OneSpaWorld Holdings Limited — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise. The filing is dated May 13, 2020.
Business context and reporting period
OneSpaWorld operates health, wellness, fitness and beauty facilities onboard cruise ships and at destination resorts, and sells related products. At the period end, it reported operations on 175 cruise ships and at 68 destination resorts. COVID-19-related cruise cancellations, travel restrictions and resort closures sharply curtailed operations. Because the 2019 business combination created a new accounting basis, the 2020 successor results are not directly comparable with the 2019 predecessor and successor periods.
Financial results and position
| Metric | Q1 2020 | Comparison / context |
|---|---|---|
| Revenue | $114.3 | 2019 combined-period revenue was $137.5; the filing attributes an approximately $35 revenue loss to COVID-19, partly offset by 12 incremental net new shipboard centers. |
| Service / product revenue | $89.6 / $24.7 | 78% / 22% of revenue, respectively. |
| Net loss | $(198.7) | Includes $190.8 of goodwill and trade-name impairment; loss per share was $(3.25). |
| Operating result | $(193.1) | Includes the impairment charge; reported operating margin was approximately (169%). |
| Operating cash flow | $4.3 | Working-capital movements contributed to cash generated despite the net loss. |
| Cash and cash equivalents | $20.5 | Up from $13.9 at December 31, 2019; the $20.0 revolver was fully drawn by quarter-end. |
| Debt | $247.5 gross; $241.7 net | Up from $227.5 gross at year-end, primarily reflecting the revolver borrowing. |
| Current assets / liabilities | $82.4 / $42.1 | Current ratio approximately 2.0; liquidity remained subject to cash burn and covenant risks. |
Shipboard average weekly revenue per ship declined 1% year over year to $59,718, and revenue per shipboard staff member per day declined 2% to $454. Average weekly destination-resort revenue fell 14% to $11,653. These operating measures reflect closures and disruption; 2019 financial comparisons are affected by the acquisition-accounting change.
Material changes versus the prior period
- Revenue was lower than the 2019 combined-period figure, with COVID-19 cancellations and closures the principal stated cause.
- The company fully impaired $190.1 of goodwill and recorded a $0.7 trade-name impairment after reassessing expected cash flows and market conditions. Goodwill was reduced to zero.
- Gross debt rose by $20.0 as the company drew the full revolving facility. It also paid $10.8 in cash and issued shares to acquire the remaining 40% interest in Medispa Limited for total consideration of $12.3.
- Cash flow hedge-related other comprehensive loss included a $6.0 unrealized derivative loss. A $1.8 income tax provision included a valuation allowance for deferred tax assets deemed not realizable.
- The company deferred its declared dividend pending Board reapproval and withdrew its dividend program until further notice.
Outlook, management commentary and risks
- Management expected Q2 and the remainder of 2020 to be severely negatively affected and could not reasonably estimate the pandemic’s full impact. The CDC No Sail Order was extended in April, with July 24, 2020 identified as the then-applicable 100-day date absent earlier action.
- Management estimated monthly cash burn of approximately $2.5, before approximately $1.1 of monthly debt service. The filing states there was substantial doubt about the company’s ability to continue as a going concern within one year of issuance.
- After quarter-end, the company announced a definitive agreement for a $75 equity-and-warrant private placement, including 18.8 million shares and five million warrants. It required shareholder approval, scheduled for June 10, 2020; completion was not assured. Management said successful execution of its plans could provide liquidity for the next 12 months. The risk-factor discussion said the raise would support more than 24 months of limited operations under its stated cash-burn assumptions.
- If the financing or alternative actions were not achieved, the company warned it was likely to be unable to comply with certain credit-facility covenants as of June 30, 2020. Lenders could require repayment or take other secured-creditor actions following a default. The company reported covenant compliance at March 31.
- Mitigation measures included spa closures, repatriation of 52% of cruise-ship personnel, furloughs affecting 96% of U.S. and Caribbean resort personnel and 38% of corporate personnel, elimination of nonessential spending, and suspension of dividends.
- Other key risks include prolonged or renewed travel restrictions, weak cruise and hospitality demand, partner financial distress or contract termination, employee-retention and restart challenges, additional health-protocol costs, and variable-rate debt exposure.
Important facts for investors to verify
- Whether the $75 private placement received shareholder approval and closed, and the resulting dilution, proceeds and warrant terms.
- Whether the company obtained covenant amendments or other financing and maintained compliance after March 31, 2020.
- Actual cash burn, debt service, available liquidity and cash runway compared with management’s estimates.
- When cruise and resort operations resumed, and the resulting ship count, resort count, utilization and revenue recovery.
- Whether impairment assumptions, deferred tax asset valuation allowances and going-concern disclosures changed in subsequent filings.