OneSpaWorld Holdings Limited — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company operates health, wellness, fitness and beauty services and sells related products, primarily aboard cruise ships and at destination resorts. All financial amounts below are U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
COVID-19 caused cruise voyages to stop and most destination resort spas to close. Second-quarter operations were nearly halted. The CDC’s No Sail Order was extended in July through the earliest of specified public-health events or September 30, 2020, and cruise partners extended voyage suspensions. Comparisons with 2019 six-month results combine successor and predecessor periods and are affected by the March 2019 business combination; the Q2 comparison is between successor periods.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 |
|---|---|---|---|
| Revenue | $1.0 | $140.4 | $115.3 |
| Operating income (loss) | $(27.4) | $8.1 | $(220.6) |
| Net income (loss) | $(31.4) | $4.6 | $(230.1) |
| Basic and diluted EPS | $(0.48) | $0.06 basic; $0.05 diluted | $(3.62) |
| Operating cash flow | Not separately provided | Not separately provided | $(8.7) |
Q2 revenue fell 99% year over year: service revenue was $0.2 million and product revenue $0.8 million. For the first half, revenue was down 59% versus combined 2019 successor and predecessor periods. The first-half loss includes $190.8 million of goodwill and trade-name impairment, recorded in Q1; goodwill was fully impaired. The impairment was non-cash.
At June 30, cash and cash equivalents were $64.7 million, with $1.9 million restricted cash; current assets were $114.9 million and current liabilities $43.8 million. Gross debt was $234.5 million and debt net of issuance costs was $228.9 million. The company reported $13 million available under its revolving facility and compliance with debt covenants. Total shareholders’ equity was $460.6 million.
First-half cash increased by $52.8 million, largely reflecting financing proceeds, including the equity placement. The company reported $8.7 million of cash used in operations and $1.5 million of capital expenditures.
Material changes versus the prior comparable period
- Q2 revenue declined from $140.4 million to $1.0 million as voyages were cancelled and resort spas closed. Operating results moved from $8.1 million of income to a $27.4 million loss.
- First-half net loss widened to $230.1 million from combined 2019 successor and predecessor losses of $42.8 million, primarily because of the $190.8 million impairment and pandemic-related operating disruption.
- Cash and cash equivalents increased from $13.9 million at December 31, 2019 to $64.7 million at June 30, 2020, supported by the June equity financing.
- Goodwill fell from $190.1 million to zero following impairment. The company also purchased the remaining 40% noncontrolling interest in Medispa Limited for $12.3 million, comprising $10.8 million cash and shares.
Outlook, management commentary and risks
Management expected a net loss for 2020 and said Q3 and the remainder of 2020 would be severely negatively affected; the impact could continue beyond 2020. It cited uncertainty around pandemic duration, travel restrictions, cruise resumptions, consumer demand and recovery. The company did not provide numerical revenue or earnings guidance.
To conserve cash, the company closed affected spas, repatriated 97% of cruise personnel, furloughed 96% of U.S. and Caribbean destination-spa personnel, reduced or furloughed corporate staff, eliminated nonessential spending, withdrew its dividend program and deferred the previously declared dividend pending Board approval. It raised $75 million gross through a June private placement of shares and warrants, with net proceeds described as approximately $68.6 million in the notes. Management said actions and current resources alleviated substantial doubt about going concern and were sufficient for obligations and covenant compliance over the next 12 months. The filing also states that, under an unlikely scenario of no cruise sailings and limited resort operations, liquidity was believed sufficient until December 2021.
Key risks include prolonged or renewed cruise suspensions, weak travel demand, partner financial distress or contract changes, additional operating and health-protocol costs, staffing challenges on reopening, limited access to future financing, variable-rate debt and covenant compliance. A foreign tax authority assessment related to VAT treatment of the business combination is disputed; the company accrued $0.2 million and said it did not expect a material adverse effect. A separate $4.0 million income-tax contingency liability was reported on the balance sheet. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether cruise voyages and destination resorts reopened on the timing assumed, and the resulting revenue and cash burn.
- Liquidity runway assumptions, revolver usage and availability, debt covenants, and any need for additional financing.
- The private-placement proceeds: the notes state approximately $68.6 million net, while the risk discussion cites $68.4 million.
- Potential dilution from the placement shares, 5 million placement warrants exercisable at $5.75, and other outstanding warrants and equity awards.
- Developments in the disputed VAT assessment, the income-tax contingency, and the deferred dividend.