing text | $(20.1) million |
- Q3 revenue fell 99% year over year: service revenue was $1.1 million, down 99%, and product revenue was $0.7 million, down 98%. Most cruise voyages were suspended and destination spas were closed or operating with restrictions.
- Nine-month revenue declined 72% against the combined 2019 predecessor and successor periods. That comparison is not fully comparable because the 2019 business-combination accounting created separate predecessor and successor reporting periods.
- Q3 operating costs and expenses were $21.2 million, substantially exceeding revenue. Conventional operating margin comparisons are not meaningful given the near-cessation of operations.
- Nine-month net loss includes $190.8 million of non-cash impairment charges: approximately $190.1 million for goodwill and $0.7 million for a trade name. Goodwill was written down to zero.
- At September 30, cash and cash equivalents were $47.3 million, with $1.9 million restricted cash. Current assets were $94.1 million and current liabilities $37.8 million. Cash-flow statements report $49.2 million of cash and restricted cash at period end.
- Gross debt was $234.5 million ($229.2 million net of unamortized financing costs), versus $227.5 million gross at year-end 2019. Debt comprised a $202.5 million first-lien term loan, $25.0 million second-lien term loan and $7.0 million drawn on the revolver. $13 million remained available under the revolver.
- Interest rates at September 30 were 4.0% on the first-lien term loan, 7.7% on the second-lien loan and 3.9% on the revolver. Debt is variable-rate and primarily LIBOR-linked; the company had an interest-rate swap with a $157.2 million notional amount.
Material changes and notable items
- Revenue and operating activity collapsed because of COVID-19, travel restrictions, cruise suspensions and resort closures. Three ships had resumed sailing and 31 U.S. and Caribbean resort spas were operating with capacity restrictions at September 30.
- The June 2020 private placement raised $75 million gross, or approximately $68.6 million net of issuance costs, through common shares and warrants. The company issued voting and non-voting shares; 5 million related warrants were outstanding at quarter-end.
- The company repatriated most shipboard personnel, eliminated or reduced personnel and salaries, cut nonessential spending, withdrew its dividend program and deferred payment of a $2.4 million declared dividend. The dividend was paid during the nine-month period, although future payment remains subject to Board approval.
- Cash used in investing activities was $1.8 million, primarily capital expenditures. Financing activities provided $57.5 million, including private-placement proceeds, partly offset by debt repayment, dividends and the cash purchase of a noncontrolling interest.
- The company acquired the remaining 40% noncontrolling interest in Medispa Limited for $12.3 million, including $10.8 million cash and shares.
- The filing corrected an immaterial cash-flow classification error for earlier 2020 quarterly statements: a $2.4 million dividend payment was reclassified from operating to financing activities, without affecting earnings or balance sheets.
Outlook, risks and contingencies
- Management expected a net loss for full-year 2020 and severe negative effects in Q4; it said the pandemic’s duration and full financial impact could not be quantified. No numerical revenue or earnings guidance was provided.
- Management stated that current resources were expected to cover obligations and maintain covenant compliance for the next 12 months. It also said that, in the unlikely scenario of no additional cruise ships sailing and limited resort operations, liquidity was expected to last through December 2021. These estimates depend on uncertain operating and cash-use assumptions.
- The CDC’s October 30, 2020 Conditional Sailing Order, a subsequent event described in the filing, lifted the No Sail Order and set a phased process for cruise resumption. The timing and extent of partner sailings remained uncertain.
- Key risks include renewed or prolonged travel restrictions, weak consumer demand, cruise-line or resort partner financial distress, contract termination or nonrenewal, staffing and repatriation challenges, additional hygiene costs, and inability to raise capital on acceptable terms. The company also warned of variable-rate debt exposure and covenant/default risk.
- The company reported compliance with debt covenants at September 30, 2020. It accrued $0.2 million for a disputed foreign VAT assessment; management did not expect a material adverse effect. It could not estimate potential losses for other legal matters, but did not believe the aggregate reasonably possible exposure was material based on information then available.
- Management concluded there was no substantial doubt about the company’s ability to continue as a going concern over the coming year. This conclusion is subject to significant uncertainty from the pandemic and operating recovery.
Important facts for investors to verify
- Actual cruise-ship and resort reopening pace, capacity, and revenue recovery relative to management’s liquidity assumptions.
- Cash burn, unrestricted cash availability, and whether the stated liquidity runway and covenant compliance remain valid.
- Debt terms, variable-rate exposure, revolver availability, and any refinancing or covenant developments.
- Whether cruise-line and resort agreements remain in force, including arrangements for ships sold or permanently removed from service.
- Potential dilution and governance implications from the private placement, warrants, and voting/non-voting share structure.
- Whether further impairments, tax assessments, litigation, or pandemic-related costs arise.